Home > The Economy > The SEC rules on CEO Pay – Sort of

The SEC rules on CEO Pay – Sort of

from Peter Radford

I have a friend who counts bank reform as one of Obama’s signature achievements. Maybe. But what he probably doesn’t realize is that it is only just now getting implemented.

Hidden amongst the weeds of the Dodd-Frank legislation was a provision authorizing the Securities and Exchange Commission to order publicly traded companies to publish the ratio of CEO to median worker pay.

That rule was finally voted on this week. That is five years after the legislation was passed.

The delay in enforcing the rule was caused, at least in part, by the massive push back by big companies. Presumably they were embarrassed by the ludicrous differential that has opened up in that ratio.

One of the major reasons business gave for objecting to the rule was that it is very difficult to calculate how much they pay their employees. Really? It doesn’t seem that way when they announce cost cutting programs aimed at boosting earnings per share. Somehow I think businesses have a pretty good idea of their payrolls. After all they are notorious for being picayune over every little detail that might cost the CEO a part of his or her bonus.

They also argued that compliance with the rule would cost them about $1.7 billion a year. Imagine that. Running a fairly routine calculation based on one of the most frequently run databases they have costs that much. I don’t think so.

Either that or I think the SEC ought to worry about the ability of these businesses to report their earnings accurately.

Big business seems to lie about the cost of compliance every time it is asked to provide basic information to the public. There is no reason to imagine that it wasn’t lying this time too.

Predictably the vote at the SEC was along party lines. The Republicans are very jealous of their image as protectors of big business. Furthermore throughout these past five years business has managed to install a number of amendments to the rule that will make the ratio appear less outrageous than the original rule would have: they can exclude foreign workers, they can choose the ‘sample’ of employees upon which the calculation is made, they can exclude a percentage of part-time workers, and so on.

Nonetheless getting the rule enforced is a step, albeit a small one, in the right direction.

One last thought: if its that hard to calculate a median of worker compensation, I wonder how difficult it must be to calculate the marginal cost of labor that economic theory argues is the basis upon which firms decide their employment requirements. Surely marginal theory isn’t just a figment of the minds of a few conservative economists is it?

On the other hand, having struggled many years ago through a maze of cost accounting at a variety of big businesses I can vouch for the irrelevance of marginal theory without having to worry about the calculation difficulties businesses face when asked about their payrolls.

Realism is not one of the major attributes of business when faced with calculating the cost of regulation. Nor is it a key aspect of economic theory.

Realism? That would spoil the fun. Wouldn’t it?

 

Addendum:

For those counting, this rule enforcement is a major setback for SEC Chair Mary Jo White who is renowned for caving to those whom she is tasked to oversee. She famously refused to order companies to publish their political donations. Apparently political transparency is bad for business. And Mary Jo is all about being pro-business.

 


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