This new rule could reveal huge gap between CEO pay and worker pay

THOUSANDS of public US companies will soon likely be forced to share a number many would rather keep under wraps: How much more their chief executives make than their typical rank-and-file employees.

The US Securities and Exchange Commission is expected last Wednesday to finalise a long-delayed rule forcing businesses to share their “pay ratio,” a simple bit of arithmetic that would cast an unprecedented spotlight on one of corporate America’s thorniest debates.

Once the pay-ratio rule is in place, millions of workers will know exactly how their top boss’s payday compares to their own, revealing a potentially embarrassing disparity in corporate riches that many companies have long fought to keep hidden.

While the average American’s pay and benefits have been growing at the slowest pace in 33 years, executive wages have soared.

Fifty years ago, the typical chief executive made US$20 for every US$1 a worker made; now, that gap is more than US$300 (RM1,170) to every US$1, and growing.

The pay ratio, at the centre of years of corporate armwrestling, could ratchet up the pressure on big companies to bring runaway executive pay under control.

Boards and shareholders could use it to judge a firm’s high-priced leadership, and customers could opt to shop at companies where work-force pay seems more fair.

The effects could ripple far beyond the corporate suite. Disclosing the pay of a company’s “median worker” — the line at which half of the employees make more and half make less — could also become a human resources nightmare, exposing the raw and awkward tensions of work places undercut by growing pay gaps.

“This is going to sensitise every single worker to how it is they compare in pay to folks within their organisation, and folks who do the same job at competitors,” said Steve Seelig, a senior regulatory adviser for Towers Watson, a human resources consulting firm.

Companies already disclose the pay of their chief executives, although not how it compares with that of personnel.

Most Americans drastically underestimate how wide that wealth gulf has become.

In a Perspectives on Psychological Science study last year, researchers found that Americans estimate the pay gap between executives and unskilled workers is about 30 to 1, when in reality it’s more than 300 to 1, a misunderstanding that Harvard Business School professor Michael Norton has said can make people less likely to fight against the gap.

But critics of the rule argue that having to calculate that ratio will be a costly headache and easily misconstrued.

“While income inequality is an important matter worth addressing,” said Jim Barrall, a global co-chair of legal giant Latham & Watkins’s benefits and compensation practice, “burdening companies and investors with more proxy disclosure is a very poor tool for dealing with it.”

The rule was added as a lastminute mandate to the DoddFrank financial reform law in 2010 and sprung forth amid national outrage over massive executive bonuses at businesses such as American International Group that were rescued by taxpayer bailouts.

In the years since the SEC began working on the rule, it has attracted an intense measure of public advocacy, including drawing more than 286,000 public comments. — WP-Bloomberg