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SEC Issues Strong Rule on CEO-Worker Pay Gaps

September 18, 2013

IPS executive compensation experts available to comment on SEC rule released today.

September 18, Washington, D.C. — The Institute for Policy Studies applauds the Securities and Exchange Commission for standing up to intense pressure from corporate lobby groups that were determined to gut a Dodd-Frank provision on CEO-worker pay disclosure.

Many conservatives and corporate lobbyists had pushed the SEC to insert numerous loopholes in the law, including provisions that would allow U.S. corporations to exclude part-time, seasonal, and foreign-based workers from calculations of median worker compensation. But in a 3-2 vote SEC Commissioners approved the release of a strong proposed rule that covers all employees.

“This is a powerful step towards a more efficient economic system that is not distorted by CEOs chasing personal windfalls,” says Sarah Anderson, the Institute’s lead author on its annual Executive Excess reports.

The core argument of opponents of the Dodd-Frank provision (Section 953b) has been that the CEO-worker pay ratio information is not of interest to shareholders and the disclosure serves merely to “name and shame.”

In fact, shareholders have a material interest in pay ratio data. As the Institute explained in detail in SEC comments submitted in 2011, extreme pay differentials between CEOs and their workers undermine enterprise effectiveness for three main reasons. Wide differentials:

1. reinforce rigid corporate hierarchies and bloated bureaucracies that discourage workers from being creative contributors to enterprise success.

2. lead to lower morale and higher turnover rates that undermine productivity.

3. reinforce a “celebrity CEO” culture that is not conducive to high executive performance.

IPS analyst Sam Pizzigati points out that the SEC’s new proposed rule would not prevent corporations from supplementing their ratio figure with worker pay breakdowns by geographic area and job status. But the comprehensive rule the SEC formally proposed today will give shareholders and the public better information on the disparity between CEO and overall worker. “In a globalized labor pool, the effects of extreme pay gaps are just as poisonous in foreign workplaces as they are in the United States,” Pizzigati adds. 

The SEC vote today is not the final battle over the CEO-worker pay ratio. The proposed rule will be open for comment before the SEC takes final rule-making action.

IPS executive compensation experts available for comment:

Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and has co-authored 20 IPS annual reports on executive compensation. Contact: sarah@ips-dc.org, 202 787-5227 (office) or 202 299 4531 (cell).

Sam Pizzigati, an IPS associate fellow, is the author of the The Rich Don’t Always Win: The forgotten triumph over plutocracy that created the American middle class, 1900-1970 (Seven Stories Press). He also edits Too Much, an online weekly newsletter on excess and inequality.

Scott Klinger, an Institute for Policy Studies associate fellow, crafted the first shareholder proposals on executive pay while working as a social investment portfolio manager. He has also written extensively on corporate tax avoidance. Scott is a CFA charterholder. Contact: ScottKlinger@earthlink.net.

Institute for Policy Studies (IPS-DC.org) has conducted path-breaking research on executive compensation for 20 years. The 2013 edition of their annual Executive Excess report received significant media coverage, including in MarketWatch, the Los Angeles Times, and the Wall Street Journal.

IPS Media Director:  Lacy MacAuley, Institute for Policy Studies, (202) 445-4692 main, (202) 234-9382 second, lacy@ips-dc.org