New Rule Could Shed Light on CEO-Worker Pay Gap

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FILE - In this Nov. 7, 2011 file photo, Vikram Pandit, CEO of CitiGroup, speaks at the Securities Industry and Financial Markets Association annual meeting, in New York. Citigroup has paid its former CEO Pandit, who resigned abruptly in October 2012, a bonus of $6.7 million for work he did for the bank this year. (AP Photo/Mark Lennihan, File)
Citigroup paid its former CEO Pandit, who resigned abruptly in October 2012, a bonus of $6.7 million for work he did for the bank that year. (AP Photo/Mark Lennihan, File)

The Securities and Exchange Commission has been considering (and considering, and considering) a new rule mandated three years ago under Dodd-Frank that would require companies to disclose the ratio between a CEO’s compensation and the median pay of the firm’s employees. Corporations have pushed back powerfully, claiming that gathering that median employee income statistic would be onerous (math being hard). But reports say the SEC is finally readying to role out their proposal for how this rule would work — it’s expected any day now.

Bartlett Naylor, a financial policy advocate with the good government group Public Citizen and the former chief of investigations for the U.S. Senate Banking Committee, hopes that news reports are right and that, after more than three years of waiting, the rule will arrive soon.

“I have been waiting around longer than the Godot characters,” Naylor says. “There are 400 rules that Dodd-Frank requires. This is the simplest one to write.”

Though the CEO-worker pay rule should be comparatively straightforward, lawmakers behind Dodd-Frank doubted it’s viability to begin with. Senator Chris Dodd, D-Conn., agreed to the rule as a favor to Sen. Robert Menendez, D-N.J., a member of the Senate Banking Committee whose vote on the legislation Dodd needed. “Let’s give it to the SEC and let them figure out how to do it,” Dodd reportedly said. So the commission has been figuring it out since Dodd-Frank became law in July 2010.

Last month, President Obama met with the heads of eight regulatory agencies, including the SEC, to put pressure on them to finish the Dodd-Frank rule making process. Naylor attributes the delay on this particular rule to extensive corporate lobbying and to the fact that Dodd-Frank did not specify a deadline for the the rule to be implemented. (In many cases, Naylor explained, regulatory agencies blew their deadlines, but did eventually propose rules for public comment, even if those rules still remain unimplemented. The Volcker Rule is one example.)

The objection to the CEO-worker pay rule commonly advanced by corporations — that gathering median employee salaries is too onerous — is “baloney,” Naylor says. This defense, advanced by advocacy groups like the Center for Executive Compensation, treats the calculation as if Dodd-Frank mandates the disclosure of the statistical average of all employees’ compensation, a number that actually would be hard to calculate. The Wall Street Journal reports that the SEC is instead leaning towards an easier approach. Corporations would be asked to use a statistical sample to find the median compensation — the amount paid to a single employee who is right in the middle of the pay scale for the company, with 50 percent of her colleagues earning more than she does and 50 percent earning less. Finding this single employee and reporting her salary will be much simpler than averaging together the salaries of all employees at the company, Naylor says.

In fact, one critic of the rule opined in Forbes that — even though he thinks the rule is regulatory overreach — the complaint that it puts too much of a data-collection burden on companies is an exaggeration.

But Stephen Bainbridge, a professor of law at UCLA, writes that the SEC requiring statistical sampling raises a new set of issues for him — issues that corporations might be expected to echo if a statistical sample-based rule is proposed:

Did Dodd-Frank authorize sampling? The statutory language is the median of all employees, which may require a rule that counts everybody (recall the Supreme Court cases about the census using sampling?).

Will the SEC finally do a sufficiently robust economic analysis of the costs and benefits to avoid adding to the string of rules that have been struck down?

Will there be safe harbors for firms that use the mandated statistical sampling but still end up with incorrect disclosures?

Even though median pay data does not currently exist for most companies, a Bloomberg investigation earlier this year calculated median pay for a given industry to explore CEO-worker pay gaps. They found many companies had ratios in the thousands — for example, JCPenney topped the list with the recently departed CEO earning 1,795 times more than the average U.S. department store worker.

But why should proponents of the rule be hopeful that it will be finalized by the SEC any faster than other portions of Dodd-Frank that are creeping along — like, say, the Volcker Rule?

