US companies now have to report their CEO-employee pay gap

High pay is a divisive issue on both sides of the Atlantic - this won't change that.

by Rachel Savage
Last Updated: 06 Aug 2015

Executive pay is a populist rabble-rousing hot potato on both sides of the Atlantic - and it’s not going to cool down any time soon. American companies will now have to report the pay gap between CEOs and employees, amid predictable complaints about the potentially misleading nature of such disclosures.

The measure was passed yesterday by the Securities & Exchange Commission by a narrow 3-2 vote (the nays were unsurprisingly Republicans). It’s been on the cards since 2010 though, as part of the mega Dodd-Frank financial reforms passed after the crash.

It’s hard to argue with the fact that top level pay is staggeringly high. In the US last year the average CEO earned 303 times more than a typical worker, according to the Economic Policy Institute, compared to a multiple of just 20 in 1965. In the UK, that ratio is around 150, according to the High Pay Centre.

Moreover, it’s reasonably well established that executive pay and company performance, in both the US and UK, do not always go hand in hand. But it’s the yawning gap between staff and their superiors that really gets people’s goat and, with a presidential election just around the corner Stateside, the issue is ripe for some more populist fire-stoking.

It’s shareholders that matter, though, when it comes to public companies. They have been increasingly active when they sniff an outsize pay package - but do they really care about boss-employee pay ratios?

‘I don't know any investor who has any interest in this,’ Regina Olshan, an executive compensation lawyer at Skadden Arps, told the FT.

But Paul Hewitt, the European business development manager at shareholder advisory group Manifest, said earlier this year that revealing pay ratios ‘would give more transparency’ - which sounds like a thumbs up to us.

He did, however, point out that ‘the ratio for a supermarket will be higher than the ratio for a research-intensive company’. Meanwhile, US business lobby group Business Roundtable has argued for allowing for differences between employees in different countries and the impact of part-time, seasonal and temporary staff on figures.

Pay ratios are not a perfect metric by any means, then. Indeed, it’s arguably more important that CEOs are paid in line with their peers - in a world where many skip between industries, labour-intensive sectors like retail could lose out on top talent if the pay ratio has to be brought down. And, secondly, investors are probably more concerned with pay relative to performance anyway.

But, as Institute of Directors boss Simon Walker argued earlier this year, ‘the biggest single things that is damaging relations between them and their workers.’ (And, in many cases, customers too.) If CEOs don’t want to be raked over the coals for pay gaps then they need to prove they’re worth top dollar.

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