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You'll Soon Find Out How Much More Money Your CEO Makes Than You

A newly adopted rule will compel publicly traded companies to annually disclose how their CEO compensation compares to the median salary of their workers.

by John Dyer
Aug 5 2015, 7:25pm

Photo via Getty Images

The debate over the outsized pay packages of America's corporate titans is about to heat up.

On Wednesday, the Securities and Exchange Commission approved a new rule that would compel publicly traded companies to annually disclose the so-called "pay ratio" between the compensation of their chief executive officers and the median salary of their workers — in other words, the midpoint between the highest and lowest earnings on the company's pay scale.

Required by the 2010 Dodd-Frank Wall Street reforms enacted by Congress at the depths of the Great Recession, the new rule is expected to illustrate what most rank-and-file employees already know: that they earn significantly less than whomever occupies their company's deluxe corner office.

Last month, the Economic Policy Institute released a report confirming those suspicions.

The institute determined that last year CEOs earned about 300 times more than their employees. Fifty years ago, in an era of exceptional economic growth, they earned roughly 20 times as much as their workers. The average annual compensation for a CEO at a large firm was $16.3 million in 2014, the report found. The median annual US household income was around $53,000 in 2013, the last year for which such a figure is available, according to the US Census.

Related: Microsoft's CEO Is Being Called Out for Suggesting Women Shouldn't Ask for Raises

But the report's average of CEO pay obscures the whopping earnings of folks like Discovery Communications CEO David Zaslav, who received $156 million last year, the most of any chief executive in an American public company, according to the New York Times.

Sarah Anderson, a fellow at the Institute for Policy Studies, told VICE News that she expects the rule will give ammunition to proponents of a higher minimum wage, such as the Fight for $15 campaign among fast-food workers. It could also lead to other changes, including state efforts in California to increase taxes on companies with high wage gaps and cut taxes on those with closer ratios.

"At a time when the country is grappling with very high levels of inequality, this is one thing policymakers can do that makes this a legitimate marker of how much different companies contribute to that inequality," Anderson said.

Corporate America opposed the rule, saying it's a sop to greedy unions negotiating wage hikes, costly for businesses to calculate, and based on accounting that ignores the realities of the globalized economy.

"At best, pay ratio is a misleading, politically-inspired, and costly disclosure that fails to provide investors with useful, comparable data," said David Hirschmann, the president and CEO of the US Chamber of Commerce Center for Capital Markets Competitiveness, in a statement. "For example, a domestic company might have a better pay ratio than a multinational company due to legal, currency or cost of living differences, creating a situation that is like trying to compare baseball to basketball stats when it's a whole different ballgame."

Related: Workers at Nationwide 'Fight for $15' Rallies Demand Higher Minimum Wages

But while drafting the new rule two years ago, regulators estimated that it would affect only around 3,800 companies and cost each of them about $19,000 to tally the pay ratio, the Washington Post reported. Many private companies also already tally pay ratios, often for big businesses that want to know how much to pay their chief executives.

The rule takes effect in 2017. Most companies will post their ratios the following year.

PayScale, a compensation information company based in Seattle, assembles lists of executive compensation because businesses need to make comparisons between corporate leaders and understand their markets and competition, the company's senior editorial director, Lydia Frank, told VICE News.

"If you have a solid basis as to why the CEO is paid as he or she is, then it makes sense to talk to your employees about it," she said. "If you feel as if it is justified, then justify it."

Companies that encourage candid discussions about compensation — not necessarily publicizing everyone's salaries, but rather discussing why some positions earn more than others — often improves morale and prevents resentment from growing among workers who might not understand why somebody earns more than them.

"There has been a lot of secrecy around pay for a long time," said Frank. "It leads to trust issues between the employed and employer. It can absolutely impact your ability to retain your best people if they don't feel like what you are paying is fair and transparent."

Follow John Dyer on Twitter: @johnjdyerjr

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