SEC rule on executive compensation mild by international standards
A Dodd-Frank requirement highlights the growth of economic inequality in the US.October 9th, 2013 | by Andrew Yarrow
The Securities and Exchange Commission is moving one step closer to a rule requiring CEOs of large companies to disclose their total compensation. This would mean that the often obfuscated pay of corporate bigwigs—which includes not only salaries but also bonuses, stock options, and other hidden financial perks—would be fully reported for workers, investors, consumers, and the general public to see.
Why have business lobbyists been so vehemently opposed to such transparency (usually a term embraced by ardent free-marketeers)? Might it be sheepishness, or even shame, that CEO pay in America’s largest firms increased by a mind-boggling 876% between 1978 and 2011. During the same period, inflation-adjusted pay for middle-class Americans has barely increased, lower-income Americans have seen their wages fall in real terms, and the upper middle class has seen a modest bump-up in pay.
The rule, required under the 2010 Dodd-Frank financial-reform act and still needing final approval, is partly a reaction to the 2008 financial crisis but is also a small way of highlighting the growth of economic inequality in the US in recent decades. In the nation’s 350 largest corporations, the average CEO is paid more than 270 times that of the average worker in comparable industries. For those nostalgic for the “shared prosperity” days of the mid-20th century, that ratio stood at a mere 20-to-1 in 1965.
However radical this new requirement may sound, it pales beside policies being considered or implemented in Western Europe and even China. Earlier this year, Swiss voters overwhelmingly approved a referendum requiring lawmakers to pass a law giving shareholders the right to hold a binding vote on executive pay. The measure also banned “golden parachute” bonuses for executives leaving a company. Violators would face up to three years in prison.
European Union (EU) leaders have called for limiting bankers’ bonuses to no more than their base salaries and for laws like Switzerland’s in all 27 EU countries. The Netherlands and Denmark already require executive compensation to be approved by shareholders, and the Dutch government is drafting a law that would limit golden parachutes to a mere 75,000 Euros.
The conservative Spanish government imposed measures to give shareholders a binding vote on bankers’ pay and cut executive compensation by up to 35 percent in companies where the state holds an ownership stake. Even the Tory government of David Cameron in Britain is pushing legislation that would curb executive pay for poorly performing companies and enable shareholders to contest executive compensation. And former Chinese Premier Wen Jinbao left directives for the new government on limiting pay for top officials of state-owned companies.
So, while the US moves toward disclosing executive pay and European governments are banning golden parachutes, limiting executive bonuses, and imposing stricter shareholder control over CEO compensation, some say that these measures still do too little. The most radical proposals are to actually set limits on executive pay as a multiple of the pay of either the median worker or the lowest-paid worker in the firm. For example, Swiss activists have demanded that executives be paid no more than 12 times what their lowliest worker gets.
In a make-believe world where such a proposal became law, it would mean that either typical McDonald’s burger-flippers would see their wage income rise from about $17,000 per year to about $750,000, or that McDonald’s CEO would see his annual pay decline from $8.75 million to about $200,000.
While a hard-and-fast ratio limiting executive pay is unrealistic and fails to account for different circumstances in which different companies operate, we clearly need to do more to reduce the widening pay gap between CEOs and workers, especially at a time when rising productivity and record profits go hand in hand with stagnant wages that leave hard-working families struggling to get by.
Click here to learn more about Oxfam’s recent report, Hard Work, Hard Lives, based on a nationwide survey of low-wage workers in the US. The survey found that America’s working poor have a strong work ethic, put in long hours, and believe that hard work can pay off. At the same time, millions of Americans hold jobs that trap them in a cycle, unable to get ahead.