Publicly traded companies will have to disclose the pay ratios of their CEOs and the median pay of their workforce thanks to a split vote by the US Securities and Exchange Commission (SEC) on Wednesday.

SEC chairwoman Mary Jo White said the regulator had no option other than to pass the rule, which passed in a 3-2 vote, with the two Republican commissioners voting against.

The commission was tasked with enforcing a number of provisions contained within the Dodd-Frank Wall Street reform act, which marked its five-year anniversary in July, including the pay-ratio rule. “It is the law and we are required to carry it out,” White said.

Opponents called the rule “pure applesauce”, “unconstitutional” and “literally a page from big labor playbook”.

The disclosure, set to come into force in 2017, will fuel a growing debate over income inequality and the minimum wage. Democrat presidential hopeful Hillary Clinton recently pointed out that “the average CEO makes about 300 times what the average worker makes”.

The vote comes two months after Massachusetts senator Elizabeth Warren attacked the SEC in a letter to White. “Under your leadership, the SEC has failed to finalize important Dodd-Frank rules requiring disclosure of the ratio of CEO pay to the median worker.

“On at least four different occasions that are documented in the public record, you promised members of the Senate that you would move quickly to finalize this rule,” Warren wrote, pointing to instances during White’s confirmation hearing in 2013 and in the months following her confirmation. “I cannot understand how and why this rule has been delayed for so long.”

SEC commissioner Luis Aguilar said the pay ratio rule was probably the most controversial rule that the committee was tasked by Congress to consider. He said that Wednesday’s vote brought the SEC a step closer to fulfilling this “congressional mandate”.



Under the final rule, companies will get to determine the methodology to find the median employee. The employee can be determined using statistical sampling and the companies are required to calculate it once every three years instead of each year. This should lower the compliance costs that many business said the rule would lead to. Additionally, companies can exclude 5% of their overseas workers when calculating the median employee.

The initial compliance costs are estimated at $1.3bn.

The rule was proposed by the SEC in September 2013 and was to be followed by a 60-day public comment period. Many expected the rule to be finalized in 2014, which did not happen.

Now that the rule is finalized, it is expected to go into effect in 2016. This means that companies will be required to publicly disclose the pay ratio in their filings in 2017.



Prior to that, the SEC is expecting a pushback from the companies and associations representing their interests.

Daniel Gallagher, a Republican SEC commissioner who voted against the rule, said he expects corporations to consider challenging the rule in court. He said similar “name and shame” legislation had run afoul of the first amendment and that the rule may be unconstitutional.

The US Chamber of Commerce is also reportedly consider pushing Congress to pass legislation to repeal the rule. Previously, the chamber argued that the rule will be too expensive and could mislead investors.



Pension funds, which have come out in favor of this rule, can use it to advance their own social agenda, according to Michael Piwowar, a Republican commissioner.

“This pay ratio rule is literally a page from big labor playbook,” he said.

Gallagher quoted supreme court justice Antonin Scalia’s dissenting view on the recent marriage equality vote. “This is pure applesauce,” he said. According to Gallagher, the SEC should not have considered this “nakedly political rule”. He said the only way he could vote in favor of disclosing pay ratio is if it was limited to full-time employees in the US.



Others, like Fabrizio Ferri, associate professor of corporate governance and executive compensation at Columbia Business School, do not believe that disclosing the pay ratio will make much of a difference. According to Ferri, compensations at US corporations are already fairly detailed and that information is already available to interested investors.

“To an institutional investor, it doesn’t make a difference. It’s good for discussion. It’s good for press, but won’t make the institutional investors vote differently,” Ferri previously told the Guardian.

According to White, the commission had received 287,400 comment letters with 15,000 unique letters. Among them, she said, were letters from shareholders who said that this additional company-specific information will be important to them when they are considering CEO compensation.