In an attempt to publicly shame CEOs into lowering their pay, or boost the compensation they pay their employees (because the forces of labor supply and demand apparently no longer work) moments ago, in a 3-2 vote, the SEC approved a rule Wednesday requiring companies to reveal the pay gap between the chief executive officer and their typical worker.
The vote was split along party lines: with Mary Jo White, who did not recuse herself on this occasion as one of her former Wall Street clients was not directly implicated, voting alongside the two democratic SEC commissioners, Luis Aguilar and Kara Stein, while republicans Michael Piwowar and Daniel Gallagher voted against.
Specifically, the SEC will require companies to disclose the median compensation of all its employees, excluding the CEO, and publish a ratio comparing that figure to the boss’s total pay. Companies would have to report the pay ratio beginning in 2017. The metrtic will have to be updated once every 3 years and will allow companies to exclude as much as five percent of their foreign workers from the calculation.
The passage of the vote comes as a bit of a surprise because the agency had delayed progress on the rule for years, with SEC Chair Mary Jo White facing attacks from unions and Democratic lawmakers in recent months for failing to get it done.
As Bloomberg adds [5], "the disclosure is required under the 2010 Dodd-Frank Act, which hasn’t stopped it from splintering the five-member commission. Republican commissioners and business groups argue it’s meant to embarrass CEOs and won’t be useful to investors."
The SEC gave allowed for some discretion in determining the median pay of workers. Companies can use sampling to estimate the figure, rather than calculating it by tallying data from all of the payrolls across the company.
“These decisions were designed to facilitate compliance with the rule in a manner that is reasonable and workable” for companies, Aguilar said.
Left-leaning organizations such as the Institute for Policy Studies promptly applauded the decision:
“We finally have an official yardstick for measuring CEO greed,” said Institute for Policy Studies analyst Sarah Anderson. “This is a huge victory for ordinary Americans who are fed up with a CEO pay system that rewards the guy in the corner office hundreds of times more than others who add value to their companies.”
“The new SEC rule could pave the way for further reforms that go beyond disclosure,” said IPS veteran compensation analyst Sam Pizzigati. “At the state level, lawmakers are already moving to subject corporations with wide CEO-worker pay gaps to a higher corporate income tax rate – or give corporations with more moderate pay divides a better shot at gaining government contracts.”
“This new ratio information,” Pizzigati adds, “will make it easier to ensure that our tax dollars do not enrich corporations that are widening our economic divide.”
Yet for all posturing, the intention behind the SEC's decision was simple: prompte Obama's agenda to redistribute wealth while shaming executives. On this the SEC's republican commissioners were spot on:
Republican lawmakers have sponsored legislation that would repeal the provision in Dodd-Frank that underpins the SEC’s rule. Commissioner Michael Piwowar, a Republican who opposed the measure, said he found White’s decision to move forward “peculiar” given that opposition in Congress.
Commissioner Daniel Gallagher, another Republican, said the vote shows how the agency’s rulemaking agenda has been hijacked by “ideologues” and partisans who want to shame businesses into reducing CEO pay. “A majority of the commission has opted for a hugely expensive rule over a much less expensive rule,” Gallagher said. “I can only conclude that there is no reasoned basis for the commission’s action.”
Jawboning aside, there are two key aspect to this issue of executive compensation. To be sure, CEO pay when compared to average employee pay, is outrageous. This is obvious not only at the macro level [6]...
[7]
... but micro as well:
[8]
And yet, as anyone who has spent just a few minutes analyzing executive comp will know too well, the leaders of America's public corporations are rewarded just as generously through their all-in cash annual comp, as with the value of their option grants and total equity holdings.
It is this that has been the primary driver of the epic stock buyback craze of the past 2 years: the fact that corporations can issue unlimited amount of debt and use the proceeds to repurchase stock in an illiquid market pushing the stock to record highs, thereby boosting not only their equity-linked comp, but the value of their equity holdings, is precisely why none other than Hillary Clinton is now preaching the BlackRock party line against activist investors [9]and demanding an end to corporate stock repurchases (as we explained it is not because she cares about the common worker but because her long-term aide Cheryl Mills is a Blackrock director [9]).
Which is why the SEC's rule will immediately backfire: in an attempt to trim their outlier comp, executives will simply be rewarded even more with options and stocks which do not have the SEC reporting treatment, which in turn will incentivize these same executives to buyback that much more stock.... using even more debt.
In fact, in pandering to democrats and dogmatic supporters of Obama's "fairness doctrine", the SEC has succeeded in further abbreviating the lifetime of most public US companies which will simply lever up that much faster and proceed to transfer stakeholder value to shareholders while leaving bondholders footing the bill, and assuring of a promptly bankruptcy filing once interest rates rise. But not before the same executives who are demonized for their exorbitant pay extract all residual equity value.
As for executive pay being exorbitant, which it clearly is in context, if only these same companies were unable to constantly keep rolling over debt, and hiding inefficiencies under the umbrella of low interest rates and ZIRP, as well as issuing stock into a stock market bubble, then these same CEO would promptly be forced by their own boards and/or treasurers to slash their pay and boost margins and profitability, or else face bankruptcy.
But that would entail looking at the real reason why the average CEO is paid more than 300x more than their average employee: the catastrophic wealth redistribution policies of the Federal Reserve. And since as the Pedro da Costa example vividly showed that anyone daring to expose that the Fed emperor has no clothes leads to prompt loss of job, nobody will ever look in the right place, or ask the relevant question.
Which is why instead we will be stuck with this kind of political farce that passes for regulation, which will do absolutely nothing to rein in executive pay - in fact it will further boost the divide between the bottom and top corporate runs - but it will also assure that the death of the US middle class comes even faster than we had anticipated.
