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On Wednesday, the Securities and Exchange Commission finally wrote a long-delayed rule mandating that publicly traded companies disclose information about how much their CEO makes versus how much their median employee makes. A provision requiring this disclosure was put into the Dodd-Frank financial regulation overhaul bill five years ago, but industry opposition and agency foot-dragging have prevented a specific rule from being written until now.
The rule passed with the SEC's three Democrats voting yes and its two Republicans voting no. The question at hand nominally relates to financial regulation and investor rights, but much more plainly reflects larger social concern — or lack thereof — about inequality.
The rule is sort of about protecting investors
Proponents of the rule have framed it as a question of transparency for investors — a companion to another Dodd-Frank rule mandating that shareholders get a "say on pay" and formally vote on whether executive compensation packages are excessive.
Realistically, though, it does not seem all that likely that the liberal groups, many of them closely aligned with labor unions, that have pushed for the rule are worried that America's executives are exploiting America's capitalists. Their realistic interest is more likely in the denominator of the ratio. If you create a cultural norm that a high CEO-to-worker pay ratio is bad, then executives looking for a huge payday are going to have an incentive to find ways to pay their typical workers more.
Critics want to shield executives from shame and administrative costs
Opposing the rule, Commissioner Daniel Gallagher said the nominal case for the rule is "pure applesauce" and that the only real purpose is to lead to the "naming and shaming" of highly paid executives. Gallagher also dubbed it "the most useless of our Dodd-Frank mandates."
Making the case for the rule, SEC Chair Mary Jo White noted that regardless of whether Gallagher thinks it's useless, the mandate is in fact a mandate. The SEC was told to write a rule, and now it has written a rule.
The other objection raised relates to the administrative costs of compliance. Here, business won a significant victory in that companies will be allowed to rely on a statistical sample of their staff compensation packages rather than an actual count.
Economy-wide CEO pay is actually stagnating
Something that is not widely appreciated about this subject is that across the entire American economy, while the ratio of CEO compensation to average worker compensation is staggeringly high, it's also in decline over the medium term.
Strikingly this is not because the typical worker has been experiencing strong income gains over the past 15 years. By most measures, inflation-adjusted wages have been flat paired with a modest increase in health-care benefits. But CEO compensation, which was driven to staggering heights by the stock market boom of the 1990s, has never fully recovered.
It's unclear if this will change anything
Proponents of the rule do not have much in the way of specific evidence to point to as reason to believe that this disclosure rule will succeed in restraining CEO pay. It is not closely modeled on a successful foreign regulation, and it's not obvious why the "name and shame" mechanism would actually lead to a more egalitarian distribution of pay.
Indeed, one might be inclined to completely dismiss the rule were it not for the vociferousness with which the Chamber of Commerce and other elements of the business community fought it. Either way, the rule itself is a clear win for the left. But whether it actually accomplishes what the left wants remains to be seen.
