When the company that you run pays you hundreds of times more than it pays its typical employee, the least you can do is endure some awkward conversations about the subject.
Last week, a divided Securities and Exchange Commission voted to require publicly traded companies to disclose the ratio between what they pay their chief executive officers and what they pay their median workers.
It’s not a shock that GOP officials and business groups would oppose such meddling. What’s surprising — and telling — is their level of indignation over this modest rule.
David Gallagher, one of the SEC’s two Republican commissioners, blasted the rule as “social policy masquerading as disclosure requirements.” And social policy it is: The labor groups that pushed for the rule, a requirement under the 2010 Dodd-Frank financial-regulation-reform law that’s been under debate for years, want to shame companies into paying CEOs less.
Michael Piwowar, one of two Republican SEC commissioners, issued a written statement decrying “Saul Alinskyan tactics by Big Labor and their political allies” and a “strategy of appeasement” by the three Democratic commissioners.
Meanwhile, David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, dismissed the pay-gap rule as an effort “to advance special interest agendas” and as “a favor to union lobbyists who misguidedly think it will help their organizing efforts.” In a Wall Street Journal article, he speculated that the Miami Heat’s pay gap was higher when the team still employed LeBron James — and won a championship — than after the superstar forward left.
The problem is that some executives receive LeBron-level compensation packages even when their companies stumble.
According to one frequently cited study by the left-leaning Economic Policy Institute, the average CEO earned 30 times the typical worker in 1978; today, that ratio is 303-to-1. As executive pay spirals, what companies are getting in exchange isn’t terribly clear. Study after study show little or no correlation between CEO pay and return to shareholders. Some research even indicates that companies with the highest-paid chief executives fare the worst, perhaps because those CEOs come to believe in their own infallibility.
Put these studies together, and a picture begins to form: Executive compensation has risen because CEOs get measured by lenient standards and can stack their companies’ boards.
Nothing in the SEC’s pay-gap rule precludes a company from paying its CEO whatever it likes, and even proponents acknowledge that the ratio is an imperfect measure. If the issue attracts attention from the public and the media, some companies will find ways to game the formula.
What opponents of the rule fear most, though, is that the pay ratio will give workers and regulators a clearer picture of what’s going on inside companies — and that they’ll demand policy changes accordingly. In his statement, Piwowar raised the possibility that companies with smaller pay gaps may be favored for government contracts, or that companies with larger ones would face higher tax rates. “Acquiescing to bullies,” he wrote, “only gives them more ammunition and makes it worse.”
Bullies? Far from reflecting the political muscle of labor groups, the fight over the pay-gap rule is happening because so many other ways of addressing income inequality, such as a more progressive tax code, are off the table.
Inequality is growing for lots of reasons, including the inexorable march of technological change. The question is whether our public policies should accelerate that dynamic — or counteract it. When middle-class workers must satisfy themselves with stagnant wages, there’s no reason to defer to the delicate sensibilities of the most exorbitantly paid executives.