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SEC Rule on CEO Pay Helps Investors Judge Compensation Practices That Affect Performance

Photo by Brandon Rees

Corporations will no longer be able to hide how much CEOs are paid compared to the workers who make those companies run, under a rule proposed today by the U.S. Securities and Exchange Commission (SEC). The rule requires companies to disclose the ratio of total compensation between chief executive officers and the median pay of employees.

That new rule does far more than help point out the historic and growing massive gap between CEO and worker pay. It is an important tool for investors to judge a company’s internal compensation structure, says AFL-CIO President Richard Trumka.

This pay data is important to investors because it shines a light on the company pay ladder for all employees, not just the pay of top executives that is already disclosed under current rules. The simple fact is that large pay disparities between CEOs and their employees affect a company’s performance….Disclosure of CEO-to-worker pay ratios will give investors an important metric to analyze the compensation practices of companies.

He points out that when the CEO receives the lion’s share of compensation, employee productivity, morale and loyalty suffer.

In contrast, reasonable CEO-to-worker pay ratios send a positive message to the workforce that the contributions of all employees are important to running a successful company.

CEO pay has increased dramatically relative to other employees. Thirty years ago, CEOs of the nation’s largest companies received 42 times the pay of rank-and-file workers. According to AFL-CIO’s Executive Paywatch site, in 2012, CEOs of companies in the S&P 500 index took home 354 times more pay than rank-and-file workers.

The proposed SEC rule was required as part the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010.  

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