Show Me the Money: The CEO Pay Ratio Disclosure Rule and the Quest for Effective Executive Compensation Reform

By Biagio Marino

Abstract

The CEO Pay Ratio Disclosure Rule (“the Rule”) represents the latest regulation designed to combat one of corporate governance’s most polarizing issues:  the meteoric rise of executive compensation and its damaging effect on the income inequality gap in the United States.  Adopted by the Securities and Exchange Commission (SEC) in August 2015, and effective in 2018, the Rule comports with over eighty years of regulations that have required public companies to disclose information about their pay practices.  The Rule now mandates further public disclosure by requiring companies to reveal the ratio of their CEO’s compensation to the median annual compensation of all other company workers.

Although a company’s board of directors determines compensation levels, the CEO Pay Ratio Disclosure Rule embodies a renewed effort to empower shareholders in the process.  By requiring companies to disclose more information about their pay practices, regulators believe that shareholders will be in a better position to hold boards accountable for awarding excessive compensation.  However, given the limited results of similar regulations, concerns have emerged regarding the disclosure methods employed and whether the current corporate structure of board empowerment will continue to inhibit shareholders from achieving this regulation’s intended purpose.

This Note discusses past attempts to combat growing levels of executive compensation, analyzes the role of both shareholders and directors in the compensation-setting process, and discusses conflicting views concerning shareholder-director power, the disclosure mechanism, and the pay-ratio metric.  Finally, this Note balances these views by proposing alterations to the CEO Pay Ratio Disclosure Rule that preserve the long-standing corporate structure, while also offering shareholders an accountability mechanism to enhance the Rule’s intended results.