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New SEC Rule Would Make Companies Disclose Ratio of CEO-to-Worker Pay

August 22, 2013
URL: http://www.entrepreneur.com/article/228030

Thanks to a Securities and Exchange Commission rule that could pass as early as September, corporate fat cats may have to tell the world just how much cream they're eating compared to their middle-rank employees. Or at least that's how proponents of the rule would have you see it.

The requirement was a provision of the 2010 Dodd-Frank law that passed because of concerns about golden parachutes for top executives of banks and other institutions that sought federal bailouts during the financial crisis. But it still has not gone into effect due to SEC concerns about the law's statutory language, according to The Wall Street Journal.

Supporters of the rule say it will encourage companies to rein in compensation for chief executives, which the AFL-CIO estimates is currently 307 times the median pay of rank-and-file workers, according to the same Journal report. Median pay is the dividing line between what the top 50 percent and the bottom 50 percent of employees earn.

Critics say compliance with the rule would be tremendously burdensome for large corporations, which often keep payroll data separated by country, business unit or department. What's more, the SEC law would require companies to calculate not salary but total compensation for each employee, including bonuses and pension, which can change from year to year. Centralizing the data and calculating median pay would be a significant undertaking for multinationals with tens or even hundreds of thousands of employees.

More fundamentally, the popular picture of bloated executive compensation is incomplete, if not outright unfair. At some companies, a dedicated salesman can out-earn the CEO thanks to healthy commissions. Many startup founders take low pay for months, or even years, while they work overtime to build their companies. And while it's true that some CEOs earn many times what their middle-rank employees do, they tend to be the first ones laid off when times get tough for their company.

Related: 3 Signs You Need to Take a Pay Cut