Pressure to Close the Pay Gap

http://www.nytimes.com/2016/05/11/opinion/pressure-to-close-the-pay-gap.html

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The strong case for the rule requiring companies to report the gap between the pay of the chief executive and everyone else keeps getting stronger.

The original rationale for the rule, mandated under the Dodd-Frank financial reforms of 2010, was that excessive executive pay encouraged corporate recklessness, fostered economic instability and deepened income inequality. Disclosure, which will begin in 2018, was intended to create public pressure on corporations to rein in executive pay.

Pressure is now building in other ways. The chief executive of Norway’s $870 billion oil fund — the world’s largest sovereign wealth fund — told The Financial Times recently that excessive executive pay had become a fundamental issue and that the fund would soon set forth principles it expects the 9,000-plus companies in which it holds stakes to follow.

There is also new research suggesting that companies with large pay gaps tend to be less profitable over time than those with narrower gaps. A study by MSCI, an investment research firm, examined nearly 600 companies in 20 countries and 10 sectors from 2009 to 2014.

In nine of the 10 sectors — encompassing technology, energy, consumer goods and services, health care, finance and industrial firms — large pay gaps and lower profits went hand in hand. The only sector in which profits were not hurt by big pay gaps was industrial materials, including chemicals, metals, mining and construction products.

Why did large pay gaps hurt profitability? One answer the study gives is that the gaps generally reflect short-term, corporate get-rich-quick tactics and strategies that crash in the end, leaving employees and long-term investors worse off.

Employees and labor activists will be able to use pay-gap information in pushing to trim executive pay packages as part of their efforts to raise worker pay. The disclosures may also influence consumers who prefer to do business with companies they perceive as fair.

Among investors, however, the expectation has been that only labor-related pension funds are likely to pay much attention to pay-gap disclosures; other investors are expected to dismiss them as unrelated to corporate performance. They need to think again.