(Reuters) - U.S. corporations will need to disclose how the paychecks of their c
ID: 418687 • Letter: #
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(Reuters) - U.S. corporations will need to disclose how the paychecks of their chief executive officers compare with those of their workers under a new proposal released on Wednesday by a sharply divided U.S. Securities and Exchange Commission.
With CEOs of many U.S. companies earning hundreds of times more than their workers, unions and labor advocates are championing the SEC's CEO pay-ratio rule. They say disclosures would help investors identify top-heavy compensation models.
But business groups such as the U.S. Chamber of Commerce and the Center on Executive Compensation oppose the measure, calling the data costly to compile and of little use to investors.
Among U.S. companies with the highest-paid CEOs are Oracle, Walt Disney, Viacom and Starbucks, whose CEOs in 2012 earned between $28 million and $96 million, according to the compensation data provider Equilar.
The SEC declined to address the chief complaint by companies and trade groups who wanted corporations with global operations to be allowed to report median pay only for U.S. employees.
The 2010 Dodd-Frank Wall Street reform law requires the disclosures and gives the SEC little wiggle room for changes demanded by critics. Still, the SEC tried to minimize compliance costs by giving companies flexibility in methods of calculating the total compensation of employees.
For instance, companies could use statistical sampling; an option that the SEC's Chief Economist Craig Lewis said could reduce compliance costs. The SEC would also permit annualized figures for permanent employees who did not work a full year, such as new hires.
Companies say investors have little appetite for such information, citing failed efforts by shareholder activists to adopt resolutions requiring CEO pay-ratio disclosures.
SEC Chair Mary Jo White said the deep divisions over how to implement this rule were evident in the more than 20,000 comment letters the agency had received on the subject.
"The staff has drafted and recommended a proposal that would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate," White said of the plan.
The opinions of the five SEC commissioners reflected the divisions between organized labor and corporate America. The newest Republican Commissioner, MichaelPiwowar, said before the vote that the SEC had no business even considering the rule.
"Proponents have acknowledged the sole objective of the pay ratio is to shame CEOs, but the shame from this rule should not be put on CEOS- it should be put on the five of us," he said.
"Shame on us for putting special interests ahead of investors."
Commissioner Luis Aguilar, a Democrat who supports the measure, said the disclosures are important. "As owners of public companies, shareholders have the right to know whether CEO pay multiples reflect CEO performance."
He added that "Pay ratio disclosure can provide a valuable new perspective for executive compensation decisions."
PAY GAPS
Equilar's analysis of 2012 data showed the highest-paid CEO was Oracle's Lawrence Ellison with $96.1 million.
The CEO ratio pay proposal is one of two major outstanding regulations mandated by Dodd-Frank that the SEC tackled at Wednesday's public meeting. The agency also approved a long-awaited rule to bring the financial advisers of municipalities under federal oversight.
After the collapse of the big investment bank Lehman Brothers five years ago, the 2007-2009 financial crisis prompted public outrage over high CEO pay at Wall Street firms bailed out by taxpayers. Congress passed the Dodd-Frank law in response.
A recent report by the left-leaning Institute for Policy Studies, which analyzed data on the highest-earning CEOs over a 20-year period, found that those whose companies collapsed or received government bailouts have held 112 of the top 500 slots.
The report said the pay gap between CEOS and the average American worker has grown from 195-1 in 1993 to 354-1 in 2012.
Compensation consultants warned about drawing conclusions based on pay ratios, even among companies that are direct competitors.
"An employer with a workforce that has a larger proportion of lower-paid employees, or that has significant overseas operations in lower-paid locations, may have a pay ratio that suggests greater disparity in pay than other employers even where the CEO compensation is lower," said Regina Olshan, a partner with Skadden,Arps, Slate, Meagher & Flom LLP.
"Further, those same companies will likely have a greater administrative burden to comply with the disclosure requirements."
Proponents of the CEO pay ratio rule lauded the measure.
"The simple fact is that large pay disparities between CEOs and their employees affect a company's performance," said AFL-CIO President Richard Trumka. "When the CEO receives the lion's share of compensation, employee productivity, morale and loyalty suffer."
Timothy Bartl, president of the Center on Executive Compensation, said he will fight for Congress to overturn that provision in Dodd-Frank.
