by Hank Boerner – Chairman, G&A Institute
The Dodd-Frank investor protection and financial industry reform legislation — officially, the Dodd Frank Wall Street Reform and Consumer Protection Act — became the law of the land in July 2010 when President Barack Obama signed the measure. It’s usually estimated that roughly half of the measures included are still in process to become the operating rules-of-the road for U.S. financial service sector firms. Commercial banks, credit card companies, credit information bureaus, consumer lenders, investment banks, bank holding companies, investment bankers, regulatory authorities, and others will be subject to the rules backed up by the statutory authority embodied in Dodd Frank.
The recent crisis in the American financial services system spread quickly to affect millions of U.S. citizens and over time, millions more citizens of other lands. We are still working our way out of the Great Recession that resulted from events in 2007-2008-2009. (The old saw is that a recession is when your neighbor is laid off, a depression is when you get the axe.) For many Americans, this is a depression — for folks who cannot find a job, pay down mortgages, cannot afford tuition, are working part-time ’cause that’s all there is, the unemployment payments ran out, and more.
Dodd Frank is actually 16 “titles” or sections (Sarbanes Oxley earlier was 11 titles), requiring several hundred rules to be adopted, as well as studies conducted and periodic progress reports issued. This was all to “improve accountability and transparency,” among many noble or at least well-meaning intentions.
Dodd-Frank addressed the issue of CEO compensation, with such measures as having shareholders vote to approve exec comp and golden parachute compensation (Section 951). Also, there was a mandate for having a shareholder “advisory” vote to determine who often the company would conduct a shareholder vote on compensation. That was the easy part it turned out. The hard part? Section 953 — requiring “…disclosure about certain compensation matters, including pay-for-performance and the ratio between the CEO’s total compensation and the media total compensation for all other company employees…” Although the other parts of the Section were not popular, this one was the whopper. Despite intense lobbying efforts to stop rule-making, we saw the news last week that SEC has moved along…953 rule making is in the final stages.
Consider that in this still recovering economy we have been transitioning to a have/have not situation, with some of the haves are doing very nicely, thank you. Count among the blessed folk certain of the higher paid CEOs of large public companies. The gap between worker and chieftain pay has been widening for years, of course, but the public notice about this has been episodic. I remember when health care “reform” was being discussed in the Clinton era reading that it was not fair that CEOs of HMOs were being paid 97 times that of the skilled intensive care unit nurses.
CNN Money in April 2012 reported that CEO pay was now 380 times the average worker’s, according to analysis by the AFL-CIO, as the largest company CEOs earned an average of US$12.9 million vs. the average worker pay of $34,053, according to the Bureau of Labor Statistics. And that was 14% higher than in 2010 when the CEO average was $11.4 million. (300 large companies were analyzed.) Back in 1980, said the union group, the pay was 42 times the average worker…by 2000 the gap was at 525X. (The union has had a web site up with this information for the past 15 years and has kept the conversation about CEO pay going with media, public officials, union members, and others.)
So now to the rulemaking: On September 18th the SEC commissioners voted along party lines – 3-2 — to propose a new rule requiring public companies to disclose the ratio of the compensation of its CEO to the median comp of employees. No specific methodology is prescribed…each company “would have the flexibility to determine the median annual total compensation of its employees in a way that best suits its particular circumstances…”
The compensation advisory company Meridian Compensation Partners LLC is circulating information about the proposed rule to clients and stakeholders. The partners point out that important issues for the companies to address include (1) what employees are to be included (all means full, p/t, seasonal, temps); (2) determining the median; (3) determining the CEO pay ratio; (4) calculating the Median Employee Total Compensation. The result can be expressed as “1 to 200X” or “200X that of.” (more information at: www. meridiancp.com)
We have 60 days to go for public comment — SEC has prepared 160+ pages of documentation to explain the disclosures required. That’s a small amount of paper (or digital file) compared to the headlines and reams of print content that we will be seeing in the months ahead if the rule is adopted and as public companies begin to disclose the “1-to-200 times” difference in pay levels. All of this will add to the earnest debate about the income and wealth gap and the continued dwindling of the American Middle Class. We’ve been tracking this issue since the 1980s and we see an intensifying public conversation coming on CEO pay and the growing gap with the worker media. This will likely heat up at specific companies come the 2014 proxy season.
This is a hot issue about to heat up more — Stay Tuned!