Why the SEC's New CEO Pay Rule Isn't the Big Win the Left Thinks It Is

Why the SEC's New CEO Pay Rule Isn't the Big Win the Left Thinks It Is


CEO compensation in America is the highest in the industrialized world. Pay for the leaders of the largest public firms has gone up 997 percent since 1978, almost twice as fast as the stock market and almost 100 times as fast as compensation for the average worker over the same period. The ratio between a CEO and the typical worker is now 303:1, up from 20:1 in 1965 (though down from its peak, 376:1, during the dot-com bubble of 2000). Last year, Discovery Communications’ David Zaslav, took home $156.1 million in salary, bonuses, stock options and other benefits. He wasn’t in the top-paid CEO, though: GoPro’s Nick Woodman made $285 million.

We knew all of these things before Wednesday, when the Securities and Exchange Commission finally relented and finalized a simple rule that was part of the Dodd-Frank financial reform, forcing publicly owned companies to disclose the ratio between the CEO and their median worker. And though liberal groups and politicians are touting this as a victory, I cannot for the life of me figure out what’s so different between this week and last week.

Related: CEO Pay Below 2000 Peak – but Still 300 Times the Average Worker

CEO pay packages at public companies are already disclosed — and, in fact, voted on by shareholders — but that hasn’t shamed corporate boards into trimming back compensation, which continues to rise, if a little more slowly than in the dot-com years. Investors, who already have a decent enough idea of the median wage in a particular sector thanks to detailed data from the Bureau of Labor Statistics, can make the calculation in their heads or at least have a sense of what the CEO makes compared to workers, and determine whether or not it offends them.

In fact, there’s no guarantee that the data from the company on CEO and worker pay will be as reliable as what we already know. Because the SEC is terrible, it not only took five years to write what was a straightforward rule but also added a series of loopholes that degrade the quality of the data.

Companies can use a statistical sampling of their employees rather than a full calculation of all workers. Though foreign workers are also supposed to be included, firms can exclude up to 5 percent of those workers from the surveys. The calculation only has to be done once every three years rather than every year. And nobody has to start doing it until 2017, which means we won’t see the first ratios brought up at shareholder meetings for nearly three more years.

The U.S. Chamber of Commerce argued that the rule would produce “fundamentally flawed and misleading statistics,” and it sounds like the SEC gave corporations the tools to do just that. Even AFL-CIO President Richard Trumka acknowledges that these weaknesses “could be exploited to allow companies to avoid reporting the median income of all workers.” It’s not clear whether the resulting data will be any better than what we currently work with, and it’s certainly not clear whether it would matter.

Related: America’s Highest Paid CEO: It’s Not Who You Think

We know what the median worker makes. We even know what factory workers make in other countries. As a polemical tool, it may be nice to say that Doug McMillon, the CEO of Walmart, makes $19 million a year while his lowest-paid workers won’t earn $10 an hour until next February. But that information is already available to us. So is the estimate that McMillon makes 1,100 times the salary of the average Walmart store employee, based on their hourly wage; Change to Win Investment Group (the investor arm of the labor federation that includes the Service Employees International Union), used that very figure in its letter opposing McMillon’s compensation package this year. That compensation package, and those of Walmart’s other named executive officers, passed a shareholder approval with 95.97 percent of the vote.

The more critical CEO compensation rule in Dodd-Frank was “say on pay,” giving shareholders a vote on these pay packages. But the vote is only advisory and non-binding. And shareholders frankly don’t seem to care, despite plenty of tools at their disposal to judge the compensation of corporate titans relative to ordinary workers. Of the 1,863 Russell 3000 companies who have held “say on pay” votes this year, 97.5 percent have passed, with 92 percent garnering over two-thirds support.

Maybe the individual ratio will make a difference in eventually pressuring corporate boards. But nothing has caused them anything resembling shame or restraint so far. You can wax poetic about how leaders of complex companies deserve to be paid handsomely for the value they create (though I believe they get it whether their company makes money or not). But more realistically, corporate boards appear to think that, like the children of Lake Wobegon, every chief executive is above average, and if your CEO isn’t making enough money it reflects poorly on the company. The role of workers doesn’t play into that equation. Making “say on pay” binding would have shifted power from boards to investors, but we don’t have that.

Related: Your Tax Dollars Pay for Walmart Execs’ Bonuses

Meanwhile, on the same day the SEC passed the CEO/worker pay rule, it also inaugurated another rule requiring derivatives dealers and market participants to register with the agency, and it was so watered down as to be completely meaningless. Security-based swap dealers get conditional acceptance for registration just by filling out the application, and they can start trading immediately. In a separate proposal, entities that have been disqualified from participating in derivative markets because of statutory restrictions arising from fraud convictions or other penalties can continue to trade pending an SEC waiver. And if another agency grants a waiver, the SEC would have to automatically accept it.

As Better Markets President and CEO Dennis Kelleher said in a statement, “The SEC is supposed to be the gold standard for investor and market protections, but today’s actions again call that into question.” You would hope that at least as much scrutiny would be paid to the mack truck driven through the derivatives rules as the feel-good CEO/worker pay rule. But there was barely a peep.

I recognize that runaway CEO compensation represents one of the fundamental shifts in the economy, as represented in that chart showing productivity gains not accruing to the median worker. But I don’t see how I’ll be any more enlightened about that trend in 2018 when self-interested companies report these pay ratios. Nor do I believe that disclosure and transparency is a sufficient condition to deal with such inequity. If you believe CEO compensation is out of whack, we have a perfectly good method through the tax code to deal with that. Getting a pay ratio to stick on a protest sign seems to me less useful.