Surprise, CEOs: You're on Candid Disclosure!

The Securities & Exchange Commission was formed after the Great Depression to protect small investors by mandating full and frequent disclosure of material financial information. While the SEC has in some ways failed us in recent years, this week it has demanded one piece of revealing information that shareholders should want to see and that CEOs and boards of directors fear: The regulator has proposed a rule requiring the CEO-to-worker pay ratio to be disclosed in every public company's public filings.

Disclosure and exposure
The SEC's proposal is even more significant given the scorching opposition from business interests and Republican politicians. It had seemed likely that any rule would have been diluted, but it turns out the SEC didn't go that route.

Not only would this rule give us an indication of how much shareholder money is squandered on huge pay packages that aren't linked to performance, it will put a negative light -- and thereby pressure -- on boards of directors who encourage and rubber-stamp these excesses.

Surely shareholder views of corporate compensation will change, and the disclosure will alert the public to just how mind-blowing many of the discrepancies are. Sadly, it could hurt employee morale in some cases. That's bad for business, and great management thinkers like Peter Drucker have warned us about it. Meanwhile, boards of directors should never have allowed such giant paydays and perks in the first place.

Cue up the scary music and sleepless nights for the undercover corporate fat cats.

Do these ratios sound OK?
Some organizations have tirelessly tracked the ratio's ups and downs (mostly ups) in recent years. According to the AFL-CIO, last year the average ratio among S&P 500 companies was 354-to-1. The Economic Policy Institute pegged average CEO pay at 202.3 times the pay of nonexecutives.

These numbers already show shocking discrepancies, and yet we're talking about the average right now, crunching data on many CEOs in different industries. According to data compiled by Bloomberg News, quite a few corporate leaders took home at least 1,000 times the compensation of the average employee in their industries last year. For example...

Former J.C. Penney CEO Ron Johnson made 1,795 times the average worker's pay, according to Bloomberg. We all know what legacy Johnson left: The retailer is still struggling, it recently served up a major quarterly loss, and there's no turnaround in sight.

Abercrombie & Fitch (NYSE: ANF  ) chief Mike Jeffries is widely associated with extravagant wealth and a distasteful brand "formula." The retailer's long-term financial performance illustrates that his tenure has seen ups and serious downs, but apparently his pay hasn't. Last month, the stock plunged 18% on disappointing tidings of teens' defections; same-store sales plunged 10%. Last year, Jeffries made 1,640 times the average worker's pay for his industry.

Simon Property (NYSE: SPG  ) : David Simon doesn't get a lot of attention, but he ranked high on Bloomberg's list, calculated to have made 1,594 times the average worker. In 2011, Simon received a stock award of a whopping $120 million -- a "retention" award that made no sense, given that Simon likely wouldn't leave the company his own father and uncle founded.

Considering that performance requirements were also missing from a reconfigured compensation plan for Simon, one of the company's investors, the Louisiana Municipal Police Employees' Retirement System, sued its board of directors last year. In June, a judge gave the lawsuit the go-ahead.

Coffee giant Starbucks is one of my personal favorite companies, and Howard Schultz has proven himself to be an amazing leader in many ways. However, one aspect that's lacking is a modest compensation plan for the founder, chairman, and CEO.

Schultz made 1,135 times the average worker's pay in his industry last year. As a shareholder who is incredibly pleased with Starbucks' performance over many years -- particularly the brilliant acquisitions made recently -- I can't say I'm pleased about such a ratio. Personally, I believe it warrants investors' "no" votes on their proxy ballots' say-on-pay section.

A laudatory list
On a lighter note, we shareholders shouldn't think the discrepancies are outrageous at all companies. Since the general ratio represents the average, some CEO compensation falls on the other side of the spectrum.

I asked the analysts of our premium services for examples of admirable CEO pay packages they've noticed in the companies they track. These are the leaders who aren't trying to personally profit at the expense of shareholders and workers -- those who can assure shareholders that management cares about all stakeholders more than their own pocketbooks.

I received some interesting examples of such leaders from some of our analysts, some of which had never hit my usual radar when I cover CEO pay issues. In next week's column, I will list some of these CEO pay "hall of fame" companies.

For an example of a high-profile corporate leader whose pay is reasonable, take billionaire Warren Buffett of Berkshire Hathaway. He has also been outspoken about egregious CEO pay in modern times.

Even though the SEC has handed out a victory to those of us who want to see the disclosure rule implemented, it ain't over till the fat cats scream. The rule is currently open for public comment, so that means we can all send the SEC our feedback.

