Rob Swystun, Pristine Advisers
Executive compensation is in the news a lot lately, but some aspects of it aren’t in the news enough, according to some people.
The Huffington Post’s Richard Eskow, for one, says there is scant press coverage of two key things the Securities and Exchange Commission is currently undertaking:
- The SEC‘s current review of the Dodd Frank law, which requires corporations to disclose the difference between the CEO’s pay and the median income of all the other employees. (The SEC is currently finalizing the regulations to determine how this reporting is to be done.)
- Rules that the SEC will release by the end of the year requiring corporations to report on the relationship between senior executive compensation and corporate performance.
These rules, as Eskow puts it, could have far-reaching consequences for the US economy and the middle class.
He gives the following reasons these rules should be receiving wider attention:
1. The gap between the haves and the have nots in the country has reached crisis levels.
- The Census Bureau reports that income inequality between the richest and poorest Americans has reached historic levels.
- More than 46 million Americans live below the poverty line (even ones that work for highly profitable corporations).
- Income inequality is the highest it’s been since 1928.
- Wages have fallen for most Americans over the last several decades, but has skyrocketed for the top 1%, risen even more for the top 0.1%, and even more for the top 0.01%.
2. Productivity is no longer tied to earnings for employees.
- In the period of extreme growth and prosperity in the 30 years after World War II, wages grew in line with productivity increases. That has changed in the past few decades due to corporate governance practices and an increasingly conservative political climate. Now, the connection between what people earn and the rate at which the overall economy is becoming more productive has been severed.
3. CEOs are not getting paid what they deserve.
- There is little relationship between CEO accomplishment and CEO pay and, in fact, studies have suggested there may be no relationship between them at all.
- CEOs are being paid more now not because they are performing better than they ever have. It has more to do with boards of directors receiving generous pay and stock options in return for equally generous treatment of the CEO. In many cases, the CEO also happens to be the board chair.
4. The way CEO pay is structured, it promotes harmful business practices and undue political influence.
- The trend in recent decades has leaned toward compensating senior executives with stock gifts, stock options, and other performance-based bonuses, which allows companies to take tax breaks for the these forms of compensation.
- This has led to CEOs concentrating on short-term stock performance at the expense of long-term well being of their companies.
- Pumping up short-term stock performance via buying and selling smaller companies, flipping real estate properties, and performing other stock influencing transactions to affect their bonuses at the end of the year has led to rising inequality, stagnating wages, and fewer jobs for employees.
- Excessive compensation also gives CEOs undue influence politically.
But, the information the SEC aims to collect can be put to good use in combating excessive CEO pay. How? Well …
1. Transparency may influence consumer choices.
- Armed with increased knowledge about where the money goes in a corporation — does it all float to the top or does it trickle down to the actual workers who make the products and provide the service? — consumers can show a corporation they’re unhappy with its pay policies by talking with their wallets.
2. The information may prompt moves to give shareholders more clout with executive pay decisions.
- Although say-on-pay exists in the US, it’s not a binding decision. That could change if the SEC uncovers enough information to warrant such a move. Shareholders in Switzerland now have a binding say on executive compensation. It’s too early to tell the effects that it has had on corporate practices, but a similar move may be possible Stateside.
3. The information may influence tax policy that can help to cut down on excessive CEO pay.
- California is considering a measure that would increase taxes on corporations whose CEOs are given more than 100 times what the median average of its employees make.
- Switzerland has already proposed a measure that would have restricted senior executive pay to just 12 times what junior employees receive. (It was voted down.)
- The information the SEC gathers could lead to useful legislation like this.
4. It could help improve government contracting and procurement
- Both federal and state governments could use the information to vet companies that make bids on government contracts to help avoid giving lucrative contracts to companies with massive pay discrepancies.
5. The information can be used to keep the debate going.
- Getting this information out there where it can be scrutinized will help fuel debate and can lead to more creative ways to address pay discrepancies. Eskow suggests tax relief for corporations that have some kind of minimum level of shareholder oversight or tax relief for corporations that have a reasonable ratio of senior executive compensation to average employee pay.
The SEC is in a position to begin to address a problem that has been basically just accepted for decades. Things won’t change overnight and there will likely be fighting and clawing the whole way, but it’s a start.