The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203 ) was signed into law on July 21, 2010, as a response to the 2008-2009 financial crisis. The act mandated extensive financial regulatory reform. Section 953(b) of the act, the so-called pay ratio provision, requires the Securities and Exchange Commission (SEC) to craft rules necessary to implement a requirement that public company quarterly mandatory disclosures to the agency include the ratio between the total compensation of their chief executive officer (CEO) and all other employees. The pay ratio provision has been the subject of considerable interest and discussion in Congress and elsewhere. Driven by concerns that the corporate costs of arriving at the disclosures would exceed their benefits, legislation was introduced in the 113 th Congress to repeal the provision. On September 18, 2013, the SEC proposed rules to implement the pay ratio provision. To address concerns over the challenges of calculating worker median pay, the SEC has proposed giving firms the flexibility to "select a [calculation] methodology," which could include the use of a statistical sample of the total worker population. After its release, the SEC proposal, which the public was invited to comment on for 60 days, became central to the public policy debate on the costs and benefits of implementing the pay ratio provision. This report provides insight into the debate over the pay provision, the SEC proposal to implement the provision, and legislation to repeal the provision. It does so by (1) examining the debate over whether public company executives are overpaid; (2) describing the pay ratio provision and the SEC proposals to implement it; (3) examining various responses to the pay ratio provision and the proposal to implement them; (4) describing legislation to repeal the provision; and (5) examining the public policy debate over the potential costs and benefits of the pay ratio provision and the implementation proposal. Public company corporate CEOs serve at the pleasure of a company's board of directors, whose members are supposed to represent the interests of—and are elected by—the shareholders. The CEO's pay is typically a combination of base pay, an annual bonus tied to performance, grants of stock, stock options, contributions to a retirement program, and various benefits such as the use of limousines and club memberships, and it is formally set by the company's board of directors. In principle, board members bargain for the CEO's services on behalf of company shareholders. Moody's, a major credit rating agency, identified several reasons why the award of proper levels of compensation to corporate executives like the CEOs matters: [I]ncentives for the key leaders help to shape company policies and performance pressures. Managers of corporations have broad powers and a wide range of discretion. Boards typically offer managers substantial and elaborate financial incentives (particularly in the United States) in significant measure to encourage certain priorities and types of behavior. Second, effective compensation policies are important for executive recruitment and retention.... Excessive pay raises governance issues, but investor interests also can be harmed by executive remuneration policies that fail to attract and retain effective leadership. Third, where disclosure on executive compensation is reasonably good (as in the United States, Canada and certain other markets), pay practice can provide some visibility into the relationship between the board of directors and senior management, and on whether management is in fact accountable to the board. Unusually high pay can signal a weak board, particularly if pay levels have limited relationship to performance. A 2005 Moody's study … found an empirical relationship between (1) outliers that pay very high levels of bonus and stock option pay in comparison with peers and (2) subsequent realized credit risk. While the study did not demonstrate causation, we believe that a likely factor in this linkage is the degree to which unusually high executive pay can reflect weak board oversight. Debate on aligning executive pay with various metrics of corporate financial performance, called "pay for performance," became prominent in the 1980s. A feature of the pay for performance approach was the provision of stock options as a major component of executive pay. Whether public company CEO compensation levels have become excessive, bearing little relationship to the goals of pay for performance, has regularly been a subject of public discourse. Describing this debate, one report observed, The question of whether CEOs of America's major companies are overpaid has been a perennial subject of interest for many years. Are the compensation practices for these elite men and women fair and appropriate? Do these compensation practices provide proper incentives? Or do they reward excessive caution or risk taking? Forbes calculated the average value of total CEO compensation for the largest public companies (the 800 largest domestic companies up to 1999 and the 500 largest domestic companies since then) in 2012 dollars for the past two