Thursday, September 10, 2015

Rich Irony

I just reviewed my Social Security statement so I know what I can expect to receive in benefits if I retire in a dozen years or if I stop working in twenty years. The agency sends me a reminder each August to log in and see the information – and it includes a total of wages earned by year from the first time I got a paycheck.  The century old program takes funds directly from each paycheck (both from workers and their employers). Then at a certain age (62, 65, 70, etc.) when retirement kicks in then there’s a monthly benefit that flows back to each person who kicked into the program. Looking at my wage totals was a quick trip down memory lane – I can see when I was an union worker making $3.10 an hour to being part of the top 5% of earners for a short time. I’ve never worked directly in the government sector, but the significant range of earnings available in the private sector doesn’t exist in the public sector with its more steady salaries and benefits. Or that was the prevailing belief.

The Huffington Post reports on an analysis by Glassdoor:  “The average pay ratio of CEO to median worker was 204-to-1, the report found. At the top of the list, four CEOs earn more than 1,000 times the salary of their median worker.”

Outrage and hyperbole from all sides on the disparity has been part of the political lexicon for several Presidential campaign cycles. Beyond the brouhaha, this time it’s different. The Securities and Exchange Commission starting in January 2017 will require companies to reveal that gap.  

Companies that sell shares to the public should have as much about their operations disclosed as is reasonable so that a shareholder can properly evaluate their stake in the business. Is the wage differential data interesting? Yes. Will it change an investor’s likelihood of buying a share in a company? Possibly, but unlikely. This rule is designed more to embarrass large companies (as it doesn’t apply to non-public companies) who are going to have a disproportionate share of large gaps.

The government is catching up. In late June 2015 it was announced that the CEO’s of the mortgage giants Freddie Mac and Fannie Mae are getting a pay increase. Per The Huffington Post: “Fannie and Freddie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new home loans. The companies don't directly make loans to borrowers. Instead they buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors.” Compensation for the positions at the firm that the U.S. Government runs was limited in 2012 after the financial crash of 2008 to $600,000 per year. The pay increase granted this summer raises the total compensation to $4 million per year.  The justification: “The Federal Housing Finance Agency, which oversees the companies, said the new plans take CEO performance into account and the executives will be paid less than most CEOs at similar companies.”

It feels like a similar argument to what boards of large public companies say about their executive compensation packages. Everybody is competing to match each other, so it ultimately becomes a circular process. Wages for workers have stagnated for over a decade. Should there be more parity between CEO pay and worker pay? The market should determine that, not a government agency and certainly not the government itself.

As one arm of the government tries to shame companies that have huge gaps between pay in the executive ranks to their workers, another arm of the government is doing the exact same thing itself. Rich irony.

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