(Securities and Exchange Commission/Flickr)
It is not often federal regulators stand up to pressure from Wall Street, applied with millions of dollars and all sorts of seen and unseen lobbying. But this week provided a rare example: on Wednesday, the Securities and Exchange Commission voted 3-2 to release a rule on executive pay that the corporate sector tried desperately to avoid or water down.
The new rule would require US corporations to disclose how the paychecks of their CEOs compare to the paychecks of the median worker at the company. Since the 1990s, executive pay at US companies has doubled, and top executives at large public companies now take home an average of 10 percent of their company’s profits each year, or 343 times worker pay.
The proposed rule—which was mandated by Section 935b of the Dodd-Frank financial reform act—is of course somewhat modest. It just mandates disclosure of the median worker/CEO pay rate for each company, and doesn’t actually impose any legal limits.
But massive corporate and trade groups, including the US Chamber of Commerce, the Retail Industry Leaders Association (RILA) and the Center on Executive Compensation spent millions trying to get the rule watered down, and deployed a small army of expert lobbyists to Washington. (A Public Citizen analysis breaks down the specific efforts, down to the names of some lobbyists.)
Publicly, those in the corporate sector argued that the rule was basically useless, a “name-and-shame” provision meant to embarrass them. But they didn’t spend millions of dollars just to avoid a tough Ed Schultz segment on MSNBC. The real concern is that investors will have their hands on this CEO pay data—and an increasing body of research, also available to investors, indicates that top-heavy compensation schemes indicates mediocre performance and ultimately a bad investment.
An excellent report from the AFL-CIO has summed up the research. It notes the work of Jim Collins of the Stanford Business School, who analyzed “great” companies, meaning, in his definition, those that over a fifteen-year period generated cumulative stock returns that exceeded the market by at least three times.
He came up with 1,500 companies—and not one had a highly paid, so-called “celebrity CEO.” Collins concluded that exorbitant CEO compensation sapped motivation and creativity from lower-level executives and transformed the management structure into “one genius with 1,000 helpers.”
Several other studies have demonstrated a decline in morale, high turnover and a significant deterioration in the quality of products produced at companies with a high disparity in CEO pay. One study in the Academy of Management Journal found that at companies with highly disproportionate CEO pay, the negative impacts extended ten levels down the chain of command.
In other words, CEO pay ratios are material information for investors when choosing where to put their money. The trade groups fighting this measure tried to have the ratios watered down in all sorts of ways—by allowing corporations to exclude, for example, foreign, part-time or seasonal workers.
But the SEC stood firm, and passed out the rule with no exceptions. If they finalize the rule, it could create real market pressure against top-heavy compensation schemes—which is exactly what the lobbying groups feared.
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