decades. The data include average annual CEO total pay in five-year increments between 1991 and 2010 and then single-year annual pay data for 2011 and 2012 based on Forbes ' calculations. As shown in Figure 1 , Forbes finds that the average CEO compensation of $3.57 million during 1991-1995 grew by more than threefold to $12.9 million by 2006-2010, the peak pay period. The average pay then fell by about $3.5 million dollars to $9.4 million in 2011, then rose by about one-tenth to $10.5 million in 2012. A widely embraced view on corporate board and CEO dynamics is that several factors distort the market for public company CEOs. Some have observed that board directors are formally elected by shareholders, but are often nominated by top management. Under these circumstances, it is rare for management's slate of directors to be voted down. Once a director becomes a member of a board, he or she may be reluctant to bargain hard with top executives over the executive's pay because cordial relationships between the executives and board members are generally believed to be important for fostering functional boards. In this narrative, rather than haggle over top management pay, boards hire compensation consultants, who recommend a "best practices" approach, which generally involves matching what the most successful companies in the industry pay their (the peer group) heads. Other factors that may help to reinforce a "cozy" CEO/board dynamic are when CEOs also serve as the board chair and when many directors are themselves active or retired CEOs. Adherents of this view, often called the managerial power thesis , describe an inefficient market for public company CEOs. Evidence consistent with a CEO market in which there is some board ''capture" by top management comes from research by Larcker, Richardson, Tuna, and Seary. The research examined possible connections between CEO pay and a CEO's "back door" links with members of the company's board, defined as shared board memberships in other companies. Among other things, the research found that CEOs with any back door link to someone on the company's board compensation committee (which oversees compensation issues) received $453,688 on average more than CEOs without such links. Another observation that appears to be consistent with the notion of a market for CEOs that does not conform with pay for performance comes from the Economic Policy Institute, a think tank: "[f]rom 1978 to 2012, CEO compensation measured with [stock] options realized increased about 875%, a rise more than double stock market growth." An opposing view is held by the so-called neoclassical school. Proponents say that various metrics indicate that the market for CEOs is generally competitive and efficient and has resulted in levels of executive pay that tend to reflect performance. Research by Stephen Kaplan, an academic from the University of Chicago, concluded that for the CEOs of companies in the S&P 500 Index, average and median inflation-adjusted CEO pay has not risen continuously. After examining annual pay data through 2011, he found that the CEOs' average and median inflation-adjusted pay peaked in 2000 and 2001, respectively. Mr. Kaplan also noted that CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s. In fact, the relative pay of large company CEOs is similar to its average level since the 1930s. The ratio of large company CEO pay to firm market value also has remained roughly constant since 1960. These findings complement observations that the tenure of public company CEOs has become less secure than was historically the case. It is a development that has in part been traced to growing demands by shareholders for CEO pay to better reflect CEO performance: [2012] CEO turnover report parallels what has been going on in the economy over the past several years, says Challenger Gray [an executive placement firm] CEO John Challenger, relatively flat but with continuing risks. "It's not a job for someone who thinks they're going to stay in one spot for a long career right now," he says. "Tenures are short," particularly in big public companies. According to Challenger Gray the average tenure of CEOs who left all companies over the last 18 months was 8.1 years… To Challenger, most CEO changes over the past few years reflect the fact that stakeholders "are much more vigilant than they ever were before." Not only shareholders, but employees and even the public "have their sights trained on the performance of companies," Challenger says, and the CEO is the public face of that performance. "When things go wrong, [those] constituencies demand action, which often starts at the top," he adds. Related to the subject of CEO pay is the concept of a ratio between a company CEO's compensation and the average or median worker compensation of other employees at the same firm. An early advocate of evaluating and monitoring the ratio of corporate CEO pay to that earned by the average or median worker was the late Peter Drucker, a globally respected management consultant. In the 1980s, Mr. Drucker argued that companies should try to adhere to a CEO-to-average worker pay ratio of 25:1, which he later changed to 20:1.