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Examining tricky ratio of chief’s pay to workers’

By Andrew Ross Sorkin

New York Times

Last week, we learned that Timothy D. Cook, Apple’s chief executive, was paid $9.2 million for 2014. Jamie Dimon of JPMorgan Chase made $20 million. The Starbucks chief Howard Schultz took home $21.5 million. And Viacom said that its chief, Philippe Dauman, received $44.3 million.

For any one of them, it’s a lot of money.

Those numbers are even more pronounced when set against Oxfam’s study on inequality, which said that those in the top 1 percent were set to control 50 percent of the world’s wealth by next year. That statistic has become a rallying cry for the average worker.

While many have contended that chief executives of successful companies deserve handsome pay packages, that assertion does not answer how to value the contribution of the average worker in relative terms.

That’s one of the reasons a provision was passed almost five years ago as part of the Dodd-Frank financial reform act to try to quantify that. Public corporations were supposed to disclose the ratio between the pay of their chief executives and the pay of their median workers.

Several years later, it is still almost impossible to know that figure. A fierce debate over the disclosure requirement continues, delaying adoption of that section of the Dodd-Frank law.

Mary Jo White, the chairwoman of the Securities and Exchange Commission, said in November that she hoped the rule would be completed before the year ended. Today the rule remains, well, nowhere to be found.

Of course, corporate America has resisted the rule, calling it a politically motivated gimmick meant to pressure boards into cutting back on rich executive compensation packages.

And, to some degree, that view isn’t wrong. The AFL-CIO is pretty upfront about its enthusiasm: “Disclosing this pay ratio will shame companies into lowering CEO pay.”

How hard can it really be for companies to calculate the ratio?

In truth, it’s harder than you might imagine. The SEC estimates companies will spend some $73 million annually to calculate their figures and comply with the law. The U.S. Chamber of Commerce claims it will cost 10 times that, more than $700 million annually.

The challenge is that most multinational companies have various payroll systems around the world. Thus, it’s not easy to just press a few buttons to figure out the median pay of a company’s worker.

Among the variables: Do you count just employees working in the United States? Or should large multinationals calculate the figure based on its workers worldwide?

Then there’s the issue of whether contract workers should count.

As a result of all the resistance, the agency has avoided ruling on how to put the requirement in place. In a hint of the agency’s own misgivings about the law, it said: “The lack of a specific market failure identified as motivating the enactment of this provision poses significant challenges in quantifying potential economic benefits, if any, from the pay ratio disclosure.”

Thus, it appears that when the law is ultimately put into effect, it will be watered down and made so complicated as to be worthless.