Naylor points to Kara Stein, a former staffer for Sen. Jack Reed, D-R.I., who, as of last month, is the newest Democratic SEC commissioner. Reed, her former boss, is good friends with Sen. Menendez, who originally proposed the rule.

“Kara Stein will understand that Menendez wants this quite badly, and that [Menendez] will be asking Jack Reed, ‘so, we got Kara Stein in there, why isn’t this moving, Jack?’ and Jack will call Kara and say, ‘Kara, I thought you were going to stick this on the agenda,’” Naylor hypothesizes.

What ends up on the agenda is, however, ultimately up to new SEC Chair Mary Jo White. White has been both a friend and a foe to corporate America in her career, but has vowed to reduce the backlog of rules her agency is required to write under Dodd-Frank. The path forward for this rule will be an interesting test for how the SEC — with three of its five commissioners new this year — will handle Dodd-Frank rule making going forward.

For now, the CEO-worker pay ratio rule remains unknowably in the future: The commission will meet next week, but not to discuss the rule.

Update: Late on Wednesday, Sept. 18, the SEC proposed a rule that would address corporate criticism by allowing flexibility in how companies use statistical sampling to find their median employee income — in line with what many experts predicted at the time this piece was published.

John Light is a writer and journalist sometimes based in New York. He writes a lot about climate policy, both inside and outside of the US. He was a former associate digital producer for Moyers & Company. His work has been supported by grants from The Nation Institute Investigative Fund and the Alfred I. duPont-Columbia Awards, and has been included in ProPublica's #MuckReads collection. You can follow him on Twitter at @LightTweeting.
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  • Anonymous

    Restoring rules on Wall Street will be an up hill battle against the big banks and the politicians they have bought. I am not hopeful.

  • Jim Bullard

    How hard is it? They plug the salaries of all employees into a spreadsheet and apply a mathematical formula. BINGO! The answer appears. They obviously know how to do spreadsheets when it’s to their benefit.

  • DavidW

    To make this pay disparity less relevant today, we should start our own enterprises. Not as individuals (though we want that) because not everyone has an entrepreneur mindset, but as a cooperative. Enterprises where a community pools its money and thereby extension the risk of starting a local business owned by workers or consumers.

    Wean ourselves away from the large banks and their corporate overlords by moving our money and investments to Credit Unions. Supporting Public Banking rules and infrastructure that can finance these cooperative enterprises and revolving that money back into the economy. Setting up our own economic democracy on which we can use as fulcrum to balance out or political democracy.

    Teaching ourselves the “ownership” culture and restrict that flow of money to the rich by not patronizing their companies. It can be done if the right amount of education and outreach is applied, so that when there are many, many more unemployed, we can all have options to start rebuilding without the influence of rich developers and their overpaid CEO’s.

  • Anonymous

    Point is they really don’t want to reveal how put of balance exec comp is. Heck they do payroll annual stuff for payroll taxes – so they could do it with ease.

  • Anne Breen

    We can follow the model of a new local currency cooperative enterprise called Berkshares developed in western Massachusetts. GBYAY’
    The salary data collected could also give us good information on the size of the gender gap for CEOs and workers. Wall Street is still mostly a male dominated industry in salary gaps too. Remember how workers are warned not to talk about how much they make. They like to hide their male chauvinism too

  • Anonymous

    Foot-dragging rule-making and implementation is another way of postponing reform. Maybe Dodd-Frank was deliberately made overly complex with this in mind? Glass-Steagall wasn’t this complicated.

  • Chris Jonsson

    Huge CEO pay is taken from the workforce by continuing to squeeze their paychecks and benefits. CEOs are rewarded for lowering workers’ pay, and benefits, as well as reducing their work force and giving more work to the people who are left. Destroying labor unions is a major component in doing this. That job is almost completed. Workers have no power or a voice by themselves. That’s where the money comes from, the work force.

  • agelbert

    Correct. And the SEC is probably being told how to write the new regulation so the “median” employee wage can be gamed to the stratosphere by the corporations. Congress is dysfunctional.

  • Ardi Hominid

    Where I work, upper management is way overpaid for what they do. Most of the difficult decisions are done by people with lower pay grades plus most of the decisions are done by outside consultants. Years ago, upper management owned the company and took risk. Today’s management take no risk and come and go in a few years. It’s totally flipped and ridiculous. Something should be done. It’s killing our economy.