SEC Adopts CEO Pay Ratio Rule, Five Years After It Became Law

A new federal rule will require public companies to list their chief executives' total annual compensation as a ratio to their workers' median pay, after the Securities and Exchange Commission adopted the rule Wednesday.

Today's vote comes five years after Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes the pay ratio rule. The vote also comes nearly two years after the SEC formally proposed the requirement.

In that two years, the agency received more than 280,000 public comments in support of the pay ratio rule. The SEC discussed and voted on the rule at an open meeting that started at 10 a.m. ET and didn't adjourn until after noon.

Update at 12:06 p.m. ET: Pay Ratio Rule Approved

The SEC's five commissioners have voted 3-2 to adopt the CEO pay ratio rule. Both Republicans on the panel — Daniel Gallagher and Michael Piwowar cited the influence of big U.S. labor unions as they voted against the rule.

Update at 11:47 a.m. ET: 'Pure Applesauce'

Speaking against the rule, Commissioner Daniel M. Gallagher, a Republican, says the description of the measure as a helpful tool for American taxpayers "is pure applesauce" — quoting Supreme Court Justice Antonin Scalia's take on the court's Affordable Care Act ruling.

Gallagher says the rule will only be used in the "naming and shaming" of highly paid CEOs and the companies that employ them.

Update at 11:10 a.m. ET: Commission Takes Up Rule

Noting that the pay ratio rule is "controversial," Chairman Mary Jo White says at today's session, "It is the law, and we are required to carry it out."

She added that the rule gives companies discretion in how to interpret the measure. White also called the rule both reasonable and flexible.

The commissioners will discuss the rule and then hold a vote. It's the last major piece of business for today's meeting.

Our original post continues:

Under the rule, many public companies must publish "the ratio of the annual total compensation of the chief executive officer to the median of the annual total compensation of the company's employees."

The final version of the rule provides companies with more leeway on determining their median employees' pay, such as provisions that allow them to use statistical sampling to define the compensation of their median employees once every three years.

Companies will also be allowed to omit non-U.S. employees from their tally.

The rule would not apply to "emerging growth" and small companies, the SEC says. The agency defines emerging growth businesses as those with less than $1 billion in annual gross revenue.

More than 280,000 public comments supporting the pay ratio rule were submitted to the SEC. The agency has posted those comments online — and summarized others into groups based on their content.

For instance, some 70,000 comments included a sentence like this one, the SEC says:

"As income inequality reaches unprecedented heights, the public has the right to know which corporations are fueling the yawning gap between rich and poor."

And the agency says that nearly 20,000 comments included these ideas:

"Disclosing corporate pay ratios between CEOs and average employees will discourage the outrageous and reckless pay practices that fueled the 2008 crash.

"Knowing which corporations heap riches upon their executives while squeezing struggling employees also will be a useful factor for me when considering which businesses to support with my consumer and investment dollars."

Other than giving more detail to discussions of pay gaps between average workers and executives, it's uncertain what effect the disclosure will have. As Bloomberg News' David Gura reports, researchers say "the more disclosure you have about executive compensation, the more it tends to go up, because these boards want the best candidates."

Critics of the rule say it would impose an expensive new bookkeeping requirement on companies.

"Business interests such as the U.S. Chamber of Commerce have lobbied against the requirement," the AP reports, "saying it will be costly and time-consuming for companies to gather the information. The Chamber maintains it will cost U.S. companies more than $700 million a year, compared with the SEC's estimate of about $73 million."