Delamaide: SEC rule will rein in runaway CEO pay

WASHINGTON — The Securities and Exchange Commission's approval last week of a rule requiring companies to show how much more the CEO is getting paid than other employees is the first step in the long overdue process of trimming executive pay that has reached obscene levels.

There is simply no justification — and never has been — for CEOs to earn tens of millions of dollars annually, but this has slipped by under a cloudy conception of "shareholder value" and disclosures too arcane for the public to make much sense of them.

The classic justification for a CEO to earn more than any person is worth is that it's a small percentage of the hundreds of millions in market value accruing to shareholders under the leadership of said CEO.

As if that single person alone were responsible for the success of the company.

The noxious practice of "aligning" executive compensation with shareholder interests as measured by the stock price — the standard promoted by former General Electric CEO Jack Welch and his ilk — has subordinated every other interest of the company to juicing the stock price.

The new rule belatedly approved by the SEC comes five years after it was mandated by the Dodd-Frank financial reform and only after massive political pressure applied by Massachusetts Democrat Elizabeth Warren and other reform-minded lawmakers on the agency chair, Mary Jo White.

It requires companies to disclose the overall compensation of the chief executive, to calculate a median compensation figure for all the other employees in the company and then show the ratio between the two.

The fact that the ratio is likely to come out at something like 300-to-1, instead of 20-to-1 just a few decades ago, will definitively rip the veil off the outrageous inequity in compensation between one single employee and thousands of other workers who make the company successful.

The political backlash against this profiteering has been late in coming as the long-term deleterious effects — stagnant wages for most workers, transfer of production abroad, failure to invest in innovation or new production — only slowly become evident.

Business opposed the rule with the lame argument that it would cost too much to figure out the median compensation — as if in this day and age designing a program to do that would be more than a rounding error on administrative expenses.

The fierceness of the opposition shows that companies are well aware of the pressure and shame that would result from exposure of how disproportionate this executive compensation is.

In addition to the pay-ratio rule, the political backlash is leading to greater scrutiny of another swindle designed to enrich top executives at the expense of shareholders and employees — namely, the rampant use of stock buyback programs.

Under the guise of "giving back" value to shareholders without the taxation of dividends, companies have spent trillions of spare cash on buying back their own stock, which generally will bolster the stock price to the ostensible benefit of shareholders.

It has long been known, however, that one of the main reasons for the stock buybacks is to forestall shareholder resistance to the dilution that would otherwise come from the massive stock awards given to top executives as part of their excessive compensation packages.

Also, this manipulation of the stock price itself increases that overall compensation, which is generally linked to the higher stock price or higher earnings per share that result from the buyback.

Even New York Times columnist Andrew Ross Sorkin, who reliably reflects Wall Street's viewpoint on restrictive regulation, was slow to dismiss the impact of increasing criticism at what has become a standard practice.

"On its face, the issue may seem like a nonstarter," Sorkin wrote this week. "But a growing debate has emerged around the topic of buybacks that increasingly has Wall Street and corporate America worried."

Sorkin cites Warren's pressure on the SEC to treat buybacks as stock manipulation, and recent suggestions by Democratic presidential hopeful Hillary Clinton for enhanced disclosure that might dampen the practice.

Executive compensation has become a dreamland of self-dealing for greedy chief executives and their compliant boards, and it has dampened investment and growth in the U.S.

Some of the smarter companies in this country are shifting away from a narrow view of shareholder value in favor of a more comprehensive view of sustainable value that embraces other stakeholders in a company besides the investors — employees, customers, suppliers, communities and society as a whole.

Apple, Google, Starbucks, Disney, American Express, General Electric and Coca-Cola are among the U.S. companies that rank high in social responsibility — which not coincidentally correlates strongly with being "most admired."

Reining in executive compensation that has run amok is an important part of this sustainability, so the new SEC rule is a step in the right direction.

Business columnist Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others.