Two little-known rules on corporate reporting of executive pay are currently being reviewed by the Securities and Exchange Commission. While they have received almost no press coverage, these rules could have far-reaching consequences for our nation’s economy and the future of the middle class.
The Dodd-Frank financial reform law requires corporations to disclose the difference between the pay received by their CEO and the median income of all other employees, and the SEC is currently finalizing the regulations that will determine how this reporting is to be done. It has also announced that it will release rules by the end of the year requiring corporations to report on the relationship between senior executive compensation and corporate performance.
While these rules may sound obscure and largely symbolic, here are five reasons they should be receiving wider attention – followed by five ways this kind of information can be used to improve economic policy:
1. Inequality is reaching crisis levels in our country.
The Census Bureau reports that income inequality between the richest and poorest Americans has reached historic levels. The chief economist at J.P. Morgan Chase reports that “U.S. labor compensation is now at a 50-year low relative to both company sales and U.S. GDP.”
More than 46 million Americans live below the poverty line. Millions of Americans who work full-time for highly profitable corporations are nevertheless being forced onto government anti-poverty programs in order to make ends meet.
Income inequality is the highest it’s been since 1928. Wages have fallen for most Americans in real terms over a period of decades, while income has skyrocketed for the top 1 percent, risen even more the top 0.1 percent, and exploded even more for the top 0.01 percent.
No wonder Thomas Piketty’s book on wealth inequality was a bestseller.
CEO pay, along with that of other senior executives, is a major contributor to this inequality. We need to know more about this phenomenon: Which companies are overpaying their CEOs? How are they performing in the marketplace? How responsibly are those companies being managed?
2. Productivity gains are going to the top, threatening the middle class way of life.
In the 30 years after World War II – the period of our greatest modern growth and prosperity – wages grew in line with productivity increases. Then that changed, as corporate governance practices and an increasingly conservative political climate led to a severance between output and the earnings of corporate employees.
Executive compensation plays a large role in this rupture between what people earn and the rate at which the overall economy is becoming more productive.
3. Contrary to conservative mythology, CEOs are not “getting paid what they deserve.”
There is a right-wing myth that says that CEOs are giants who walk among us. If they receive enormous sums in compensation, says the myth, it’s because they are “job creators” who drive the economy for the rest of us.
This is nonsense, born of the addled fictional works of Ayn Rand and her ilk. Sure, there have been CEOs who change the world with their brilliance and drive. But nowadays there is very little relationship between CEO accomplishment and CEO pay. Studies have suggested, in fact, that there may be no relationship between them at all.
CEOs aren't being paid more nowadays because they’re better than they once were. They’re getting paid more because there is a system of institutionalized corruption that has engulfed corporate board members. Boards of directors receive generous pay and stock options in return for equally generous treatment of the CEO – who, like JPMorgan Chase’s Jamie Dimon, is often also the board chair.
4. CEO pay often gives them the incentive to do harmful things.
What’s more, there has been a trend in recent decades toward compensating senior executives with stock gifts, stock options, and other “performance-based bonuses.” This has become attractive because it allows companies to take tax breaks for the wildly generous sums they give to their chief executives.
This practice has the unfortunate side effect of encouraging CEOs to emphasize short-term stock performance over the long-term financial security and well-being of the company and its stakeholders – a group that includes customers and employees, as well as shareholders.
What greed-driven CEO in his or her right mind would invest in a corporation’s long-term growth if it minimized next quarter’s stock performance, and that meant a few million dollars taken off an end-of-the-year bonus?
CEOs have increasingly behaved like stock manipulators, rather than executives of working companies. If they can pump up a stock’s short-term performance by buying and selling smaller companies, flipping real estate properties, and engaging in other highly leveraged transactions, most executives these days are only too eager to do so.
The result? Rising inequality, stagnating wages, and fewer jobs for employees who have become increasingly less critical to those factors which matter most to a CEO – the ones that affect his or her own bottom line.
5. These excessive pay packages give CEOs undue political influence.
Perhaps it goes without saying, but grossly overpaid executives are also in a position to exercise undue political influence – especially in this post-Citizens United economy. (And we wonder why things aren't getting better for the rest of us?)
Information like what the SEC hopes to obtain will be interesting and informative. But that’s not the only reason to collect it. It can also be put to constructive use. For example:
1. Transparency allows consumers to make better choices.
Conservatives are always lecturing us on “the wisdom of the free market.” The free market has a right to decide whether it wants to spend its money on a corporation that will give most of it to the CEO and other senior executives while giving very little of it to the people who are building the product or providing the service.
If people are unhappy with a corporation's policy, they can take their business elsewhere.
2. Shareholders should have more responsibility for executive pay decisions.
Voters in Switzerland approved a referendum that gave shareholders a binding say over the compensation given to senior executives and board members. As in the United States, many large shareholders are pension funds, including union pension funds.
Many people are unaware of the fact that shareholders, aside from nominally voting for board members, have very little say in executive compensation. That can mean that pension funds are investing in corporations whose practices are harming the very people they exist to serve. It can also mean that shareholders have no say in management practices that lessen the value of their investments.
This disconnect has also led to abusive practices on Wall Street, where shareholders have paid tens of billions of dollars to settle lawsuits caused by the wrongdoing of bank executives whose pay packages encouraged them to commit fraud.
It is not yet clear how effective Switzerland's measure has been in changing corporate practices. But shareholder activism, together with worker activism, could make such a move quite effective – here, and worldwide.
3. Tax policy can be used to minimize abusive pay practices.
The California legislature is once again considering a measure that would increases taxes on corporation whose CEOs make more than 100 times as much as its median employee wage. In the bill’s latest version, that revenue would be used to provide tax credits for companies relocating to California. (A considerably stricter measure, rejected by Swiss voters, would have restricted senior executive pay to 12 times that received by junior employees.)
That’s one of the practical uses to which data like the SEC’s could be put.
Some Democrats in Congress are now proposing to disallow tax deductions of more than $1 million for senior executive pay – unless the corporation pays its lowest-paid employees $10.10 per hour or more, in which case that ceiling is lifted.
4. This information can help improve government contracting and procurement practices.
The federal government and the states may choose to use this information when soliciting bids for government services. It would be reasonable for elected officials to consider the effect of a corporation’s compensation policies on the overall economy when giving out taxpayer dollars for lucrative contracts.
These decisions could be implemented by executive order, much as President Obama has done with recent orders requiring federal contractors to pay a minimum of $10.10 per hour and observe all appropriate labor laws.
5. It can be also used to stimulate further debate.
Open, informed debate will almost certainly lead to additional creative ways to apply this data – both to amplify employee purchasing power and to improve government policy.
Other creative ideas might include tax relief for corporations that have appropriate levels of shareholder oversight, or who can demonstrate they have a reasonable ratio of senior executive compensation to average employee pay.
A free and open society runs on information, and these rules on executive compensation can make an important contribution to our nation’s economic conversation. They have been under discussion at the SEC for years. It should finalize them, once and for all, at the earliest possible opportunity.