U.S. companies must soon begindisclosing what many would rather keep secret: The ratio betweenthe CEO's compensation and the paycheck of the company's medianworker. The mandate was included in the 2010 Dodd-Frank Act to shedlight on the growing income gap between executives and workers.Opponents say it's only meant to embarrass executives andwon't be useful to investors. One critic called it an example of“bigotry against the successful.”

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1. What are we likely to learn?

The disclosures will provide a first-ever glimpse into howthousands of U.S. companies compensate their workers, plus a moreaccurate sense than ever before of the CEO-to-worker paygap. According to the AFL-CIO, the average S&P 500 chiefexecutive officer got $13.1 million in 2016, compared with about$37,000 for the average worker, a 347-to-1 ratio. The worker figurein that calculation is based on Bureau of Labor Statistics nationalsampling data. Now, such ratios will bebased on actual company payrolls.

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2. Which companies must comply, and by when?

Publicly traded U.S. companies must disclose the ratio inregulatory filings for fiscal years starting on or after Jan. 1,2017. Because executive compensation is always reported in thefiscal year after it's paid, most businesses will reveal theirratios for the first time in 2018. Small public companies andinvestment firms are exempt.

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3. What fallout should we expect?

The disclosures will likely fuel the debate on U.S. incomeinequality. Some companies and directors are worried abouthow the media will characterize their ratios. Others aremore concerned with how employees will react, especially the halfthat earns below the median wage, and how the information mightaffect negotiations with unions. These worries led business groupsto lobby Republican lawmakers in 2017 to scrap the pay ratio,arguing that it was too difficult to calculate.

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4. How hard is it to determine the median employee's pay?

The bigger the company, the harder it gets. Global companiesoften have separate payroll systems in different countries and payemployees in various currencies. Workforces consist of a mix offull-time and part-time people and contractors. Some workers getpension contributions, bonuses, profit-sharing plans, and otherbenefits in addition to salaries. As a result, the U.S. Securitiesand Exchange Commission, the agency implementing the rule, grantedcompanies some discretion to ease the burden.

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5. What sort of discretion?

Because workforces tend to change over the course of a year,companies can use the number of employees they have on any singleday within three months of themost recent fiscal year-end. They may exclude all contractors and a share of non-U.S.workers (but no more than 5 percent of the total workforce). Allpart-time employees, however, must be counted, even if they makefar less than most full-timers. The SEC also said companies don't have toinclude non-salary compensation, such as 401(k) contributions andprofit-sharing plans, as long as excluding them doesn'tsubstantially change the median pay figure. And once the medianemployee's pay has been pinpointed, the company can use that as thebenchmark for as many as three years.

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6. How comparable will the ratios be?

Comparisons could be misleading. Some won't capture nuances,such as how a company calculated median worker pay. Investmentbanks, whose employees tend to be well-compensated, may come outlooking better than companies reliant on part-timers making closeto minimum wage, such as retailers, even if the bank chief makesfar more than the retailer CEO. Executive-pay figures also can varyby several million dollars from one year to the next, which willaffect the ratio even if median pay doesn't move.

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7. How did the rule come about?

It was championed by Senator Robert Menendez, a New JerseyDemocrat with strong union ties. He hoped forcing companies toreveal the gap between typical workers and CEOs would help restore“sanity to runaway executivepay” and give investors a glimpse of how employees are treated.CEO pay in the U.S. has soared while wages for many Americans havebarely budged in decades.

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8. How much will investors care?

Some public pension funds and labor unions have been vocalproponents of the ratio. But there's scant interest among someof the biggest institutional investors. The ratio will “perhaps domore to inflame than to inform,” Vanguard Group Inc.'s GlennBooraem, who oversees the firm's governance efforts, said at a 2017conference. At the same event, Donna Anderson, T. Rowe Price GroupInc.'s head of corporate governance, said the pay ratio is “not aninstitutional investor issue—it's a local newspaper issue.”

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9. Why did it take so long to put the rule in place?

While the pay ratio is merely 18 lines in the 2,300page Dodd-Frank Act, it became one of the law's most controversialprovisions. The SEC was flooded with comment letters and lobbyingefforts as business groups, companies, and executives weighed in.This delayed the rule-making process. The agency finally voted to approve therule in 2015.

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10. Do other countries have similar requirements?

U.K. Prime Minister Theresa May has proposed rules requiringcompanies to publish the pay ratio between CEOs and their averageBritish employees by June. A German lawmaker in the EuropeanParliament is seeking to force banks in theEuropean Union to disclose pay ratios. In 2013, Swiss votersrejected a proposal tobar executives from getting paid more in a month than theirlowest-paid workers would in a year, which would have capped theratio at 12-to-1.

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See also:

From: Bloomberg

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