CEO Shaming Tactics Get Federal Seal of Approval

If you knew that the head honcho of the company you work for made 200 times what you make or 800 times what you make, would you quit your job? Go outside of your building to picket?

If you still want a paycheck you’d probably say nothing, but that’s not what advocates like liberal Democrats in Congress and unions want. They want you to get so riled up when reading about how much the CEO of your company or other companies make, that you’ll vote for candidates who propose more federal regulation in the workplace.

Thanks to the Securities Exchange Commission (SEC), they now have more ammunition in this fight. This week, the SEC approved regulations requiring that most public companies disclose how much more executives earn than the average worker at their company. They would have to report this pay ratio every three years. The cost for compliance with this new rule, only a smidgen: about $1.3 billion.

As part of the 2010 Dodd-Frank financial law, the CEO pay-rule has been a controversial regulation meant to stir up division and class warfare. The timing is impeccable as inequality and corporate behavior and profits will be popular talking points to frame the presidential cycle debates about the role of government in the affairs of private companies, as well as engendering angst between the rich and poor.

Reducing the nuances of CEO pay down to a ratio will be good for fueling populist animus. There is no room for explanation of why those packages were negotiated, how risk is rewarded for executives, and how salary is structured. There is also concern that publicly-held companies will find it more difficult to attract or retain top talent who will simply flee to private companies.

In addition, employees will get caught up comparing their salaries to the median salary at their company and deciphering what message that sends with no context. There’s a good reason that salary discussions are kept private, it’s very personal and individual. What will that do for staff morale? HR experts aren’t looking forward to dealing with this.

The Wall Street Journal reports:

Companies will have to explain large pay gaps to investors, and face new challenges explaining to workers why they make so much less than the boss and, possibly, why they are less richly rewarded than their peers or competitors.

Steven Seelig, a senior regulatory adviser for Towers Watson & Co., a human-resources consultancy, said the SEC rule means rank-and-file workers will be able to see how they stack up against the median employee at their firm and at other firms. “This is going to raise all sorts of questions as to whether that person believes they’re paid fairly both internally…and [compared] to competitors,” he said.

The pay-ratio measure is one of several Dodd-Frank provisions that aim to empower shareholders to better understand and challenge executive-pay practices at major U.S. companies. The SEC earlier this year unveiled another proposal designed to make it easier for investors to judge whether top executives’ compensation is in line with the company’s financial performance. The commission previously greenlighted new “say on pay” rules directing firms to submit executive-compensation packages regularly to a nonbinding shareholder vote.

But the pay-ratio rule has sparked greater controversy—and the SEC’s action is likely to trigger a new round of partisan and legal warfare. Corporate advocates such as the U.S. Chamber of Commerce could challenge the measure in court, while Republicans in Congress greeted the SEC’s action with promises to move quickly on legislation repealing the Dodd-Frank mandate.

…

David Larcker, director of the Corporate Governance Research Initiative at Stanford University’s business school, said, “You have an incredibly important and complicated issue that’s being reduced down to one ratio.”

While debates about income inequality are ones the country should have, he said, “I just worry that the focus is going to be so much on that ratio without doing the deep dive into it and saying what does it actually mean and is it conceivable that it could be appropriate. I think the numbers are going to be electrifying for a large chunk of workers out there.”

…

MaryAnn G. Miller, chief human-resources officer of technology distributor Avnet Inc., AVT -1.07 % expects the rule will require careful preparation to limit the effect on employee morale. “It will consume a fair amount of management’s time at the outset,’’ she said in an interview on Wednesday. But overall, the rule won’t be “very impactful to the business,” she added.

We already have a picture of what this reporting will look like and the effects on the market. According to a new USA Today analysis of worker pay data, the average CEO of Standard & Poor's 500 companies was paid 216 times more than the median employees at their companies. This is up from 20 times more on average in the 1950s. This is based on the most recent total reported compensation of current CEOs and Glassdoor.com (a job search site) worker-reported data.

Nine CEOs including Chipotle co-CEOs Steven Ells and Montgomery Moran, David Zaslav of media company Discovery Communications, and Larry Merlo of CVS Health, were paid 800 times or more than the average worker at these companies.

The question is now what? Are we to expect that the young women folding your Chipotle burrito should be earning as much as co-CEOs Ells and Moran? The goal for some is to reduce the CEO salary to boost everyone else’s salary. For large national companies, good luck with your new penny increase -if so much. In that scenario no one is better off. Sound familiar? Redistribution of wealth only makes more people miserable.

What’s missed in this discussion is often why CEO’s earn so much. While we don’t know what goes on behind closed doors when decisions about CEO pay are made, we acknowledge that they are on the hook far more for the performance of major companies than the median worker, so that level of responsibility and even the risk-taking to go after earnings and cut spending is compensated at a higher rate.

In short, there's more to the story and efforts like the SEC's don't help, they just stir up more division.