Richard Trumka is the president of the A.F.L.-C.I.O., the nation’s main labor federation.
Millions of Americans invest in the stock market through their retirement funds and pension plans. Investors evaluate numerous metrics to determine where to place their hard-earned savings, but another measure could help determine whether a company is a good buy: the chief-executive-to-worker pay ratio.
It has been well documented that large pay gaps between chief executives and their workers severely weaken companies and put investments in those companies at risk. These gaps inhibit teamwork and lead to lower job satisfaction and morale, higher employee turnover, reduced productivity and inferior product quality. Companies with low employee morale are routinely outperformed by competitors with higher morale. According to Moody’s Investors Service, excessive executive compensation indicates a weak board and poor decision-making.
All of this makes the pay ratio an important financial indicator that should have investors thinking twice before they invest their money. Many money managers and stockholders already recognize this. That’s why the Securities and Exchange Commission was flooded with letters supporting its proposed rule to require companies to disclose the pay ratio between the C-suite and the shop floor, which Congress required in 2010 as part of the Dodd-Frank financial overhaul law. The vast majority of the more than 128,000 comments the S.E.C. received were supportive.
Pension funds like the California Public Employees’ Retirement System submitted favorable comments. So did the offices of the New York City comptroller and the New York State comptroller. Even international funds from the Netherlands and Britain sent letters of support. They all had a common theme: additional disclosures of the pay ratio would help investors make more informed decisions.
However, it’s not just the impact of an investment that is relevant when considering these pay ratios. In an age of record income inequality, such a disclosure will provide insight into the stark contrast between the paychecks of the 1 percent and the 99 percent. Disclosure of the pay gap can make transparent the lavish overcompensation of some executives and how that contrasts with workers’ struggles to pay their bills during a time of stagnant wages. Transparency could also inspire corporate America to change.
Calculating the pay ratio can be done efficiently and inexpensively. Don’t be influenced the protests from the Chamber of Commerce that it would be prohibitively expensive. In comments to the S.E.C., Intel estimated its costs of calculating the ratio would be just $15,000 a year. And Lynn Turner, the S.E.C.’s former chief accountant, told a Senate Banking Committee hearing that he did not expect that calculating the ratio would be expensive. “If it is a high-cost number,” he said, “that company probably has some other management problems.”
That’s why some companies like Noble Energy, the Northwestern Corporation, First Real Estate Investment Trust of New Jersey and the Bank of South Carolina already calculate and voluntarily disclose this ratio. India has also recently adopted a similar regulation, so any company that operates in India will be required to disclose the pay ratio.
To paraphrase former Supreme Court Justice Louis D. Brandeis, sunlight is the best disinfectant. Investors need to see this ratio to help them make informed decisions. Corporate America should stop howling in protest.