Opinion and Investing Column

Skarbeck: SEC turns up spotlight on pay for top brass

October 5, 2013

Ken SkarbeckThe Securities and Exchange Commission has proposed a rule that would require large public companies to disclose the total annual compensation of their CEO, the median annual compensation of all their employees (excluding the CEO), and the ratio between these two figures.

So far, the SEC has received more than 20,000 comments (viewed at www.sec.gov/comments/s7-07-13/s70713.shtml). Anyone may weigh in with thoughts through Dec. 2.

The rule would amend a pay disclosure law ordered by Dodd-Frank and is intended to give investors a way to more accurately judge the effect of pay structures on company performance. Proponents praise the rule as progress toward transparency, while critics complain the calculations are too complex, time-consuming and costly.

Let’s just call this rule for what it is: an effort to shame CEOs for the widening pay gap between executives and workers. Likewise, the claim by company boards that the rule is too complex and costly is nonsense—they don’t want the figures in print. As a result, large corporations and Wall Street have waged a fierce lobbying campaign to fight the proposed rule.

The ramp-up in executive compensation has recently accelerated. Bloomberg’s data show the average multiple of CEO compensation to worker is 204, which is up 20 percent from 170 times the average worker’s pay in 2009. Studies have estimated that multiple is up from 20 in the 1950s, 42 by 1980 and 120 by 2000.

Thanks to Dodd-Frank, the voluminous calculations companies use in doling out executive pay are now made available in the annual proxy statement. It is not unusual for the executive compensation section to span 30 pages or more. The narrative details all sorts of arcane pay categories including SARs (stock appreciation rights), non-qualified deferred comp, non-equity incentive plan comp, restricted stock units, and (my associate’s favorite category) perquisites. A final chart tallies it all up for the shareholders to see.

The intent of all these pay disclosure requirements, including the proposed pay-ratio rule, is to put more pressure on company boards to take a critical view of executive pay. The Dodd-Frank “say on pay” provision that gave shareholders a yes or no vote on whether they approve the company’s executive pay has been largely ineffective. The say-on-pay voting results are nonbinding on the company.

Oracle Corp., with off-the-charts executive compensation, has seen shareholders vote against CEO Larry Ellison’s pay ($76.9 million in 2012), while its stock price has stalled. Yet Oracle’s board, while expressing disappointment that investors rejected its pay practices, stated “that significant changes to its executive compensation program were not warranted.”

Certainly, the truly egregious cases play well in the press, such as Ron Johnson, the CEO brought in to turn around J.C. Penney, who received a compensation package of $53 million—roughly 1,795 times the average pay of a U.S. department store worker. Johnson was replaced after less than 18 months on the job, a span in which J.C. Penney’s stock sank 50 percent.

With executive pay accelerating and middle class incomes stagnant, corporate board rooms deserve the wrath of all stakeholders when lavish executive compensation is awarded for poor or mediocre results.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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