WASHINGTON, DC – Today, U.S. Senator Jack Reed (D-RI) backed a final rule adopted by the Securities and Exchange Commission (SEC) that will require a publicly traded company to disclose the pay gap between its chief executive officer (CEO) and rank-and-file employees. The rule, adopted at the urging of Senator Reed and others, shines a light on the dramatic and growing income disparities in the United States between CEOs and the workers they employ.
“While CEOs can create value for companies, so do workers. Now those workers and shareholders will have a much better sense of how companies compensate and value their rank-and-file employees. When companies succeed, there should be growth at both ends of the pay scale. This new rule is long overdue, but I am glad the SEC is finally moving forward with the law. Increasing transparency and making publicly traded companies more forthcoming about pay ratios is a commonsense step toward addressing growing income inequality,” said Senator Reed, a senior member of the Banking Committee.
According to a recent report by the AFL-CIO, the average CEO at S&P 500 companies earned 373 times more than the typical U.S. worker in 2014. While in 1980, the report found CEOs made about 42 times more than the average employee.
This disclosure requirement stems from the Reed-backed Dodd-Frank Wall Street Reform and Consumer Protection Act, which required public companies to disclose their CEOs’ total compensation compared to rank and file workers. The landmark law, now more than five years old, required disclosure of the pay ratio, but left implementation of the regulation to the SEC. The pay ratio rule was finally adopted today after a public consideration process during which nearly 288,000 public comments on the rule were submitted.
Now that the rule has been finalized, starting on or after January 1, 2017, public companies will be required to report the ratio in their SEC disclosures.
In a letter to the SEC last year, Senator Reed called on the agency to adopt the pay ratio rule, arguing: “When a company’s performance improves but only the CEO is rewarded…investors should know, so they can ask what kinds of incentives this creates for the company’s future performance. Or when a CEO asks for a raise while giving other employees a pay cut, investors should have this information to help them evaluate whether this is value creation or simply value capture by insiders.”
Senator Reed was joined by Senator Richard Blumenthal (D-CT) earlier this year in introducing the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act. This legislation would close a major loophole in current corporate tax law by putting an end to unlimited tax write-offs on performance-based executive pay. The bill would allow a publicly traded corporation to deduct only up to $1 million in pay per employee, regardless of the form that compensation takes. The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act will restore fairness to the tax code and ensure corporations, not taxpayers, are the ones who pay for multimillion dollar bonuses. In their most recent estimate, the Joint Committee on Taxation estimated that this loophole costs U.S. taxpayers more than $55 billion over a 10 year timeframe.
The Atlantic Monthly notes that: “Between 1940 and 1970, average CEO pay remained below $1 million (in 2000 dollars). According to the Economic Policy Institute, from 1978 to 2013, CEO pay at American firms rose a stunning 937 percent, compared with a mere 10.2 percent growth in worker compensation over the same period, all adjusted for inflation. In 2013, the average CEO pay at the top 350 U.S. companies was $15.2 million.”