If you'd like to make your voice known, visit the SEC website, read "How to Submit Comments," which gives a full rundown of how the SEC wants the comments formatted and identified, click "Proposed Rules," and then move along to "Submit Comments on File No. S7-07-13."

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Read/Post Comments (9) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2013, at 6:34 PM, dennyinusa wrote:

    We as stockholders own the company and can pay whatever we want. If CEO does not agree he is free to leave. This is exactly why CEOs and Board of Directors are so opposed to let stockholders/ (real owners of company) have say in compensation packages. Come on stockholders you are the real owners of these corporations these people are stealing your money. Does the owner where you work have no say on employee pay package? I think people have forgotten a CEO is an employee, not owner of company. The first step should be no current CEOS should be able to sit on a board of directors; directors should only be on one board; nor should they have any other full time job; sitting on a board should be a full time job. To many boards are just made up of cronies and the old boys club members who do little research and have little incentive to do more than act as rubberstamp to CEO’s whims.

  • Report this Comment On September 23, 2013, at 6:49 PM, cmalek wrote:

    I wonder what is the pay ratio for AFL-CIO union management versus union members'??? Those numbers are rarely, if ever, mentioned.

  • Report this Comment On September 23, 2013, at 7:06 PM, devoish wrote:

    AFL-CIO management pay. Google it and it took 3 seconds to find this page for anyone who really wants to know and not just leave questions hanging. Now that you know, please mention them all the time in reference to average ceo pay.

    http://www.unionfacts.com/union/afl-cio

    Best wishes,

    Steven

  • Report this Comment On September 24, 2013, at 4:16 PM, CHill8008 wrote:

    How is the ratio calculated? Do you have a link? If the employee average is populated by large numbers of young, uneducated, seasonal, low-wage, part-time workers that will skew the average (and 3 of the 4 examples provided would fall into that category, the fourth being a REIT). Comparing averages from different sized populations is also problematic. Are there methods for addressing these? With low-wage workers skewing the average a lay-off among them would be a very effective way to move the average. Combine that with increasing the wages of a few of the non-executive management and you can dial this average right in. Ahh... fun with statistics!

    I've saved this article so we can revisit this "Surely shareholder views of corporate compensation will change, and the disclosure will alert the public to just how mind-blowing many of the discrepancies are" prediction in a year.

  • Report this Comment On September 24, 2013, at 4:22 PM, hokiebigdog wrote:

    @cmalek @devoish

    Here is your answer.

    http://republicanredefined.com/2012/04/24/union-boss-trumka-...

    Funny how the author is very off base in trying to make a big deal out of Trumpka salary discrepancy vs avg american worker (probably a conservative proxy for AFL-CIO members) being 8 x greater. That's a pretty low/good ratio. In fact, my supervisor makes 4-5x my salary. Trumpka's salary of 293K doesn't sound unreasonable at all, actually I would have thought it would have been more.

  • Report this Comment On September 24, 2013, at 4:24 PM, TMFBlacknGold wrote:

    Anyone know what has to occur for the rule to go from "proposed" to law? The likelihood?

    --Maxxwell

  • Report this Comment On September 24, 2013, at 4:48 PM, deafelephant wrote:

    I am so thrilled about this because there is some serious runaway greed among the CEOs of many corporations and it's hurting their investors. The pay-ratio will help temper their excess of which in the end would benefit them as much as their investors.

  • Report this Comment On September 27, 2013, at 12:12 PM, BruceS78 wrote:

    CEO compensation of 1700 times the average employee means that company could hire 1700 employees to replace 1 CEO. That's pretty amazing that anyone thinks he or she is worth that much especially in some of these companies that have tanked because of their CEO decisions. Companies with extraordinary CEO compensation also tend to have extraordinary compensation for many of the other senior company employees.

    Board of Directors ought to remember that CEO,etc, are still just employees.

  • Report this Comment On September 27, 2013, at 7:18 PM, cmalek wrote:

    @hokiebigdog:

    Ratio of 8 to 1 does not sound bad in comparison to 1700 to 1. However, comparing $293k to $34k has a bigger impact.

    I agree with the author's last sentence about unions no longer representing the workers. I have been a union member since 1973. In all that time rarely, if ever, did I feel that the union management had my best interests in mind. Since I retired, I am sure of that. Whenever management demand concessions or givebacks during contract negotiations, it is the retirees that must concede and give back. Because retirees are not allowed to vote, they get thrown under the bus.

Add your comment.

DocumentId: 2647685, ~/Articles/ArticleHandler.aspx, 4/19/2014 8:47:33 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement