On August 5, 2015, the Securities and Exchange Commission (SEC) voted 3-2 in favor of a final rule requiring public companies to disclose CEO pay as a multiple of the median-paid employee. The rule was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, but languished at the commission for five years.
Commissioner Michael Piwowar voted against adoption of the final rule. He said “ideologues” and “bullies” pressed the SEC to carry out this mandate.
Public Citizen members and supporters appealed to the SEC to adopt this rule, which was mandated in 2010. (Yes, laws from Congress often require agencies to translate them for industry before they become enforced, but the time lag on this rule was ridiculous.) To achieve the success of the SEC following-through with a congressional mandate, Public Citizen worked in concert with the AFL-CIO, AFSCME, the Institute for Policy Studies, As You Sow, the Teamsters and other members allied with Americans for Financial Reform. We count, apparently, among the “bullies” that Commissioner Piwowar complained about. Our chief weapon — the written and spoken word (with an occasional Facebook graphic).
The rule itself is intended to confront economic bullying, namely, the diversion and concentration of corporate income into the bank accounts of senior managers. The SEC’s final rule final rule harnesses shareholder pecuniary interests to help arrest the runaway CEO pay that’s part of yawning income inequality in America. The SEC’s important action drew front page media attention in the Washington Post, stories in the Wall Street Journal, New York Times, CBS, Fox, etc.
With the new SEC rule in place, investors can better determine if CEO at company X is overpaid compared to the CEO at peer company Y. Like any good unit-price comparing shopper, the rational shareholder should value the company with the lower cost CEO better than the one with the higher cost CEO. Company boards mindful of shareholder value should adjust CEO pay accordingly.
Yes, CEOs are valuable to a firm and should be paid fairly. But by the same consideration, so are other employees. What’s more, disparities in pay can be dispiriting and harm productivity. What code writer in Silicon Valley will burn the midnight oil if it’s clear that the fruits of that extra labor only mean another bonus for the CEO?
Alone, of course, this simple disclosure won’t reverse the rising red tide of CEO pay. In 1980, CEOs took home 20 times the pay of average workers; now it’s more than 300 times. None claim that today’s CEOs are better than the ones who developed the technology and pharmaceutical industries of the 1980s and 1990s, nor that today’s workers are somehow worth less. But the new CEO/median pay ratio can serve as one tool to restore some sanity.
That the rule moved forward and was finalized is definitely good news. The story behind this success, unfortunately, isn’t so good.
How this rule became final serves as an abject object lesson in Washington’s dysfunction. First, this modest reform comes irresponsibly late. Approved in 2010 as the simplest of the 400 statutes in the Wall Street reform law, the SEC’s action comes five years overdue. SEC Chair Mary Jo White promised over several years in numerous congressional hearings to finalize the rule within months, only to delay it as many times on her agency’s formal agenda. Scores of members of Congress petitioned White to finalize the rule. When Senator Elizabeth Warren pointed out these routinely broken promises, White finally moved.
Yet White’s SEC still found a way to dilute the simple injunction of the statute, which is to identify the compensation median among of all employees. First, the rule won’t take effect until 2018. That’s a full decade after the financial crash of 2008 that exposed the fact that bankers made millions from crashing the economy, costing millions of Americans their jobs, homes and savings.
Second, firms reliant on seasonal workers can avoid counting some of them. Firms may select the day in their fiscal year for the employee count, including a day with few seasonal workers. Think UPS, which hires tens of thousands of Christmas package workers.
Third, the SEC allows firms to delete up to 5% of the workforce employed outside the United States. Think Nike, with shoe-manufacturing concentrated in low-wage Southeast Asia.
How did these loopholes arise? Industry commenters claimed that identifying the median is complicated. That’s an embarrassing confession if true; they don’t know what they pay their employees? But this specious argument really masked opposition to the rule itself. That opposition, including millions in lobbying dollars that Public Citizen documented, continues. Industry is likely to sue. In the Republican Congress, House Financial Services Committee Chair Jeb Hensarling (R-Texas) promises to move repeal legislation.
Separately, this opposition evinces that the rule might actually work — it might truly force firms to pay CEOs more responsibly.
The loopholes needed a champion among the commissioners. At the public meeting August 5, Republican Commissioners Daniel Gallagher and Michael Piwowar argued that the rule should never have engaged the SEC’s time. Since one doesn’t bargain with someone who will never buy, that left only the three Democrats — Chair White and Commissioners Luis Aguilar and Kara Stein – to decide the contours of the rule. Stein and Aguilar have stated for years that the rule should be implemented and without loopholes. It is the chair, alone, who decides when rules move. In their statements August 5, Stein and Aguilar noted their objections to the loopholes. That means the loopholes came from White. And presumably there were deeper loopholes that White conceded.
Chair White has delayed other rules. The SEC lags the other Washington government agencies in finalizing the mandates of the 2010 Wall Street reform law. Most important is an interagency rule prohibiting “inappropriate” banker pay. The other agencies have completed their work, leaving it to Chair White’s SEC to release this important reform.
Public Citizen and allies will focus on this and other needed rules. We shall reload from the thesaurus with sharp words, biting sarcasm, and crushing calumny to continue our bullying ways. That is, unless Wall Street wants to give up the fight and accept reform meant to stop its bullying of the American people.
Bartlett Naylor is the financial policy advocate with Public Citizen’s Congress Watch division.