Cards on the Table: the SEC’s New CEO Pay Disclosure Rule

Exploding pay packages for Fortune 500 and Wall Street CEOs were briefly back in the headlines this summer, as the US Securities and Exchange Commission has finally approved a rule requiring Wall Street and other companies to calculate the ratio of the CEO’s pay to a median worker’s. The new rule, part of the Dodd-Frank finance reform bill of 2010, applies to larger domestic firms, went into effect after a 3-2 party-line SEC vote. That narrow margin reflected opposition from the US Chamber of Commerce—the dominant business organization—versus over a quarter million public commentsthat swamped the SEC, mostly supportive of the rule. Not quite the four million public comments received by the Federal Communications Commission regarding net neutrality, but still pretty impressive!

The Chamber’s counter-arguments include predictable complaints that it is “divisive” or “populist,” and the ludicrous claim that the calculation will require too much work or research to compute the median pay amount. This is a hard claim to swallow, considering that these major firms have no lack of resources and brain-power to design baffling financial derivatives with tiered-risk tranches of collateralized debt instruments. Indeed, the Wall Street Journal quotes an HR officer of a Fortune 500 tech firm who expects that while “a fair amount of management’s time” will be required when the rule first kicks in, afterwards it will demand little. The SEC estimated a total price tag for compliance of $1.3 billion—crumbs compared to overall corporate earnings.


The importance of this obscure-sounding regulation is that casting light on CEO salaries has become much more important in the current era of rising inequality and corporate power. The enduring effect of the Occupy movement on US consciousness, with the “1%” now commonly discussed even in business journalism, means that this information will have an impact. But it’s also important because today’s huge C-suite salaries actually represent an important change in exactly how the richest households make their gigantic fortunes.

Consider the eminent Thomas Piketty, who wrote in his surprise smash Capital in the Twenty-First Century that at the very highest levels, income from capital assets (stocks, bonds and other investments) becomes the dominant income stream. However, while “a very substantial and growing inequality of capital income since 1980 accounts for about one-third of the increase in income inequality in the United States,” this only happens in the richest fraction of the top 1%. Most of the rest of the top 1%’s growth “was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among managers of large firms.” (p. 298)

Importantly, “the fact that the unprecedented increase in wage inequality explains most of the increase in US income inequality does not mean that income from capital played no role. It is important to dispel the notion that capital income has vanished from the summit of US social hierarchy. In fact, a very substantial and growing inequality of capital income since 1980 accounts for about one-third of the increase in income inequality in the United States.” (p. 300) In other words, the huge growth in Fortune 500 profits is making a major contribution to the growth of the 1%’s gigantic wealth, but the larger remainder comes from the preposterously huge pay packages for CEOs and other corporate decision-making figures.

An insider view of this process can be found in the “plutonomy” memos, the leaked pair of 2005-6 Citigroup investment memos. These documents caused a stir with their claim that a small rich class now controls enough income and wealth that its own actions and decisions shape economic development. Its writers observe that “while in the early 20th century capital income was the big chunk for the top 0.1% of households, the resurgence in their fortunes since the mid-eighties was mainly from oversized salaries.”

Writing for an elite audience of affluent investors and not expecting public scrutiny, the authors openly described today’s powerful CEOs as a “Managerial Aristocracy,” and they found its rising share of national income can occur “either through capital income, or simply paying itself a lot.” One interesting thing to add about these memos is their references to other reports that regrettably haven’t been leaked, but are referred to by name in the ones that have, allowing us to wonder about the contents of reports with titles like “Earnings—Don’t Worry, Capitalists Still On Top.”

But all this isn’t assured, as the Citi analysts find “There are signs around the world that society is unhappy with plutonomy,” and a “backlash against plutonomy is likely at some point.” The SEC pay ratio disclosure rule will add some clarity to exactly how disproportionate our modern labor markets have become, which could contribute to that reaction.

As far as what kind of numbers can be expected, the progressive Economic Policy Institute’s estimates of CEO/worker pay are in the neighborhood of 300 to one, having hit a peak in 2000 at a towering 376 to one. Exactly what the number has rebounded to today we’ll learn in time. For some broader guidance, Kevin Phillips in his influential book Wealth and Democracy observed that the Gilded Age banking kingpin JP Morgan insisted that the heads of his financial and industrial conglomerates be paid no more than twenty times the lowest wage at the company, while “Plato had said that a five-to-one ratio was about right.”

Poker Face

The rule is limited, however, and reflects the “lobbying blitz” in which it was formed, including in its start date—2017. Furthermore, companies are permitted to leave as much as 5% of their international work forces out of the calculation, and corporations only have to calculate and release the numbers every three years. And over the objections of organized labor, firms can adjust their payroll data to make part-timers into full-timer equivalents, as the Wall Street Journal reports. These allowances by the SEC enable the firms to inflate the average pay of their rank-and-file workers and thus lower the ultimate ratio. These frustrating limitations and cop-outs are pretty typical of the Dodd-Frank Wall Street “reform” bill, which left many crucial decisions and rules to like the SEC, where public inattention allows endless backroom lobbying and arm-twisting.

But despite these issues, the SEC’s pay ratio disclosure rule does represent a small but potentially constructive victory, like the FCC’s net neutrality decision. Crucially, it’s a “non-reformist reform” that rather than curbing a specific flaw of capitalism, actually encourages more critical attitudes and thought toward the one percent. That means there may be more potential for future “labor and social backlash” to rocketing inequality, and this New Year’s will kick off the one-year countdown to some fascinating numbers! Then maybe the twenty-first century won’t continue to be bonanzas as usual.

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