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The chief executive of General Electric raked in a $37.3 million pay package last year, a large sum by any standard.
But how much larger was it than the average pay of the 305,000 employees who helped General Electric earn billions in profits that year? The industrial giant did not disclose that comparison, and corporate America rarely reveals how the compensation of the chief executive stacks up against that of the workers in the ranks below.
That will soon change.
After a long delay and plenty of resistance from corporations, the Securities and Exchange Commission (SEC) approved in a 3-to-2 vote on Wednesday a rule that would require most public companies to regularly reveal the ratio of the chief executive's pay to that of the average employee.
Representatives of corporations were quick to assail the new rule, which will start to take effect in 2017, saying that it was misleading, costly to put into practice and intended to shame companies into paying executives less.
But the ratio, cropping up every year in audited financial statements, could stoke and perhaps even inform a debate over income inequality that has intensified in recent years as the wages of top earners have grown far more quickly than anyone else's.
Fifty years ago, chief executives were paid roughly 20 times as much as their employees, compared with nearly 300 times in 2013, according to an analysis last year by the Economic Policy Institute. "We have middle-class Americans who have gone years without seeing a pay raise, while CEO pay is soaring," said Senator Robert Menendez, the New Jersey Democrat who helped insert the pay ratio rule into the 2010 Dodd-Frank overhaul of financial regulation. "This simple benchmark will help investors monitor both how a company treats its average workers and whether its executive pay is reasonable."
The rule, which the SEC's two Republican commissioners opposed, does not in any way limit how much a chief executive is paid.
Instead, it requires that public companies take their chief executive's compensation, which is already disclosed annually, and compare it with the median pay figure for all their other employees.
The drafters of Dodd-Frank primarily intended for the ratio to be used by shareholders, who could apply it when comparing compensation between similar companies. If, for instance, the gap between the pay of the chief executive and the average employee turns out to be far higher for PepsiCo than Coca-Cola, shareholders might press Pepsi to explain the difference.
Some shareholders might even criticise executives at companies with high ratios in the belief that better-paid rank-and-file workers perform more productively.
Corporate performance aside, the ratio will no doubt be seized upon by those who believe that the wages of moderate earners have not grown fast enough.
Economists who study incomes say that ever-expanding executive compensation packages have played a substantial role in increasing the divide between the wealthy and everyone else. Thomas Piketty, a French economist whose best-selling book set off a global debate on inequality, asserted that higher wages for top earners in corporate America had been among the main drivers of the widening income differences in the United States.
The system is pretty much out of control in many ways," he said in an interview last year.
From the start, the pay ratio rule was a source of controversy.
Though the rule seemed to merely require a somewhat simple calculation, the SEC took a long time to finish it, going to great lengths to listen to the concerns that corporations expressed about the costs and complexity of the rule.
The delay frustrated supporters of the rule. Senator Elizabeth Warren, Democrat of Massachusetts, for instance, sent a sharply worded letter in June to Mary Jo White, chairwoman of the SEC, complaining about how long the rule was taking. White, on Wednesday, said in a statement said that the rule was "both flexible and faithful to the terms and objective of the statute." She joined the two Democratic commissioners in voting for it. Some analysts said that companies were not wrong in underscoring the potential costs of the rule.
While corporations have advanced payroll systems that would seem to make it relatively simple to calculate a median wage, they said that the rule required companies to make new calculations for workers across the globe.
In addition, the final median number will be in financial statements, which means companies need to ensure it is accurate.
"Calculating this figure is definitely not trivial," said Robert J Jackson, a professor of law at Columbia.
He said that the number might nevertheless be useful. "Management will have a more systematic understanding of what their employees earn - and that might be very beneficial, both for investors and for the public," he said.
Some labor union researchers, however, said that the agency appeared to give up too much ground in the final rule.
"There are definitely weaknesses that we are concerned about," said Heather Slavkin Corzo, director of investment at the AFL-CIO.
The rule takes a relaxed approach in several areas.
When calculating the median employee pay figure, the rule allows companies to choose a statistical sampling of its employees, rather than an actual survey of all its workers. In addition, companies can exclude up to 5 per cent of their employees who are not in the United States.
The rule also lets companies make a so-called cost-of-living adjustment - reflecting that lower wages in some places can buy the same goods and services as higher wages in other places - which would most likely increase the median employee pay figure. Still, companies applying the adjustment would also have to disclose the ratio without the adjustment.
And companies can calculate the median pay of employees on any date within the last three months of its fiscal year. Selecting the right date could result in the company leaving out many lower-paid seasonal workers.
"It allows the company to identify workers based on a snapshot," Slavkin Corzo said.
The first disclosures of the ratio will most likely start to appear in filings in early 2018. Before then, opponents of the rule may try to overturn the rule in the courts. Daniel M Gallagher, one of the Republican commissioners who voted against the rule, said at Wednesday's meeting of the commission that it "may be the most useless of our Dodd-Frank mandates."
The Center on Executive Compensation, which represented large corporations in lobbying against the rule, noted on Wednesday that shareholders in the past had generally voted against proposals that required companies to disclose pay ratios.
"Only a small segment of shareholders, primarily unions, certain pension funds and social activists, are likely to use the pay ratio to drive their own narrowly tailored agendas," the center said in a statement.
©2015 The New York Times News Service
