Pay Disparity Ratio

The Dodd-Frank Wall Street Reform and Consumer Protection Act includes an important provision that will make company pay disparities more transparent.  Section 953(b) of the law requires companies to disclose the ratio of CEO-to-worker pay for their median employee.  By passing this provision, Congress sought to address the public’s concern that runaway CEO pay has contributed to growing workplace inequality.

Income inequality in the United States during the past decade has spiked to levels not seen since the Roaring '20s that led to the Great Depression.  The increase of income inequality leading up to the 2008 financial crisis and “Great Recession” is striking.  Between 1993 and 2008, the top 1 percent of Americans captured 52 percent of all income growth in the United States.[1]

While we don’t yet know each company’s specific CEO-to-worker pay ratio, the averages are shocking. According to the AFL-CIO’s analysis of 299 companies, a CEO of a Standard & Poor's (S&P) 500 Index company received, on average, $11.4 million in total compensation in 2010.  In other words, the combined pay of 299 CEOs could support 102,325 workers earning the median wage.[2]

Disclosure of CEO-to-worker pay disparities will encourage companies to moderate the amount of compensation they give to their CEO.  Currently, CEO pay is often set based on peer group analysis rather than what is best for the company’s own internal pay structure.  This leads to a ratcheting up effect in which CEO pay continues to rise to keep up with what other companies are paying their CEOs.

Pay ratio disclosure will encourage boards of directors to focus on their internal compensation structures.  Greater pay transparency also will help shareholders evaluate whether a company has a steep or flat compensation structure.  This information is important to investors because high CEO-to-worker pay disparities hurt employee morale and productivity.

Disclosing the median level of employee pay is also valuable information for investors. A high level of median employee compensation may indicate that a company pays high wages to attract the most qualified employees and to ensure high productivity. High employee compensation also may indicate a highly skilled workforce.  This information will allow investors to compare employment practices between companies.

To be meaningful, corporations should be required to disclose the median annual compensation of their U.S. and global employees as two separate statistics.  The disparity between the median pay of domestic and international employees may help explain the decision to move operations offshore.  U.S. companies are increasingly employing a significant percentage of their workforce overseas.

Corporations have access to data that could be used to calculate their pay ratio. For example, companies could identify their median employee based on cash pay as reported to the IRS and the tax authorities of other countries.  Companies also collect and maintain payroll data for accounting purposes. In fact, at least one corporation (Whole Foods Market) already discloses this type of information to investors.