11
New rule could disclose CEO-to-employee pay ratio
The SEC says they should have a rule out mandating the disclosure of the ratio of CEO to average worker pay by the end of this year. It could shed more light on the widening income gap in the U.S.
To view this content, Javascript must be enabled and Adobe Flash Player must be installed.
Jeremy Hobson: Now to another Washington deadline, this one involving the Securities and Exchange Commission. The regulator is supposed to finalize a new rule that would force companies to disclose how much more the boss gets paid than the average Joe.
Marketplace's David Brancaccio is looking into how the new economy can better serve more people for his Economy 4.0 series and he joins us now to discuss. Hi David.
David Brancaccio: Hello Jeremy.
Hobson: So David, tell us exactly what this new rule requires.
Brancaccio: Think of it as a rough index of income inequality but within individual companies. It requires companies to disclose the ratio of the bosses -- the CEO's total compensation along with bonus, stock options, and so forth -- compared to what a typical worker makes. It was a part of the big Dodd-Frank financial reform law last summer 2010.
Hobson: Last summer? So this is taking them quite a while to implement this thing.
Brancaccio: Yeah, a summer ago. In fact, you could say the same for a lot of the Dodd-Frank law. As of this month, regulators had blown through more than 150 Dodd-Frank deadlines. We asked about this one -- about compensation. The SEC is a bit tight-lipped, but they pointed to the website, which says it's supposed to be done by December 2011. That's like...
Hobson: Right now!
Brancaccio: Yeah. They could still deadline. Companies around the country have been fighting this tooth and nail. They think it's "useless information."
Hobson: Well, why would they fight this, David, because don't they already have to disclose CEO pay?
Brancaccio: Yeah, you can look it up. But this ratio is ammunition custom made for an argument against income inequality. In fact, President Obama used it just this way in a big speech in Kansas last week.
Barack Obama: The typical CEO who used to earn about 30 times more than his or her worker, now earns 110 times more.
Brancaccio: And that might even be low ball, Jeremy. Some think tanks put the ratio as high as 325 to 1.
Hobson: 325 to 1?!
Brancaccio: Varies, of course, by company. I mean Wal-Mart -- lots of low-wage workers -- and their ratio has been estimated to be higher than 700 to 1. But the fancy grocery store Whole Foods, they cap executive compensation ratio at 19 to 1. There's the legendary management guru Peter Drucker. He wrote about this years ago. And his thinking is that a company where the ratio is above 25 to 1 would hurt their esprit de corps.
Hobson: Marketplace Economy 4.0 correspondent David Brancaccio. David thanks so much.
Brancaccio: You bet.
Pages
Once this is out, every employee (especially retail employees) should wear a button or sticker that very simply states the ratio. An absolutely critical reminder to them and to everyone else every day showing what their CEO makes for every dollar they make.
I understand why businesses do not want this to happen. I work for a large company and even sharing among the employees is considered ground for dismissal. The pay disparity among the rank and file is without rhyme or reason. If the company made it public (or even company-wide) the average salary among the hourly staff, that alone would require some kind of explanation to some of us. When a data entry person with little to no industry experience is paid $19/hr and a person with 11 years experience with specialized skills makes $25, one has to wonder who decides the pay for the new hires.
CEOs and corporate executives are supposedly paid well because they take on a lot of personal risk (which recent events call into question) but one of their jobs is to then delegate tasks to subordinates which mitigate that risk and move an organization forward toward the shared mission for which they receive payment. Therefore, part of the work delgation process moves portions of the larger risk pie from the CEO to subordinates and as a consequence, the CEO must pay those subordinates thereby lowering his/her overall portion of the risk and thus takehome pay while increasing the subordinate's portion of the risk and pay. If a company has a high CEO pay to worker pay ratio, it's indicative of a large amount of risk concentrated within fewer people. It could also be a sign that managment does not trust their employees or that management is greedy. It could also mean that the CEO is bad at delegating and orgainizing the work needed to accomplish the organization's goals. Each of these scenarios is a bad situation for a publicly traded firm. CEOs are not super human and work and risk spread among many people is safer and more productive than work and risk concentrated within a few. Therefore, companies with high CEO to worker pay ratios and their CEOs should be shunned by the investment community as extremely risky. The CEO pay ratio could be a pretty nice market indicator of risk and incompetence.
Worker owned cooperatives, a model not seen frequently in the US, but huge in Spain and Italy, have typically held income ratios to less than 10 to 1. When Spain's massive Mondragon Cooperatives proposed raising the ratio from 3:1, there was a considerable backlash from the worker-owners. Interesting to compare to Walmart's 700:1. I'd like to hear from someone at a US cooperative like San Francisco's Arrizmendi Bakeries on what they think about the incredibly high ratios typical today in US business.
The idea of discontinuing CEO pay with stock options was floated at the start of the ’08 crisis, and then quickly buried, along with restoring Glass-Steagall, never to be heard in any political/financial discussions again. This shows how far we are from resolving any of the problems that led to the financial crisis. The financial industries won’t even sit still for the idea of disclosure, let alone an effective regulatory system. Pay in stock options increases the incentive for fraud, high leverage, and excessive risk (with other people’s money). Legislation that offers only toothless regulatory oversight or more captive regulators in an industry we all know is rife with abuse brings us right back to square one: Make stock option pay illegal entirely, and restore Glass-Steagall.
Boards of Directors should have the right to pay as much as they wish, but I do not think taxpayers should subsidize those exorbitant compensation packages. I'd like to see a tax code that limited the expense deduction to say 25 times the average worker salary.
David Brancoccio: PLEASE do not say something like "regulators had blown through more than 150 Dodd-Frank deadlines" without clarifying that Congress has not given the SEC any additional funding to implement Dodd-Frank. We are under a pay freeze, ridiculously understaffed and overworked and face the possibility of government shutdown every few months--I don't appreciate hearing on my way to work that we have "blown through" deadlines as if we were cavalier about our mission to protect investors. You should also mention all the rules the SEC has implemented over the last year DESPITE lack of resources from Congress.
This is news? I'm a retired federal employee. For decades an employee could find out the approximate salary of anyone else including one's supervisor and the guy in the next cubie. Each organization has an organization chart which had the position's federal grade pay schedule posted. Find the position on the chart, find the grade for the position, get the most current salary chart by grade and bingo you've got it. And you did't need any kind of computer to do it. There's been transparency in federal government for a long time. Sad the big business cannot say the same.Signed, retired federal employee with 32+ years of service.
As an entrepreneur myself, I embrace the the American tenet that those who undertake the risk deserve the rewards. The Land of Opportunity is supposed to be opportunity for All, not just the wealthy.
The obscene wealth of Executives at the top of Big Finance, Big Oil, Big Pharma and huge companies in general is no reflection of the value they add to their companies or for their shareholders. On the contrary, it's just pure greed, abetted by policies and politics that shun transparency. Those executives take no personal risk, usually not even jail time when laws are broken; the risks are borne by shareholders and the public.
Unless and until we demand pay ratio disclosure, shareholders won't assert themselves on Executive pay.
This excellent TED Talk by Richard Wilkinson reveals the data and the consequences of wealth inequality across a variety of market democracies, by several indices of well-being, including Community involvement, Mental illness, Homicides, Highschool dropout rates, Infant mortality, etc.
Plainly put: when Rich and Poor are too far apart there are measurable, dramatic effects throughout society on health, lifespan, even such basic values as trust.
Pages