"The Center strongly opposes the pay ratio requirement will continue to work for its repeal in Congress," he said.
(Reporting by Sarah N. Lynch; Additional reporting by Lisa Lambert; Editing by Karey Van Hall, Leslie Gevirtz, Lisa Von Ahn and David Gregorio)
More on the subject can be found in the business press:
http://fortune.com/2014/05/16/study-cvs-has-largest-ceo-to-worker-pay-disparity-among-top-companies/
http://www.businessweek.com/articles/2013-05-02/disclosed-the-pay-gap-between-ceos-and-employees
If you were curious about 2016 CEO pay, http://www.equilar.com/reports/49-table-equilar-200-ranking-largest-ceo-pay-packages.html.
Question #1: What is your take on this matter? Do you agree with Peter Drucker (Business Week article) in that excessive executive compensation is “bad for business” or do you side more with Michael Douglas in “Wall Street” movie from 1987?
“The point is, ladies and gentlemen, greed is good. Greed works; greed is right. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed in all its forms, (greed for life, money, love, knowledge) has marked the upward surge of mankind—and greed, mark my words—will save not onlyTeldar paper, but that other malfunctioning corporation called the USA.”
Question #2: What philosophical framework from chapter three most clearly supports your opinion expressed in question #1 above? Employ that framework to make me believe that your stance is the most in line with our definition of Ethics.
Explanation / Answer
1) Peter Drucker was an advocate for maintaining unacceptable ratio between salaries of top level management including the chief executive officer and the compensation paid to lower and Middle level management. Is 20:1 mark came to be known as the Drucker principle after the world economic forum speech in davos Switzerland. Ratios which go beyond this are bound to impact morale of middle management much more than lower level employees within any organisation. the middle level management is always more like the executive management of any organisation and put into action most of the plans conceptualised at the top level. When I use disparity between compensation of top and middle level management, which is largely responsible for implementation of all plans, exists it leads to serious disillusionment among this cadre.
The kind of compensation being awarded to CEOs today makes it extremely difficult to rationalize the figure with the output generated by these CEOs as well as value addition and growth of the company resulting there from. I agree entirely with brokers reasoning that excesses executive compensation can be extremely bad for overall performance of the organization. Excessive pay packages offered to executives tend to show disrespect for contribution of all other employees who are the major support system of any organization. It belittles their contribution and renders it as a relevant to the success of the organisation while placing excessive valuation on the performance and importance of the role of the executive.
Due to such excesive salaries many companies may go to great extent to justify the figures, but when the risk does not pay of and the salary is not substantiated by marked increase in profitability and growth of the organization which can lead to bankruptcy of the organization. It can prove to be a major disadvantage while competing with companies which do not follow this Trend and utilise excess funds available in processes which render more tangible outputs, such as marketing or improved technology etc. The major disadvantage is the impact on the profitability and sustenance of the very company which doles out excessive compensation to the executive. Capitalist culture however will ensure that this Trend is controlled in the future, due to globalisation providing exceptional leadership talent at extremely competitive prices. Competition shall prevail in the market for executives leading to every organisation rationalising compensation with performance and output generated by the executive. Till then the chief executive officers of large corporates will continue to consider the company's bank balance as a private wealth and plunder it without a twinge of guilt.
Michael Douglas in Wall Street may have pointed out that greed is good, and rightly to an extent greed may lead us to strive for the best, thereby help attain greater heights and achievements. Question is at what cost? Is it sustainable? Do the means justify the end? The answers are mostly not palatable for an individual who is ethically inclined. Personal fulfillment and enhancement of self worth what should be the driving forces and not greed for more. These attributes have an essential goal in site where as greed never has, and is an endless pursuit of self gratification.
2) Utilisation of strategy seems to be all pervasive in the economic environment today, therefore compensation management is not untouched by strategizing resulting in all compensations of employees of an organisation becoming dynamic, and therefore, vulnerable to constant control and monitoring. Compensation is a major input cost for any organisation, therefore, adopting a viable strategy for ensuring that output delivered is commensurate to input required, should be a part of company policy.
