By: Jeannette Showalter
September 25, 2013
The issue of income inequality polarizes. It seems to divide groups between those who believe that income inequality in the U.S. is "unfair" and those who believe that the inequality reflects just rewards for intense labor, extensive sacrifice, commitment to higher levels of education, high degree of capital risk taking, etc. There is possibly truth to both sides of the aisle.
This debate's importance was recently elevated by the Securities and Exchange Commission in that the SEC has proposed a requirement that publicly traded companies annually report the "gap in pay between chief executives and rank-and-file employees (which) has been growing steadily... Now regulators (the SEC) want companies to tell investors just how wide it is." The proposal comes as part of the roll out of the Dodd-Frank legislation. (Deal Book, "The SEC proposes greater disclosure on pay for CEO's," Sept. 18, 2013.)
The proposed rule "would require public companies to report the ratio of top executive compensation to the median compensation of their employees. Median pay is the point at which half the employees earn more and half earn less" (Deal Book). The SEC's five mt member commissioners were split on the ppct proposal with three voting for the proposal and two voting against the proposal. The public now has a 60-day comment period before the SEC brings the matter to a final vote.
Some facts about the current income inequality situation ....
Economic inequality is often defined in multiple ways, as inequality of: earned income (earned in the private sector), total income (earned and unearned income) and/or assets owned. Many of the U.S. foundations and entities reporting on this topic focus on wages or unearned. The data supporting the U.S. studies can be more easily garnered from public company reports that list executive compensation and compensation for all employees. But reports on earned income of executives fail to capture the value of executive perks, option programs and other mechanisms ...which often dwarf executive wages.
Wage inequality in the U.S. has been increasing in the past decade. Compare the present to the 1960s/1970s when the U.S. really had a meaningful middle class.
"Executive pay is now more than 277 times an average worker's pay, compared with just 20 times in 1965, according to the Economic Policy Institute (Deal- Book).
"Between 1979 and 2007, wages for the top 1 percent rose almost 10 times as fast as those for the bottom 90 percent: 156.2 percent versus 16.7 percent" ("State of Working America, 12th edition," Economic Policy Institute).
"These disparities are especially pronounced in the explosion of CEO pay, which in the late 1970s was about 30 times that of a typical worker. Today, it is more than 200 times that of a typical worker. From 1978 to 2011, CEO compensation grew more than 725 percent. Private-sector worker compensation grew only 5.7 percent" ("State of Working America").
The problem of income disparity problem is international in scope as this trend characterizes most of the developing world. Most international statistics do not cover earned income only in that such data is not readily available; rather, total income is measured which includes earned income and non-earned income (i.e., unearned income is mostly investment income).
Some think the disparity problem is worst in the U.S. "The United States has a higher degree of income inequality than almost any other developed country.... In fact, the most recent data compiled by the Organization for Economic Cooperation and Development (OECD) shows that Chile, Mexico and Turkey are the only OECD member countries that rank higher than the U.S. in terms of inequality. And it's only getting worse" (The Global Post, the Ford Foundation).
With the problem having some definition, the question is whether anything can or should be done to mitigate or resolve the problem. The U.S., in embracing capitalism, has generally preferred that market forces adjust inequalities and that the U.S. government stay out of the affairs of business, especially compensation issues. The SEC's proposed rule, if enacted, will certainly raise employee, shareholder and board of directors' awareness of the issue.
Much of today's corporate gains come from globalization, technology's productivity gains, and the heightened role of risk capital. But for many corporations, their existence was created on the backs of yesteryears' laborers.
Possibly the SEC's idea is a very good one. Some reporting companies will be quite proud of their legacy and others should be embarrassed by their executives' grotesque greed, all at the expense of employees and shareholders.
Consider writing to the SEC in support or objection to their proposed rule.