Do Mark Zuckerberg and Jeff Bezos Make Too Much?
The Dodd-Frank legislation, passed in the wake of the 2008 financial crisis, was supposed to reduce the need for future bailouts. But the sweeping reforms have not addressed the government-created incentives for risky behavior in the financial sector. Some provisions of Dodd-Frank, such as the requirement for companies in all sectors to publicly release CEO pay ratios, instead solve nonexistent problems.
The rationale for the required publication of CEO pay ratios is that CEOs are supposedly overpaid, and shareholders and the public ought to know how much CEOs make in relation to the lowest-paid workers in the firm.
CEO pay ratios are calculated by dividing CEO compensation by the median wage of all workers in a company (including the executives). The Securities and Exchange Commission took several years to finalize the guidelines of this requirement, so the mandate did not take effect until this year. The pay ratio requirement is costly and creates harmful incentives. According to a survey by the SEC, it will cost many companies thousands of additional hours and millions of dollars for outside professional services annually. The specifics vary from company to company. The mandated publication of company ratios may even cause fewer low-wage workers to be hired because some companies may wish to raise the median wage of their employees for public relations purposes. This rule could motivate employers to contract out lower-paying work in accounting and janitorial services (for example), or it could even be the pivotal push to fully automate thousands of jobs in low-wage labor-intensive services.
Employees working in a consolidated subsidiary overseas are included in the ratio calculations if they comprise more than 5 percent of a company’s workers. Employment opportunities at companies currently below 5 percent could therefore be offshored. The 5 percent rule can be avoided in some cases.
While this CEO pay-ratio data is meant to provide valuable insight, it gives the flawed impression that companies have a secret. Fortune 500 companies have grown at the same six-fold rate as CEO pay at those companies since 1980. The average CEO pay was $194,000 in 2016, millions below what the public may assume.
Attempts to observe nationwide patterns of CEO pay ratios are common, but they are typically hollow. Equilar, a consulting firm that specializes in executive compensation, has gathered a sample of 356 companies’ pay ratios for the past year. Equilar calculated the median CEO pay ratio across categories such as company revenue, number of employees, region, and industry. Executives were predictably compensated at a higher rate when managing companies with more employees and more revenue. However, the aggregated figures across regions and industries could be easily misconstrued.
For example, the median West Coast ratio of 113 to 1 is lower than the Southeast’s median ratio of 153 to 1. Companies on the West Coast, it could be said, have a fairer distribution of wealth across industries than companies in the Southeast. However, states such as California have a high concentration of companies (e.g. information technology) that require more skilled workers that will receive higher pay.
Despite the many reasons for pay discrepancies, pay-ratio data provokes misplaced ire from union leaders against market-based compensation of top executives. The AFL-CIO, the largest federation of unions in the country, has a special section on its website dedicated to CEO pay. It falsely pits workers against employers, boldly denouncing a system of “More for Them, Less for Us.” Its pay ratio estimates are inflated, and many union leaders earned more than the average CEO.
For instance, United Food and Commercial Workers president Anthony Perrone earned $345,362 in 2015, and the median wage for food service workers was $19,630 in 2016. But rather than criticizing this disparity, what matters is whether Mr. Perrone meets the criteria of a union president that members want.
Companies are targeted by unions for doing what they are supposed to: offering executives better compensation packages than competitors. A small difference in talent brought by a CEO can mean millions in profits for the shareholders and greater value for customers. Even if CEOs are paid too much, which former CEO Steven Clifford says in The Atlantic is common, the boards of directors can adjust compensation down or replace CEOs.
Union efforts, as well as the efforts of socialist activists and academics, to curb CEO pay are misplaced. Critiquing CEO pay as a function of workers’ wages does not make sense because managing a company with more low-wage workers is not inherently harder or easier than managing a company with more high-wage workers.
The deeper problem with mandating CEO pay ratio publications is that it directs attention away from the ways that government intervenes and brings about financial crises and inequality. High CEO pay did not cause the financial crisis, and regulating CEO pay will not solve it. The SEC states that the rule was implemented to help engage shareholders. But shareholders have always been free to ask companies for pay- ratio information, or sell their shares in companies whose policies they consider harmful. Executives are free to reveal their company’s pay ratios, but requiring them to do so is an unwarranted invasion of private business.
The federal government should focus on real solutions to the problems in our economic and financial systems, not paper them over with costly platitudes such as pay ratio statements.
Joshua Hardman is a contributor to Economics 21. You can follow him on Twitter @headwingnews
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