On Feb. 6, Michael Piwowar, acting chair of the Securities and Exchange Commission (SEC), invited corporate managers to file public comments noting any troubles they’re having complying with a new rule. This rule, mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, provides that corporations post the pay of the CEO as a multiple of the median paid worker at the firm.
It’s the simplest of all the mandated rules from the Wall Street reform law. The SEC even made it simpler; it allows sampling– as in a political poll—to determine median salaries. In other words, larger firms who forgot to scale up the accounting department need only chose a statistically robust random sample, then scrutinize the pay of each member of the sample, and find the median pay.
But Piwowar, who has long objected to the existence of this statute in the law, is clearly seeking ways to derail it. Specifically, Piwowar explains:
“In order to better understand the nature of these difficulties, I am seeking public input on any unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed. I welcome and encourage the submission of detailed comments, and request that any comments be submitted within the next 45 days.”
Leave aside for a moment that Piwowar is skating on the edge of his job description; he is acting chair pending the confirmation of a replacement. Congress approved the rule and no commissioner is allowed to stymie it. Nor may he limit comment to public companies, as his invitation suggests; note that he is “seeking public input on any unexpected challenges issuers have experienced.” [Emphasis added.] Piwowar seems to ignore that the SEC’s first stated mission is “to protect investors.”
That being said, please do comment. Follow this link, and write “CEO Pay Ratio/953b” in the subject heading.
Unwittingly, Piwowar is effectively asking incompetent managers to expose themselves. “Okay, we don’t run a tight ship here at Acme Corp. We actually don’t know what we pay each employee. We don’t have them on a spreadsheet. Actually, we’ve been meaning to buy a computer. When it comes to the expense line in our reports, we just wing it. We did ship some jobs overseas, but we’re not quite sure how much that saves. But hey, we’re still a great investment.”
As it happens, the comments to date aren’t helping Piwowar’s case. Writes Reisa Jaffe, “As a bookkeeper, I have had to provide payroll related data for many different purposes. Using the technology that’s available today, it is a very easy thing to do. The reasons for implementing the rule are as important today as they were when the rule was put into place. Please do not delay implementation any further.” CPA Kathryn Olson says the same: “I can fairly declare that providing this information is not difficult, and is not a hardship.”
One Florida-based discount retailer has written to complain about the utility of the rule, but doesn’t say it’s facing any “unexpected challenges.” The firm argues that comparing the full time CEO’s total compensation for full time work to “an hourly worker only working part-time” is not relevant. But indeed it is relevant: It reveals a firm that may churn employees and therefore must spend more time on training, may suffer lower customer satisfaction and other problems than its peers with lower pay ratios.
This rule provides an instructive lens on the current contest between corporate and citizen interests. The Trump administration wants to roll back rules generally. One executive order, which Public Citizen is challenging in court, calls for throwing out at least two rules for every new rule adopted. This ignores that rules are written in tragedy, in train wrecks and dirty water, exploding factories, imploding banks and exploited workers.
CEO pay is one such problem in need of reform. For the large companies, it’s often more than 300 times more than the pay of average workers, a multiple that in 1980 was about 50 times. Surely, today’s CEOs are not that much brighter or valuable as those who developed early computers, miracle medicines or fuel efficient automobiles. Wall Street bankers crashed the entire economy chasing these fabulous sums. Wells Fargo compensated then-CEO John Stumpf more over $155 million in performance-based pay between 2012 and 2015. Government fines now show that the performance stemmed from fraudulent account creation.
Will this published pay ratio bring sanity to runaway pay? In practice, it allows investors to unit-price the CEO. Where two firms have similar businesses, similar revenues, similar profits, investors can easily tell that money may be wasted on a CEO by looking at the ratio. The higher the number, the greater the waste. Of all the testaments to its promise, perhaps the most persuasive is the vehemence and mendacity of opposition to it. On Feb 22, for example the Business Roundtable sent its list of the top 16 rules to kill because they “negatively impact growth.” One of these is the CEO pay ratio. How does this rule harm the economy? They best economic analysis they proffer is that the number is “meaningless.”
As for Piwowar, Rep. Maxine Waters, (D-Calif), ranking member of the U.S. House Financial Services Committee, says he “should stop trying to reverse rulemakings that inform shareholders about outrageous CEO salaries, and instead take up measures that give greater confidence and protections to investors who entrust their capital to U.S. businesses.”
He should also stop inviting corporate managers to embarrass themselves with a public confession that they don’t have a grip on what they pay their employees. If you want to add your public comment, you can so here.