Under new rules enacted as part of the Dodd-Frank financial reform act, companies are now required to report how much median employees at their firms make and compare it to what their CEOs make. It’s designed to bring more transparency to pay by both spotlighting the growing gap between lower- and middle-income workers and the wealthy and giving corporate boards more information about soaring executive compensation so they could potentially reign it in.
But now that rule appears to be in danger.
On Monday, the acting chairman of the Securities and Exchange Commission (SEC), Michael Piwowar, called for reconsideration of the rule that went into effect on January 1, hinting that it could be reversed.
“[I]t is my understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline,” he wrote. So he called for a new period of public input over the next 45 days, after which he will direct the SEC staff to “reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.”
Corporations have long opposed the rule, arguing that it would be difficult to comply with and offer little useful information. They haven’t won a full victory yet, as it takes the same process to undo an existing SEC regulation as it does to implement a new one, and the agency’s leadership is evenly balanced between Piwowar, a Republican, and Kara Stein, a Democrat. Stein said of Piwowar’s actions, “It’s problematic for a chair to create uncertainty about which laws will be enforced.”
But if they do win out and kill the new rule, they will obscure a fast growing trend. CEOs at the largest American companies made an average of $15.5 million each in 2015. While without the new reporting in place it’s impossible to know how each CEO’s pay compares to his median worker’s, that figure is 276 times greater than what typical American workers make.
The ratio is far higher than it was in 1965, when CEOs made 20 times what typical workers made. Since 1978, CEO pay, adjusted for inflation, has grown about 940 percent. In that same time period, the growth in yearly wages for a typical worker grew just about 10 percent.
Pay for chief executives has even outpaced other top earners. In 1989, CEOs as a group made 2.63 times as much as what people in the top 0.1 percent of earners made; by 2014 they made 5.61 times as much.
That indicates, according to the progressive Economic Policy Institute (EPI), that sky-high CEO pay doesn’t just reflect greater rewards for greater talent and productivity at the top, but instead shows that CEOs have been empowered to demand ever-higher pay despite their performance. Indeed, compensation for the highest-paid CEOs bears no relationship to their companies’ profitability, revenue, or stock return; many of them instead oversee the worst results.
“Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on output or employment,” EPI concludes.
Dodd-Frank in theory empowered company shareholders to pull back on executive compensation, giving them the power to disapprove proposed packages. So far it doesn’t seem to have had much of an impact, and that rule could also wind up on the chopping block.
Piwowar’s announcement is the latest in a string of actions aimed at weakening new rules that curb the financial industry’s abuses. On Friday, President Trump signed a memorandum calling for a review and possible reversal of a rule that requires financial advisers to put their clients’ interests ahead of their own. He also signed one directing regulators to put together proposals for revising Dodd-Frank, and he’s planning action that would weaken the Consumer Financial Protection Bureau (CFPB), the agency devoted to protecting Americans from financial fraud.
Congressional Republicans are also moving forward with their own plans to hobble the CFPB and to roll back Dodd-Frank. Their overhaul bill could be introduced as early as this week. They also voted last week to undo an executive order issued by President Obama that required any company that contracts with the federal government to disclose past labor law violations, another blow to transparency.