Pay Ratio Nightmare Fitting Concern for Labor Day

US companies face a “logistical nightmare” from a new rule forcing them to disclose the ratio between their chief executive’s pay package and that of the typical employee, lawyers have warned.

Yes, the disclosure required by section 953(b) of Dodd-Frank “will provide ammunition for activists seeking to target perceived examples of excessive pay and perks.” Maybe the Tea Party will focus.

S&P 500 chief executives last year received median pay packages of $7.5m, according to executive compensation research firm Equilar. By comparison, official statistics show the average private sector employee was paid just over $40,000.

Admittedly, it may be a “logistical nightmare” for multinationals to calculate the median annual total compensation for all employees in the US and abroad, especially if you’re trying to take into account currency fluctuations.

Companies are now gearing up to lobby the Securities and Exchange Commission, which has to write detailed provisions for the new rule. The rule could also reward with a relatively low ratio those companies that outsourced low-paid work rather than keeping jobs in-house, lawyers said. (US pay law branded ‘logistical nightmare,’ FT, 8/30/10)

I’m not sure there’s any “reward” involved, but explanations will be required.  However, it is likely to bring pressures for a more equitable distribution of the wealth. According to research by Emmanuel Saez and Thomas Piketty, who examined tax returns from 1913 to 2008,  in the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income. As Robert Reich points out:

In the decades after World War II, legislation like the G.I. Bill, a vast expansion of public higher education and civil rights and voting rights laws further reduced economic inequality. Much of this was paid for with a 70 percent to 90 percent marginal income tax on the highest incomes. And as America’s middle class shared more of the economy’s gains, it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs. (How to End the Great Recession, NYTimes, 9/2/10)

Why not repeal George Bush’s tax cuts for the rich? A CBS poll found that repeal is supported by 56% and opposed by 36%.

Repeal would cut $700 billion off the federal deficit over the next decade and, because consumption by the wealthy doesn’t depend very much on small changes in income, it wouldn’t noticeably affect consumer spending either. (One Dollar, One Vote?, Mother Jones, 9/3/10)

Unfortunately, it isn’t likely to happen. Why? Look to the scientific research by Professor Larry Bartels. (Economic Inequality and Political Representation, August 2005)

Senators appear to be considerably more responsive to the opinions of affluent constituents than to the opinions of middle-class constituents, while the opinions of constituents in the bottom third of the income distribution have no apparent statistical effect on their senators’ roll call votes…

These disparities are especially troubling because they suggest the potential for a debilitating feedback cycle linking the economic and political realms: increasing economic inequality may produce increasing inequality in political responsiveness, which in turn produces public policies increasingly detrimental to the interests of poor citizens, which in turn produces even greater economic inequality, and so on.

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  1. What’s the activists real agenda? - South Capitol Street - September 6, 2010

    […] when one suspects it’s mostly about left-liberal politics than efficiency. Take, for example, James McRitchie’s defense of the pay disclosure provisions of Dodd-Frank, which claims that “it is likely to bring […]

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