The Financial Times reported
this week that lawyers for corporate America are warning of a “logistical
nightmare” from a provision in the new financial reform law that requires
companies to disclose the ratio between a chief executive’s pay package
and that of a typical employee.
The lawyers say that the
ratio would be unfairly complex to calculate and could encourage false
comparisons. But the real problem is that C.E.O.’s and corporate boards
would have to justify — to shareholders, employees and the public — what
are sure to be some very large gaps between pay at the top and pay for
Federal filings already
tell investors how much top executives make. The median salary of a
Standard & Poor’s 500 chief executive last year was $1.025 million, and
the median total pay package including bonuses and nonsalary income was
$7.5 million, according to Equilar, an executive compensation research
firm. The median pay of private-sector workers in the United States was
about $30,000 in 2008, the most recent year of data. With benefits added
in, that comes to roughly $36,000.
data, however, it is impossible to measure and judge the effect of pay
structures on companies and the broader economy. It is clear that C.E.O.
pay has skyrocketed while workers’ pay has stagnated; it is also clear
that skewed pay and rising income inequality correlate to bubbles and
How does the pay gap
between the boss and the workers figure into performance? Are companies
efficiently providing goods and services or are they being run for the
enrichment of the few? Disclosure of the gap could help provide answers
and in the process, help investors, policy makers and the public
understand the forces that are shaping business and the economy.
It is up to the Securities
and Exchange Commission to develop rules to calculate employees’ total
compensation, including whether to include workers outside the United
States. The best approach would be to measure the pay gap both against the
global work force and the American work force, because company performance
— and the impact of corporate decisions on investors and the economy — are
tied to each number.
Corporate opponents of the
law insist that pay-gap disclosures would be misleading. A company that
outsources its low-wage work, for example, could have a smaller gap than a
company that employs low-wage workers, even though the outsourcer is not
necessarily a better-run company. That misses the point. The point is to
calculate, disclose and explain the gaps as they exist for the way a
company does business.