The Securities and Exchange Commission approved a
rule last
week requiring that large publicly held corporations disclose the
ratios of the pay of their top CEOs to the pay of their median workers.
About time.
For the last thirty years almost all incentives operating on American
corporations have resulted in lower pay for average workers and higher
pay for CEOs and other top executives.
Consider that in 1965, CEOs of America’s largest corporations were paid, on average, 20 times the pay of average workers.
Not only has CEO pay exploded, so has the pay of top executives just below them.
The share of corporate income devoted to compensating the five
highest-paid executives of large corporations ballooned from an average
of 5 percent in 1993 to more than
15 percent by 2005 (the latest data available).
Corporations might otherwise have devoted this sizable sum to research
and development, additional jobs, higher wages for average workers, or
dividends to shareholders – who, not incidentally, are supposed to be
the owners of the firm.
Corporate apologists say CEOs and other top executives are worth these
amounts because their corporations have performed so well over the last
three decades that CEOs are like star baseball players or movie stars.
Baloney. Most CEOs haven’t done anything special. The entire stock market surged over this time.
Even if a company’s CEO simply played online solitaire for thirty years, the company’s stock would have ridden the wave.
Besides, that stock market surge has had less to do with widespread
economic gains that with changes in market rules favoring big companies
and major banks over average employees, consumers, and taxpayers.
Consider, for example, the stronger and more extensive
intellectual-property rights now enjoyed by major corporations, and the
far weaker antitrust enforcement against them.
Add in the rash of taxpayer-funded bailouts, taxpayer-funded subsidies,
and bankruptcies favoring big banks and corporations over employees and
small borrowers.
Not to mention trade agreements making it easier to outsource American
jobs, and state legislation (cynically termed “right-to-work” laws)
dramatically reducing the power of unions to bargain for higher wages.
The result has been higher stock prices but not higher living standards for most Americans.
Which doesn’t justify sky-high CEO pay unless you think some CEOs
deserve it for their political prowess in wangling these legal changes
through Congress and state legislatures.
It even turns out the higher the CEO pay, the worse the firm does.
Professors Michael J. Cooper of the University of Utah, Huseyin Gulen of
Purdue University, and P. Raghavendra Rau of the University of
Cambridge, recently
found that companies with the highest-paid CEOs returned about 10 percent
less to their shareholders than do their industry peers.
So why aren’t shareholders hollering about CEO pay? Because corporate
law in the United States gives shareholders at most an advisory role.
They can holler all they want, but CEOs don’t have to listen.
Larry Ellison, the CEO of Oracle, received a pay package in 2013 valued at
$78.4 million, a sum so stunning that Oracle shareholders rejected it. That made no difference because Ellison controlled the board.
In Australia, by contrast, shareholders have the right to force an
entire corporate board to stand for re-election if 25 percent or more of
a company’s shareholders vote against a CEO pay plan two years in a
row.
Which is why Australian CEOs are paid an average of only
70 times the pay of the typical Australian worker.
The new SEC rule requiring disclosure of pay ratios could help strengthen the hand of American shareholders.
The rule might generate other reforms as well – such as pegging corporate tax rates to those ratios.
Under a
bill introduced
in the California legislature last year, a company whose CEO earns only
25 times the pay of its typical worker would pay a corporate tax rate
of only 7 percent, rather than the 8.8 percent rate now applied to all
California firms.
On the other hand, a company whose CEO earns 200 times the pay of its
typical employee, would face a 9.5 percent rate. If the CEO earned 400
times, the rate would be 13 percent.
The bill hasn’t made it through the legislature because business groups call it a “job killer.”
The reality is the opposite. CEOs don’t create jobs. Their customers
create jobs by buying more of what their companies have to sell.
So pushing companies to put less money into the hands of their CEOs and
more into the hands of their average employees will create more jobs.
The SEC’s disclosure rule isn’t perfect. Some corporations could try to
game it by contracting out their low-wage jobs. Some industries pay
their typical workers higher wages than other industries.
But the rule marks an important start.
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