The SEC’s Executive Pay Rule and Dividends

Everybody with a stake in the issue is likely to sue, claiming the requirement is, choose one: illegal, unnecessary, too onerous, inadequate or not punitive.

My prediction is that the legal battles will be long, drawn-out affairs with some kind of reporting requirement remaining in place. Yet whatever standardized yardstick comes to pass, I bet not much will change in the way of executive compensation. Here’s why it won’t and why executive pay matters to investors.

Today, the chief executives of America’s largest companies earn 300 times the pay of the average worker at their company. In 1965, they earned 20 times the average. That enormous — and growing — difference, compounded with the dismal fact that average earnings have been stagnant for decades and the middle class is shrinking, has focused attention on why CEOs are paid so much.

Those who say the market determines CEO pay contend that no one is forcing corporations to pay their leaders those high numbers. CEOs are paid what they are worth, so the reasoning goes, because they are a rarely talented group of individuals who create loads of shareholder value. Highly talented sports figures and show business celebrities make just as much or more and nobody cares, say the high-pay advocates, so why make such a fuss about CEO pay?

Well, the reason to make a fuss is because high CEO pay diverts money from investment, from pay for other workers and, ultimately, from rank-and-file shareowners. CEOs get paid what they get paid because nothing is stopping them. It’s certainly not the other CEOs and former CEOs who occupy the board seats of America’s corporations. Even the token outsiders on corporate boards, where directors are paid hundreds of thousands of dollars to attend a few meetings and occasionally do some real work, are unlikely to rock the boat by pointing out that the CEO is making an excessive amount of money.

Second, the comparison to celebrities is ridiculous. Sports stars and show biz greats typically have very short careers and are only paid as much as they make and for as long as they make it because of their power to put derrieres in expensive seats and eyeballs in front of commercials. Once they can’t throw a ball or popular tastes change, their earning days are over.

CEOs make a lot when they’re CEO and get stock options that enrich them for life. Worse for stockholders and dividend-oriented investors is that they tilt corporate behavior to favor their interests. Managing earnings for the short term, which drives up stock prices and CEO paychecks, can kill a company in the long run. Stock buybacks, which increase earnings per share, are usually a diversion of corporate assets from productive purposes. And investing in new ventures? That’s risky and may pay off only down the road when a new CEO is in charge, so why gamble?

And as far as being the chief reason their companies do so well, I say phooey. Don’t tell me that ExxonMobil’s 75,000 or so employees are such nincompoops that without Rex Tillerson at the tiller the company would devolve into chaos. Anyone who has ever worked in a large corporate bureaucracy knows that no one person makes much of a difference, and that most of the time companies make money despite themselves.

So what was different about the times when CEOs were paid well, but not crazily? For one, labor unions were stronger, which meant that workers got more of the total pie than they do now. I’m not advocating a return to unions, which tend to be best at enriching and politically empowering union bosses and ruining many an industry with their demands (Detroit, anyone?). But a workforce with a little more political muscle wouldn’t be the worst thing in the world to offset CEO power.

More government regulation isn’t the answer, either. The government doesn’t run the government very well and already sticks its nose too far into the private sector. Architect Mies van der Rohe was very wise when he said “less is more.”

I believe that the strongest force that kept CEO pay within bounds in the past was simply the general moral climate of the times. CEOs got paid what they got paid because there was a general consensus that their pay level was fair. CEOs would have liked to been paid more — who wouldn’t — but they didn’t think it was seemly to grab more of the pie.

Today, self-restraint and dignified comportment are as old-fashioned as 45 records and Oldsmobile 98s. We can’t demand, regulate or legislate self-restraint, especially in today’s climate of political correctness and self-absorption. I say the most potent weapons we have to fight insane CEO pay are: 1) outgrowing our obsession with CEOs and the cult of the Leader; and 2) public shaming.

Let’s stop idealizing CEOs. Enough with the hagiographies in business magazines and on business TV. There are lots of smart people in Corporate America, not just CEOs. Let’s deprogram ourselves and see that CEOs are just as human as we are, which means there’s no reason to pay them as if they were gods.