https://guernicamag.com/wp-content/uploads/2015/08/6174172046_b37d81b23b_z.jpg

Image from Flickr user Rocky Lubbers.

By Robert Reich

By arrangement with <target=”blank”>Robert Reich

The Securities and Exchange Commission approved a <target=”blank”>rule last week requiring that large publicly held corporations disclose the ratios of the pay of their top CEOs to the pay of their median workers.

About time.

For the last thirty years almost all incentives operating on American corporations have resulted in lower pay for average workers and higher pay for CEOs and other top executives.

Consider that in 1965, CEOs of America’s largest corporations were paid, on average, twenty times the pay of average workers.

Now, the ratio is over <target=”blank”>three hundred to one.

Not only has CEO pay exploded, so has the pay of top executives just below them.

The share of corporate income devoted to compensating the five highest-paid executives of large corporations ballooned from an average of 5 percent in 1993 to more than <target=”blank”>15 percent by 2005 (the latest data available).

Corporations might otherwise have devoted this sizable sum to research and development, additional jobs, higher wages for average workers, or dividends to shareholders—who, not incidentally, are supposed to be the owners of the firm.

Most CEOs haven’t done anything special.

Corporate apologists say CEOs and other top executives are worth these amounts because their corporations have performed so well over the last three decades that CEOs are like star baseball players or movie stars.

Baloney. Most CEOs haven’t done anything special. The entire stock market surged over this time.

Even if a company’s CEO simply played online solitaire for thirty years, the company’s stock would have ridden the wave.

Besides, that stock market surge has had less to do with widespread economic gains than with changes in market rules favoring big companies and major banks over average employees, consumers, and taxpayers.

Consider, for example, the stronger and more extensive intellectual-property rights now enjoyed by major corporations, and the far weaker antitrust enforcement against them.

Add in the rash of taxpayer-funded bailouts, taxpayer-funded subsidies, and bankruptcies favoring big banks and corporations over employees and small borrowers.

Not to mention trade agreements making it easier to outsource American jobs, and state legislation (cynically termed “right-to-work” laws) dramatically reducing the power of unions to bargain for higher wages.

It even turns out the higher the CEO pay, the worse the firm does.

The result has been higher stock prices but not higher living standards for most Americans.

Which doesn’t justify sky-high CEO pay unless you think some CEOs deserve it for their political prowess in wangling these legal changes through Congress and state legislatures.

It even turns out the higher the CEO pay, the worse the firm does.

Professors Michael J. Cooper of the University of Utah, Huseyin Gulen of Purdue University, and P. Raghavendra Rau of the University of Cambridge, recently <target=”blank”>found that companies with the highest-paid CEOs returned about 10 percent less to their shareholders than do their industry peers.

So why aren’t shareholders hollering about CEO pay? Because corporate law in the United States gives shareholders at most an advisory role.

They can holler all they want, but CEOs don’t have to listen.

Larry Ellison, the CEO of Oracle, received a pay package in 2013 valued at <target=”blank”>$78.4 million, a sum so stunning that Oracle shareholders rejected it. That made no difference because Ellison controlled the board.

In Australia, by contrast, shareholders have the right to force an entire corporate board to stand for re-election if 25 percent or more of a company’s shareholders vote against a CEO pay plan two years in a row.

Which is why Australian CEOs are paid an average of only <target=”blank”>70 times the pay of the typical Australian worker.

The new SEC rule requiring disclosure of pay ratios could help strengthen the hand of American shareholders.

The rule might generate other reforms as well—such as pegging corporate tax rates to those ratios.

Under a <target=”blank”>bill introduced in the California legislature last year, a company whose CEO earns only 25 times the pay of its typical worker would pay a corporate tax rate of only 7 percent, rather than the 8.8 percent rate now applied to all California firms.

CEOs don’t create jobs.

On the other hand, a company whose CEO earns two hundred times the pay of its typical employee, would face a 9.5 percent rate. If the CEO earned four hundred times, the rate would be 13 percent.

The bill hasn’t made it through the legislature because business groups call it a “job killer.”

The reality is the opposite. CEOs don’t create jobs. Their customers create jobs by buying more of what their companies have to sell.

So pushing companies to put less money into the hands of their CEOs and more into the hands of their average employees will create more jobs.

The SEC’s disclosure rule isn’t perfect. Some corporations could try to game it by contracting out their low-wage jobs. Some industries pay their typical workers higher wages than other industries.

But the rule marks an important start.

Robert Reich

Robert B. Reich, one of the nation’s leading experts on work and the economy, is Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including his latest best-seller, Aftershock: The Next Economy and America's Future; The Work of Nations: Preparing Ourselves for 21st Century Capitalism which has been translated into 22 languages; and his newest, an e-book, Beyond Outrage. His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at www.robertreich.org.

At Guernica, we’ve spent the last 15 years producing uncompromising journalism.

More than 80% of our finances come from readers like you. And we’re constantly working to produce a magazine that deserves you—a magazine that is a platform for ideas fostering justice, equality, and civic action.

If you value Guernica’s role in this era of obfuscation, please donate.

Help us stay in the fight by giving here.