Value In Sharing The Ratio Of CEO's Pay To Employees'?

The U.S. Securities and Exchange Commission recently proposed new rules requiring public companies to disclose the ratio of CEO compensation to the average employee's pay. Host Arun Rath talks with Cornell law professor Lynn Stout about how executive pay got to be so high, and what effect the proposed rules may have.

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ARUN RATH, HOST:

In the 1980s, the title of chief executive officer might earn you a salary 40 times larger than your company's average employee. Today, a top CEO makes at least 200 times more than their workers, and some of them many times that. A law passed after the 2008 financial meltdown required large corporations to disclose more information about the difference between executive and worker pay. Now the Securities and Exchange Commission is moving forward with that mandate with a new rule proposed that would make companies disclose the ratio of CEO to average worker salaries.

To learn more, we called Lynn Stout. She's a professor at Cornell Law School, where she teaches corporate law and ethics and has studied the SEC's plan.

LYNN STOUT: This strategy is designed to try and give the shareholders a chance to weigh in with their opinions. Sadly, there's also two reasons to think it's going to cause a lot of trouble without having its intended effect.

RATH: So the proposed rule would only require disclosure. Is there an idea that it would do anything else beyond that symbolic aspect?

STOUT: Well, I think one of the hoped for and direct effects would be that the disclosure might affect shareholder voting and whether shareholders would re-elect directors who allowed CEOs to get these large pay packages. I think that's the intended purpose. Again, though, I think there's real reason to doubt whether we're going to see that in very many cases.

RATH: I'm assuming that if the businesses wanted to disclose, they'd be disclosing them by now. So what's the pushback been like?

STOUT: Well, the pushback's been pretty strong but not for the reasons, I think, that most people think. They already have to disclose a lot of information about the absolute amounts of pay that their top executives get. The pushback is that this calculation between top executive pay and median employee pay is actually a really hard calculation to make. It can be extremely hard with a global corporation with hundreds of thousands of employees or even millions of employees in the case of a company like Wal-Mart to figure out what exactly the median employee's paid, especially since some work part time, some may work in other nations.

RATH: I'm kind of surprised that they wouldn't have had that worked on already, wouldn't already have the answers ready for such a thing.

STOUT: Well, they know what their employees are paid, but they have never had a recent to make the sorts of calculations that the SEC is demanding.

RATH: Lynn, how do we get to this situation? I don't imagine that we started out with businesses in this country with the disparity being so dramatic.

STOUT: Not even close. And to me, that's the really interesting part of the story. If you go back even 20, 25 years, you'll find that the typical CEO of a Fortune 500 company received a total pay package valued at about a million dollars a year. To today's CEOs, that sounds ridiculously small. It really sounds quaint. How did it change? I think there's a lot of evidence that it changed because Congress changed the tax code in a way that encouraged companies to pay their CEOs more. And that happened in 1993. And if you look at CEO pay, it's in 1993 that it takes off and starts leading to the very high levels that we see today.

RATH: So you can't wind back the clock, but is there any prospect of anything that's a bit more robust, something with more teeth that could actually affect this issue?

STOUT: Well, I don't see why we can't wind back the clock. I would love to see the Congress look at the tax code again. You could have a very simple rule that says any compensation in excess of three or four million's not deductible. You could even tie it to a ratio, something simple to measure like the minimum wage. Any CEO pay that's more than 100 times the minimum wage is no longer tax deductible. So there are lots of ways to approach this problem.

RATH: I'm just curious because, you know, the tenor of the debate in the outside world - inside corporate boardrooms, is there a debate about the ethics of that kind of pay disparity?

STOUT: Well, I wish there were more debate. You do hear some. But, of course, we've now had 10 or 20 years of runaway CEO pay. And I'm afraid to a lot of people in business, that's the new normal.

RATH: Lynn Stout is a professor at Cornell Law School where she teaches business and corporate law and ethics. Lynn, thank you so much.

STOUT: Thank you, Arun.

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