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In Focus: AFL-CIO White Paper on CEO-to-worker pay-ratio disclosure and its importance to investors

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    AFL-CIO White Paper on CEO-to-worker pay-ratio disclosure and its importance to investors

In Focus

AFL-CIO White Paper on CEO-to-worker pay-ratio disclosure and its importance to investors

The AFL-CIO recently released a white paper on the importance of disclosing CEO-to-worker pay ratios to investors. The paper expounds on Section 953(b) of the 2010 Dodd-Frank Act, which introduces a new set of reporting requirements on pay-ratio disclosure for publicly traded companies.

The act came into being due to public and investor concerns regarding the exponential growth of executive compensation over the past few decades. There are several investor-related risks associated with excessively high levels of CEO compensation, which include creating additional financial expense that ultimately comes out of the company’s shareholders’ pockets and providing incentives for executives to take unnecessary risks.

Currently, existing disclosure requirements do not call for companies to make employee compensation data publicly-available. However, under Section 953(b) publicly-traded companies would be required to make transparent to the public both the average annual compensation for all employees as well as the ratio of the CEO’s pay to the average employee wage.

The white paper maintains that making the disclosure of CEO-to-worker pay ratios mandatory provides many material benefits to investors and shareholders. The provision of this information serves as a good indicator of company performance (as higher employee wages traditionally indicate higher employee morale), and can paint investors a more accurate picture of compensation and responsible employment practices – factors shareholders consider while assessing their investments. Additionally, transparency on the issue would encourage companies to moderate the level of CEO pay and compensate their executives according to their performance.

The U.S. Securities and Exchange Commission (SEC) will make a decision on the proposed rule later in 2011.

For more information:

The AFL-CIO’s white paper “Dodd-Frank Section 953(b): Why CEO-to-Worker Pay Ratios Matter For Investors”

The CWC campaign page on pay-ratio disclosure

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