06 Aug SEC Passes CEO Pay-Ratio Rules on Partisan Lines

A sharply divided Securities and Exchange Commission approved rules mandated by the Dodd-Frank Act requiring most companies to disclose the ratio of their CEO’s pay to their average median employee salaries. The two Republican commissioners strongly opposed the rules on various grounds. A controversial part of Dodd-Frank, passed over 5 years ago, the rules are finally approved after having been proposed back in 2013.

The new rules will require companies (smaller reporting and emerging growth companies are exempt) to compare their Chief Executive’s pay to their median employee, in a methodology which companies have some flexibility to select. Nearly all non-US employees have to be included. The Republicans felt it should have been limited to US employees, and that including foreign employees dramatically increases the cost of the calculation. They also expressed concern that the rules represented “Big Labor’s wish list.”

Combined with the new “say on pay” obligations, the theory is shareholders will have more information about the relative appropriateness of the top executive’s pay compared to most company employees when they make their advisory votes on executive compensation. No question US CEOs are among the most highly compensated on Earth. Will these new rules impact on how boards structure compensation going forward? Let’s reconvene in a few years.