Executive pay packages have long been political targets, but they may become even bigger ones next year.
That’s when a controversial new rule, required by the Dodd-Frank Act of 2010, will require companies to compare their chief executive’s pay to that of an average worker. Bloomberg, in 2015, estimated that the CEO of McDonald’s earned 664 times as much as the folks working in its restaurants.
That’s an inflammatory number, although not an especially meaningful one for comparison purposes. A fast-food company could reduce the ratio by selling more restaurants to franchisees, or by outsourcing its janitorial services.
“It will give political fodder to politicians who don’t like corporations, but I don’t think it’s an economically meaningful number to focus on,” says Radhakrishnan Gopalan, assistant professor of finance at Washington University.
In February, the Securities and Exchange Commission asked for comments on whether it should delay or reconsider the pay-ratio disclosure. Time is growing short, however, to revoke the rule.
Eric Marquardt, a compensation consultant for Pay Governance in Clayton, says companies must spend between $25,000 and $35,000 just to gather information and calculate the ratio the way the SEC requires. Some of his clients have already begun compliance efforts.
“It’s the most expensive and the least valuable part of Dodd-Frank,” Marquardt said. “Yet, because of a lack of staffing (at the SEC) and the timing, it’s highly unlikely at this point that repeal will see the light of day.”
The SEC would have to go through a full rulemaking process to reverse the pay-ratio rule it adopted in August 2015. Even then, it would have to finesse the fact it’s under a congressional mandate to require such disclosure.
Some Republicans are talking about repealing all or part of Dodd-Frank, but that’s a tall order in a Congress that’s also dealing with complex health care and tax issues.
Dodd-Frank had other provisions that affect executive pay. It required companies to conduct nonbinding “say on pay” votes, which in just six years have become a central part of corporate America’s annual-meeting ritual.
“Institutional investors have gotten used to this,” Marquardt says. “They like having an annual vote on pay.”
Some companies groused about the votes at first, but many now say they appreciate the feedback from shareholders. The average company gets about 90 percent support for its pay practices.
Even though the votes are nonbinding, they’re something that shareholders value. That is probably enough to keep them in place, Marquardt says, Dodd-Frank or no Dodd-Frank.