Why Can't We Fix Outrageous CEO Pay?

CEOs should be forced to reveal how pay stacks up against the average worker. But not on the SEC's watch.

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In theory, a new proposal from the Securities and Exchange Commission would require CEOs to disclose not only how much they make, but how that sum compares to the average worker. In practice, however, don't hold your breath. 

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A total lack of clear methodology in how exactly companies are meant to calculate this figure gives corporations a blank check to come up with any figure they want. What turned a measure meant to increase transparency and accountability into yet one more way for corporations to obscure truth and cast illusions? A deep and abiding concern on the part of the SEC that following this rule not be too expensive for multibillion dollar corporations. Why are we not surprised? 

While, yes, the CEO definitely makes more than you, the question of just how much more is set to become a matter of public record. Three years ago, the Securities and Exchange Commission (SEC) was charged with drafting a rule that, as part of the Dodd-Frank Act, would require public companies to disclose the total annual compensation of their CEO, the median total annual compensation of the remaining employees, and the ratio between the two. This is, presumably, to increase financial transparency and highlight the growth of an already hideous inequality between well-heeled executives and the average worker, without whom no wealth would be generated at all. Sounds good, right?

On Sept. 18, the SEC released its draft proposal on how exactly companies would go about disclosing this and the result is a vague, toothless, broad-as-the-universe mess than is so ineffective and counter to the legislation’s original intention that it’s insulting. Given the task of creating a rule to increase transparency and highlight inequality, the SEC has instead given us a regulation-in-name-only proposal that doesn’t so much have loopholes but is instead composed almost entirely of them. What, exactly, is wrong? Let SEC Chair Mary Jo White, in her statement about the proposal, lay it out for you:

“The rules proposed would not require a specific methodology, but instead would provide a company with the flexibility to determine the median and calculate the annual total compensation for that employee in a way that best suits its particular circumstances.”

Note that, for her, this is a good thing.

What is the SEC offering instead? According to the proposal text, “we are providing instructions and guidance designed to allow registrants to choose from several alternative methods to identify the median, so that they may use the method that works best for their own facts and circumstances.”

So, for example, a company might use payroll figures to determine their ratio, or they could base it on a random sampling of employees, or they might use tax records, or they might do something entirely different depending on what outcome the company wants to produce. They could even, according to the proposal text, “exclude employees in the sample that have extremely low or extremely high pay because they would… not be the median employee.” Good news for companies that use a lot of minimum wage workers.

The proposal is similarly vague on what, exactly, they mean by compensation. Is it cash only? Does it include benefits? Do stock options count? Who knows? According to the SEC, it is believed that it’s best if the companies themselves decided what does and does not count as compensation, which the proposal said “would result in a reasonable estimate of a median employee at a substantially reduced cost.”

This concern for protecting companies from what they would see as a burdensome compliance cost pops up all over the proposal. The SEC is, apparently, very concerned about making things easier for the companies affected. Here are just a few quotes to that effect within the proposal:

  • “In light of the significant potential costs articulated by commenters, we believe that it is appropriate for the proposed rules to allow registrants flexibility in developing the disclosure required by the statute.”
  • “Where we have exercised discretion in implementing the statutory requirements, we are proposing alternatives that we believe will reduce costs and burdens, while preserving what we believe to be the potential benefits, as articulated by commenters, of the disclosure requirement mandated by the Dodd-Frank Act.”
  • “The proposed rules to implement Section 953(b) are designed to comply with the statutory mandate and to address commenters’ concerns regarding the potential costs of complying with the disclosure requirement.”
  • In light of the significant potential costs articulated by commenters, we believe that it is appropriate for the proposed rules to allow registrants flexibility in developing the disclosure required by the statute.”
  • “We are not proposing to require registrants to perform this type of adjustment, however, because we do not believe that the costs of requiring companies to make an extra calculation would be justified.”

In case you’re wondering, the commenters arguing about increased costs are generally large corporations that would be subject to this rule. Consequently, the proposal itself has been shaped largely by people who didn’t even like it in principle and would have preferred to have seen it taken out entirely. But as long as it’s now law, the thought must be, they may as well fight to make it as ineffectual as they can.

Does the SEC not see what could go wrong by leaving things so open? Yes, and it doesn’t really think that will be a problem so long as companies use consistent figures. 

 “[W]e recognize that allowing registrants to select a methodology for identifying the median, including identifying the median employee based on any consistently applied compensation measure and allowing the use of reasonable estimates, rather than prescribing a methodology or set of methodologies, could permit a registrant to alter the reported ratio to achieve a particular objective with the ratio disclosure, thereby potentially reducing the usefulness of the information. We believe that requiring the use of a consistently applied compensation measure should lessen this concern.”

While the commission’s trust is refreshing, this is still a textbook example of how regulatory agencies too often take on the perspective of those whom they’re supposed to be regulating, as opposed to being an advocate for the public. Many times this is because their leadership is often composed of people from that same industry, justified as someone adding specialized knowledge to the ranks, but more often acting as its man (or woman) on the inside. Other times, it’s just vociferous lobbying from the regulated industries drowning out other perspectives and leading the agency to think their point of view is the consensus. Sometimes, like in this case, it’s both.

There is still time to let your voice be heard on this proposal. Concerned parties have 60 days to comment once the proposal has been put in the Federal Register, which means you have until Nov. 17 to send your thoughts. You can use the form here, email (include File Number S7-07-13 in the subject line), or mail a letter to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090, again directly referencing S7-07-13.







Christopher Key is a longtime journalist and activist who lives in Brooklyn.