Public U.S. companies will be required to compare their CEO's compensation to the median pay of all employees beginning this year, leaving company boards to speculate whether these disclosures may rein in CEO pay, according to an analysis in The Washington Post.
Anders Melin, executive compensation reporter with Bloomberg, offers these five insights on CEO pay ratio disclosures.
1. Large executive compensation packages stem from intense competition to find managers capable of leading global organizations. These pay packages are closely tied to performance. Company boards argue executives today are smarter, scarcer and are working harder, explaining the pay gap between U.S. CEOs and their employees, which has increased six-fold in three decades.
2. Critics of company boards argue CEOs make their fortunes at the expense of shareholders and other workers, since the average American employee's pay has only incrementally increased in recent decades.
3. People throughout various countries think pay gaps between CEOs and the average worker are smaller than they actually are, according to a 2014 global survey. U.S. survey respondents thought the ratio of CEO to average worker pay was 30 to 1.
4. However, leaders of S&P 500 companies made approximately 347 times more than their employees in 2016, up from 41 to 1 in 1983, according to the AFL-CIO labor union.
5. The 2010 Dodd-Frank Act, which requires companies to disclose CEO pay ratios in regulatory filings, also requires companies to let shareholders approve or reject executive compensation policies. This vote provided investors with a way to publicly express dissatisfaction with company board members. As a result, companies may change pay plans to avoid drawing the attention of activist investors and embarrassing directors.