The Deal: Divided SEC Takes Shot at CEO Compensation
NEW YORK (TheStreet) -- Federal securities regulators voted on Wednesday along partisan lines to propose a controversial rule that would require corporations to calculate and compare the median annual pay of all its employees to its CEO compensation.
The provision is required by the Dodd-Frank Act, written in the wake of the 2008 financial crisis.
The proposal by the Securities and Exchange Commission, which sought to strike a delicate balance between the interests of global corporations and labor unions, comes after CEO pay has risen significantly compared to that of employees. The labor union AFL-CIO notes that in 2012 CEOs of S&P 500 index companies were paid 354 times more than rank-and-file workers. The labor union also reported that thirty years ago, CEOs of the nation's largest companies received 42 times the pay of employees.
As sought by labor union and consumer groups, the proposal would require U.S.-based corporations to calculate the median annual compensation of all its employees including full and part-time workers outside the U.S.
However, the balance wasn't enough of a compromise for Republican SEC commissioners, who voted against introducing the measure. They argued that global corporations would have a difficult time calculating the pay of their thousands or tens of thousands of oversea employees.
Michael Piwowar, a new Republican commissioner at the agency, said "shame on us" for voting on this proposal and putting "special interests" ahead of investors. He argued that the measure is intended to shame CEOs and instead will harm investors because it will encourage global corporations to maintain a low pay ratio, which will discourage expansion of business operations into regions with low labor costs.
"It will unambiguously harm investors," Piwowar said.
However, a former SEC official familiar with the proposal argued it was unlikely that a corporation will make a decision not to expand into a new region because hiring low income employees there will translate into an embarrassing pay ratio. "I give very little credence to that argument," he said.
Business groups argued that these U.S.-based international firms would have a difficult time reconciling pay processing systems set up in different parts of the globe to meet the new requirements. They also will have a hard time identifying part-time employees or employees of joint ventures, all of which would create an unmanageable costly burden.