Wall Street Desperately Trying to Kill Law That Could Curb Obscene CEO Pay
Sometimes lobbyists — even the most perfectly coiffed — mess up. Lobbyists for Corporate America messed up big-time last summer. They let slip into law, via the 2,300-page Dodd-Frank financial reform bill, an obscure provision that could give future lawmakers a powerful lever for ratcheting down excessive CEO pay.
Now those lobbyists are pushing hard to undo their mistake — and progressives, led by AFL-CIO president Rich Trumka, are pushing back.
The winner won’t be clear until later this year when the Securities and Exchange Commission, the federal watchdog agency over Wall Street, releases the final regulations that will enforce the Dodd-Frank legislation.
That legislation includes an assortment of provisions that impact executive pay. One of these — “say on pay” — has been receiving a good bit of media attention. This “say on pay” guarantees shareholders a regular opportunity to cast “advisory” votes on the CEO pay packages that corporate boards produce.
Corporate boards don’t particularly like the idea of letting shareholders vote on CEO pay, but most have come around to understanding that, by just tweaking how they structure their CEO pay packages, they can continue conducting CEO pay business as usual even with “say on pay” on the books.
Indeed, several other nations — including Britain — already give shareholders the right to take advisory votes on executive pay. Executive pay, in these nations, has kept right on rising.
Corporate boards, in other words, can live with “say on pay.” But they seem to be choking an another Dodd-Frank executive pay provision that Senator Bob Menendez from New Jersey slipped into the legislation at the eleventh hour.
This Menendez mandate requires America’s corporations to disclose, for the first time ever, the specific gap between what they pay their CEO, on an annual basis, and what they pay their most typical workers.
Current law requires corporations to report how much their top five executives are making. Under the Menendez mandate, corporations must now also report their overall wage “median” and the ratio between this median and their top pay.
That information — from a public relations standpoint — could be explosive. CEOs who make 1,000 times more than their most typical workers would have to explain what makes them so much more valuable than competing CEOs who make just 100 times their worker pay.
But the impact of the Menendez mandate could go far beyond public relations. Future lawmakers could, for instance, deny lucrative government contracts to companies that pay their top executives over 100 times what they pay their workers — or 25 times, the CEO-worker pay ratio back in the mid 20th century.
In Britain, advocates for more reasonable executive pay levels are now making just this sort of proposal. The prospect of similar pressure here in the United States has Corporate America shuddering — and pressing the Securities and Exchange Commission to water down the Dodd-Frank Menendez mandate.
The SEC can’t, of course, kill the mandate outright. Pay ratio disclosure, after all, now stands as the law of the land. But the agency still must translate that law into enforceable specifics, and this translating will require a series of rulings, on a variety of fronts, that could mute the Menendez mandate's ultimate impact.
One example: Should corporations be required, under the mandate, to figure into their median worker pay calculations the wages that go to part-timers or workers outside the United States?
Corporate trade groups like the American Benefits Council — an outfit that represents the bulk of the Fortune 500 — want only full-time U.S. workers to be included. For obvious reasons. Including only full-time U.S. workers would let American corporations that outsource jobs — or load up on part-timers — to style themselves as noble “high-wage” employers.
Corporate lobbyists are also attacking the new Dodd-Frank pay ratio mandate as a “highly costly and burdensome” new obligation on corporations. They’re asking the SEC to let companies offer up a “single employee” as “representative” of what they pay their workers, instead of requiring corporations to calculate what their median workers actually get paid.
AFL-CIO president Rich Trumka, in an official response filed last month shortly before the holidays, dubbed these corporate charges clearly “overblown.”
Corporations, Trumka pointed out, already have to file W-2 forms that report every American worker’s total compensation. Foreign nations “have similar reporting requirements.” And firms, he added, can easily prorate their part-time worker pay “to provide a more complete picture of workforce compensation.”
The actual language of the Dodd-Frank law, the AFL-CIO leader went on to note, requires publicly traded companies to disclose “the median of the annual total compensation of all employees of the issuer,’” not just U.S. employees. Corporations could meet this requirement, Trumka suggests, simply by reporting the median pay of their U.S. and foreign workers “as two separate statistics.”
In any case, Trumka emphasizes, investors — and the public at large — need the information the Menendez mandate seeks to provide. A “meaningful disclosure of how employee compensation is allocated over their workforce” will help the public understand how corporations are approaching core operating issues.
Are these corporations, for instance, paying more than minimal wages to “attract the best qualified employees and improve employee productivity”?
Higher levels of median compensation, Trumka reminds the SEC in his statement, can “make it easier to retain workers and reduce employee turnover.” And smaller disparities between the top and bottom of the corporate pay ladder, his SEC comment adds, also strengthen enterprise “cohesion and teamwork,” as the founder of modern management science, Peter Drucker, often argued.
Average Americans, Trumka’s commentary makes clear, have still another reason to care deeply about Corporate America’s pay practices. Everyday Americans have billions of pension dollars invested in U.S. corporations.
“The retirement savings of America’s working families,” says Trumka, “depend in part on public companies having responsible compensation practices for both their CEOs and all other employees.”
Will the SEC agree — and come out with regulations that match the Menendez mandate's full-disclosure spirit? Or will the agency issue regs that let Corporate America off the hook? That answer remains months away.
In the meantime, a variety of public interest groups will be meeting this week in Washington, D.C., to kick off a new CEO pay taskforce — and help make sure SEC rulemakers hear from all America, not just the corporate lobbying set.