Compensation policies need to be tailor made for any organisation and cannot be applicable across the board for every organisation, considering that there is a wide variance in company goals, the sectors a company operates in, as well as, the type of workforce it employs. It is important for a company to formulate a very specific policy for management of compensation, keeping in mind the most important factors which are relevant to the acievement of goals of the company, and implementing them within compensation guidelines. Management of compensation should be based on very specific guidelines, on the range of pay for every job profile, the factors for deciding compensation for each profile, the system to be adopted for merit and competitive achievements, exceptional performance and quality output. Besides this external factors of commercial environment also impacts compensation management. This may be in the form of various changes in the taxation laws, or accounting conventions, as well as, pressure for implementing changes from within the sector the organisation operates in. However to assume that compensation is entirely controlled by internal and external environmental factors, would be and assumption which is not only misleading but also incorrect. Strategy and decision making within the compensation system allows for sufficient flexibility to be employed, while allowing for influence of all existing factors.
Strategy in an organisational atmosphere mostly means focusing on alone time goals of an organisation and ensuring that the plans directing these goals are not deviated from. Keeping this in mind while deciding on the strategy for designing the perfect compensation plan for the organisation would help decide on crucial matters such as linking of increments to team or individual performance and formulating the merit increase grid. It is important to identify the decisions which are necessarily strategic within the compensation management, by understanding the impact a decision a policy may have on the behaviour of workforce and as a motivational tool along with its ease of implementation. For example, the importance of employee groups needs to be assessed to understand which groups may be critical for the organisation to achieve goals and succeed. These groups will necessarily require increased focus and strategy. Therefore it makes considerable sense, to design compensation systems which work along lines of work within the organisation and include segregation aling profiles like professional, scientists and engineers, Sales, Production, clerical, executives and managerial.
I would introduce management by objective to secure more participation from employees at every level and make them feel more a part of the organization, thereby assuring loyalty and retention of employees. The major Management process is of planning every activity and process within the organisation, in order to minimise input resources and wastages thereby maximizing profits. Management by objective essentially requires inclusive management of Human Resource by involvement of employees at every level of the organisation in achievement of the set objective, through involving then in decision making and ensuring this clear and open channel of communication from top to bottom. Management by objective is mostly for objective which have been decided upon in conference with all levels of employees within the organisation. Competition and motivation need to be encouraged through adequate utilisation of value based compensation packages. Utilisation of strategy seems to be all pervasive in the economic environment today, therefore compensation management is not untouched by strategizing resulting in all compensations of employees of an organisation becoming dynamic, and therefore, vulnerable to constant control and monitoring. Compensation is a major input cost for any organisation, therefore, adopting a viable strategy for ensuring that output delivered is commensurate to input required, should be a part of company policy. Management of compensation should be based on very specific guidelines, on the range of pay for every job profile, the factors for deciding compensation for each profile, the system to be adopted for merit and competitive achievements, exceptional performance and quality output. Besides this external factors of commercial environment also impacts compensation management.Keeping this in mind while deciding on the strategy for designing the perfect compensation plan for the organisation would help decide on crucial matters such as linking of increments to team or individual performance and formulating the merit increase grid. It is important to identify the decisions which are necessarily strategic within the compensation management, by understanding the impact a decision a policy may have on the behaviour of workforce and as a motivational tool along with its ease of implementation. Self belief of individuals is largely dependent on achievements, which maybe based upon assessment of the end result of an action or task. All individuals are motivated to improve self worth as well as belief in self, through increasing self worth. This self worth maybe the level of Intelligence, amount of knowledge, ambition and desire for success through achievement of goals, and perception of abilities and our control over them. Therefore, every individual indulges in a self assessment exercise constantly reviewing all inherent personal attributes and coming up with results which may not be satisfactory, in comparison to assessment of others on similar basis. This results in a constant search for increasing self worth which improves belief in self, through addition of external possessions, which seem to visibly increase self worth thereby becoming increasingly important to an individual, as it is equivalent to identity of self. Therefore, compensation can be a tool which is viewed as a measure of an individuals self-worth as it is the value placed on their output and ability, leading to motivation to excel or a major demotivating factor. Therefore,pay packages for any company are definitely an issue which exhibits their ethical stance in relation to the way they value the employees and their work output. Compensation packages are indicator of the value placed on contribution of a particular individual to the organisation as a whole. Great disparities which exist between various levels of Management, as well as, within different profiles of the same level, can result in extreme discontent and demotivation of employees receiving comparatively lower compensation due to self worth being greatly depreciated.
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