Home > Compensation, Internacional Remuneracion > Pay ratios: the case of the USA

Pay ratios: the case of the USA

Should a Ceo of a retail company earn 1.795 times the average pay of a department store worker? There are probably many arguments against, but also against any prohibition or limitation to the way market freely establishes compensation for employees, whatever their rank. (1)

The Dodd-Frank law, passed by the USA Congress in 2010 urged the Securities Exchange Commission (SEC) to introduce a regulatory proposal so that public companies became forced to disclose the ratio of their Ceo pay to the average pay of rank workers. (2)

The Sec has delayed the proposal for three years, amid out loud voices on both sides, as the controversy raised by this matter has been noisy. (3) But in a vote by three against two, the Sec has finally made public their proposal on September 19th 2013 , that will now follow its path. (4)

The proposal can be described as follows:

a)      Companies shall disclose the ratio of Ceo Pay to median compensation of employees.

b)      Companies will be free to determine the way they identify the median employee.

c)      Companies shall use an already existing definition of total compensation for the median employee.

d)      Employees will be counted if hired by the firm or any subsidiary, and only if employed the last day of each fiscal year.

e)      Companies shall disclose their methodology, assumptions, adjustments, and so on, and will be allowed to complement with a narrative or additional ratios.

The proposal will be analysed and publicly commented, and follow the usual procedure.

Will that regulation be copied in other countries? In that case, will these countries follow the same flexible scheme? To be seen…..

(1) “CEO Pay 1,795-to-1 Multiple of Wages Skirts U.S. Law”, Bloomberg, April, 30, 2013.

(2) http://www.towerswatson.com/en/Insights/Newsletters/Global/executive-pay-matters/2013/Dodd-Frank-Pay-Ratio-Rule-Coming-Soon.

(3)               http://articles.washingtonpost.com/2013-07-06/politics/40404900_1_rule-financial-overhaul-legislation-agency

(4)               http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539817895#.UjtSzHr9rgs

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  1. September 21, 2013 at 5:56 pm

    Commissioner David M. Gallagher issued a dissenting vote on pay ratio proposal, which is interesting, and states basically the following:

    – The proposed rule will entail huge costs to firms, with no real proved benefit, as no market failure has been identified justifying the rule.
    – Its only purpose ios to shame firms and executives, and just another concession to interest groups.
    – The rule is nevertheless quite flexible, it could have been worse, but thjis does not help to the previously said.
    – The proposal though, includes “all worldwide employees” in the calculation, thus forcing firms to include so many different realities that the meaningfullness plunges and the costs soar.

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