Friday, September 20, 2013

A Victory for CEOs: More Disclosure

A Victory for CEOs: More Disclosure

As if the SEC doesn’t have enough to do, the agency has finally issued proposed rules requiring companies to show the ratio of the compensation paid to a company’s CEO versus the median worker.  I wrote about this proposal in “More Executive Pay Disclosure: False Reform (August 29, 2013).”  The New York Times succinctly describes the debate:

“Proponents of the new rules praise the move as progress toward more transparency and increased information for investors, while critics complain that the method for determining median income is too complex, time consuming and costly.”[1]

This rule is an example of the SEC’s sunshine power that I discussed in yesterday’s post about hedge fund advertising.  In this instance, Congress and the SEC are shining light on a subject that has received plenty of attention over the last decade.  Executive salaries and perks are already laid out in mind-numbing detail in a company’s annual proxy statement, and the sunshine has done nothing to slow the rise of executive compensation.  Thus, I have to agree with the critics that the new disclosure requirement is a waste of time and resources.  We already know that executive pay is wildly higher than that of the average worker.
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While the SEC was crafting the new disclosure requirement, the US Census bureau reported that the average American household made about $52,000 in 2012, which is the same amount they earned twenty-five years ago.  Meanwhile over the same period, health care costs per person have doubled, and college costs have risen far faster than inflation.  Corporate profits are at record levels and the workers’ share of those profits is at 1965 levels.[2]  Put together stagnant income with rising costs, and the picture is particularly dismal.   A large portion of the middle class isn’t middle class anymore.

So the new SEC proposed rule simply gives us another set of statistics to tell us that there’s something amiss in our economy.  The Economic Policy Institute provides us with a small preview of what the SEC’s exercise will show.  According to EPI, the ratio of CEO compensation to average compensation was 272 times in 2012.[3]  In 1965 the ratio was 20 times and rose as high as 411 times during the bubble as the result of stock options.   Of course, the other members of the executive suite and their investment bankers are also sharing in the spoils.  It is no wonder that income inequality in the United States has reached levels not seen since the Gilded Age that crested at the dawn of the 20th century.

Rather than creating another yardstick to measure the yawning gap, we need policies that narrow it.   The SEC’s proposal is a big victory for corporate executives.  Regulators will waste scarce government resources developing and monitoring the new compensation ratios, and the CEOs will continue escalating their pay packages while suppressing everyone else’s wages.


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