In line with the growing regulatory trend to hold individuals to account, the U.S. Securities and Exchange Commission (SEC) has adopted a new ruling that will require listed firms to effectively disclose the salaries of their CEOs and other high-ranking executives.
With a vote on the final version of the rule having taken place today, the five-member Commission voted 3-2, with the panel’s two GOP members opposing the measure.
The new rule requires companies to provide investors with a ratio outlining the disparity in pay between the median salary and the executives in question.
The Dodd-Frank Act sought to shed light on this murky phenomenon, requiring clear, concise and understandable disclosure about compensation, amidst concerns that the disparity in pay between rank-and-file employees and the top dogs is disproportionately high.
While there is room for flexibility in terms of how firms may calculate the median salary – firms will be allowed to exclude up to 5% of overseas workers’ salaries – industry groups remain concerned, with a legal battle likely to ensue.
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Republican SEC Commissioner Daniel Gallagher described the pay-ratio rule as a “textbook example” of “social policy masquerading as disclosure requirements,” which are helping encourage companies to stay private, according to the Wall Street Journal.
Moreover, trade groups and the U.S. Chamber of Commerce have further argued against the potential ruling, stating that the ratio does not paint an accurate picture and is open to misinterpretation.
Countering the conservatives, SEC Democratic Commissioner Kara Stein remarked: “Pay ratio disclosure should provide a valuable piece of information to investors and others in the marketplace.
As investors increasingly focus on corporate governance and executive compensation issues at public companies, the pay ratio disclosure will provide another metric that is useful on many fronts, such as say‐on‐pay votes.”
The move echoes recommendations coming out of the UK’s Fair and Effective Markets Review, which Bank of England Governor Carney hopes to establish as industry-wide best-practice. The recommendations sought to “raise standards, professionalism and accountability of individuals.”
Companies will have to start reporting the new pay ratio disclosures in the first fiscal year beginning on or after January 1, 2017.