Companies to Disclose CEO Pay Vs. Employee Pay

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Companies to Disclose CEO Pay Vs. Employee Pay
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4 min read
This story originally appeared on CNBC

Do you think it'd be nice to know how much a CEO makes compared with the typical amount made by an employee of his or her company? Well, you're going to find out. Soon.

This past week the chairman of the Securities and Exchange Commission told a congressional committee that the agency is finally ready to put into effect a law passed by Congress three years ago.

"I hope that it is completed in the next month or two," Mary Jo White said at a Senate Banking Committee hearing on Tuesday, according to The Hill. "We are very much as a staff and commission focused on that rule-making."

Publicly traded companies will have to calculate how much all their employees get paid, figure out the median, then compare it to the CEO's pay package. 

Oddly enough, both supporters and opponents of the new rule argue it's all about the investor.

"It will add another data point for investors and even boards of directors to compare performance," said Brandon Rees, acting director of the AFL-CIO's office of investment.

"This is useless information," countered Baruch I. Lev, a professor of accounting and finance at NYU.

Both sides have what seem to be some valid points.

When the CEO is making huge amounts over and above everyone else in the company, that hurts morale, which in turn hurts productivity, Rees argued. This kind of information will flag to investors when it's getting out of hand. It will also allow investors to compare the company's pay structure to that of competitors, he suggested.

Sure, the ratio of a CEO's pay to employee pay might be vastly different between Wal-Mart and Goldman Sachs. But if it's vastly different between Wal-Mart and Target ... that could flag a potential problem, Rees suggested.

On the other hand, when you get the numbers, what do they mean?

"First, there is no yardstick for fair differential between CEO and median employee," said Lev. "We have no way of quantifying adequate compensation for CEO's vastly larger responsibility, experience and risk, relative to median employee. What is a fair differential? 10, 50,100 times? No one knows."

"Second, who is the median employee? In McDonald's it's probably a part-time employee. Same in retail. And if McDonald's median employee earns more than Wendy's, great for the former. Who cares what the CEO makes? The whole concept of such a comparison fits a society built on envy. I don't begrudge the higher salary of a Nobel Laureate professor."

Of course investors have always groused about CEO pay, particularly when that CEO hasn't goosed any gains in the company stock. Indeed, stories here on comparing CEO pay versus stock performance always are popular (much like Apple stock).

How the SEC directs companies to make the median calculation will be crucial. What employees will be counted? Overseas? Part-timers? And over what time periods?

Our competition over at Bloomberg put together a neat little table making a stab at a calculation of sorts. Of course, they couldn't get real company payroll information, so they used industry averages estimated by the government. You can check it out here.

The figures are intriguing, ranging from nearly 1,800-to-1 down to 173-to-1. The wide range may also signal how subjective the numbers may be or even how easily they may be manipulated.

"One of my clients told me he could probably just outsource some departments to alter where the median falls," said a pay consultant.

Indeed, the possible complexity of the calculation has been a main complaint of the business lobby. Labor opponents argue there are plenty of statistical methodologies available.

"It's hard to believe they can't formulate a calculation," said Rees. "What's more likely is that they just don't want to do it because it will embarrass CEOs."

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