As part of new regulations that have been coming in the wake of the recent financial melt down, The Securities and Exchange Commission approved new rules that require publicly traded companies to reveal the gap between what their CEO makes and what rank and file employees take home – but what will the rule achieve?
Although it won’t take effect for two years, the rule has been big news as debates around income equality heat up due to upcoming elections. There are lots of shocking numbers out there already. Currently, the average CEO of Standard & Poor’s 500 companies were paid 216 times more than the median employees at their companies, according to a USA Today analysis of worker pay data from Glassdoor.com and CEO pay data from S&P Capital IQ.
The gap is much larger in several cases. Nine CEOs including David Zaslav of media company Discovery Communications, Chipotle co-CEOs Steven Ells and Montgomery Moran and Larry Merlo of CVS Health, were paid 800 times or more than the average worker at these companies. Pharma company Pfizer came in at 60:1, Amgen at 52:1, Eli Lilly 50:1, according to a PayScale report.
It is easy to to feel the frustration of workers who struggle to pay their bills trying to understand how their time could be worth so much less than someone else’s, but there are many who believe the salaries are justified. Starbucks CEO and founder Howard Schultz was paid $21.5 million last year— 994 times greater than the median $21,600 paid to employees. But shares of the corporation tanked when Schultz stepped down a few years ago, and have raced higher ever since he returned, so investors aren’t complaining. The argument goes that high level CEOs, like movie stars or professional athletes, have specialized skill sets that deserve tremendous compensation.
But will the new rule have any effect? There are voices that say the point of the rule is to publicly shame companies into dropping CEO pay and raising the pay of average workers. That could happen, but public shaming has its limits. The U.S. has been requiring companies to reveal how much they pay their CEOs since the 1930s, and CEO pay continues to soar even with that transparency.
Others say the strategy of public shaming isn’t entirely without merit—consumers seem to care. A paper from researchers at Harvard Business School found that a company with a 1,000:1 CEO pay ratio needed to charge 50 percent less for its products in order for consumers to view them as favorably as full-price products from a company with a 5:1 ratio, when that information was visible.
But the bigger problem, according to an article in the Atlantic, is that the ratio isn’t very useful in the first place. “The bottom line is that this is one of the sillier and more pointless disclosures that I have ever seen,” David Yermack, a professor of finance at NYU’s Stern School of Business.
As Kevin Murphy, a professor of finance at USC’s Marshall School of Business, explained in the article, it’s not a useful yardstick across companies. “Ironically, the ratio will not be as high for Goldman Sachs and other firms where the median ‘worker’ is a highly paid professional—for example, Goldman will have a lower ratio than JPMorgan Chase, because the latter has commercial banks and the median worker is likely a teller,” he says. Similarly, ratios could look very different for fast-food companies than they will for tech companies, or banks, or media conglomerates.
Nonetheless, the data will be helpful in tracking general trends on how CEO pay has climbed relative to workers’. These new rules will certainly continue to keep ever-increasing CEO pay into a new light—one that will be easier for employees and consumers to relate to, for better or worse.
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