The Securities and Exchange Commission proposed a new rule that would require publicly traded companies to disclose how much their CEOs earn compared to their employees. Specifically, it would require them to tell investors the ratio of how much CEOs make compared to the median employee’s salary.
Supporters of the proposal said it would enhance accountability to shareholders and employees at a time when executive pay and compensation are climbing much faster than the average American’s and public scrutiny over outsized pay packages at several big corporations. (Bloomberg put together an interesting analysis earlier this year of CEO-to-employee pay ratios.)
"The simple fact is that large pay disparities between CEOs and their employees affect a company's performance," AFL-CIO President Richard Trumka told Reuters. "When the CEO receives the lion's share of compensation, employee productivity, morale and loyalty suffer."
The SEC’s proposal brings up a thought-provoking question for business owners. Though leaders of privately held companies don’t have to disclose anything about their compensation, should they volunteer such information? In general, does disclosing company leader’s pay create more trust and accountability in the workplace and show ethical management? Or does it just make employees bitter to know their boss earns so much more?
More startups are adopting the viewpoint that disclosing every employee’s salary—including the boss’s—creates more trust in the workplace, according to The Wall Street Journal. Particularly among Millennials, accustomed to sharing information on Facebook and using salary-comparison tools like Glassdoor.com, disclosing salary information may feel second nature. "People are much more willing to talk about pay than they were even 10 years ago," said Kevin Hallock, director of the Institute for Compensation Studies at Cornell University.
Namaste Solar, an employee-owned company in Boulder, Colorado that designs and installs solar electric systems, discloses everyone’s salary on a regular basis and has a rule that no employee can earn total compensation of more than four times that of another employee. CEO Brian Jones says the practice helps alleviate the usual suspicions and preoccupations among employees that a colleague earns more than them. Full disclosure engenders more trust that pay is handled equitably, he says. "Usually, salary is an emotional and sticky situation," Jones told BusinessInsider.com. "They have an emotional impact on all of us and in the end, people actually waste more time and energy wondering how much Bob or Jill is making and thinking the worst."
However, one study suggests salary disclosure is not such a feel-good thing after all. A 2010 research paper by economists at the University of California-Berkeley and Princeton University analyzed a public salary database of University of California employees. Those employees who were paid below the median were unhappy when they discovered their colleagues’ pay and were more likely to seek jobs elsewhere.
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