SEC Adopts 'Say on Pay' Rule

Last Tuesday the SEC adopted regulations requiring companies to hold non-binding shareholder votes on executive pay packages. The final "say on pay" rules implement a mandate of the Dodd-Frank financial reform law to give shareholders a greater say in compensation packages. Companies don't have to accept the results of say-on-pay votes, but board members may think twice before approving packages that could anger shareholders.

Last week the Dow crossed and then fell back sharply from the 12,000 level after the stunning developments in Egypt. Nevertheless, the 11,824 close on Friday represents about a 20 percent increase in stock prices in one year. Meanwhile, unemployment numbers released last Thursday show that jobless claims have surged to 454,000 thousand. The unemployment rate was 9.4% in December or 14.5 million. That does not include 2.6 million individuals who have dropped out of the workforce and discouraged workers. It will be interesting to see the results for January that will be reported later this week. Regardless, the inescapable conclusion is that no one’s getting employed but someone’s making money. 

The CEOs who laid off the most employees during the recession are also the CEOs who took home the biggest pay checks, according to a study released last week. CEOs of the 50 U.S. firms that slashed the most jobs between November 2008 and April 2010 took in 42 percent more than the average CEO at an S&P firm, according to the 17th annual Executive Excess study by the Institute for Policy Studies. The study also found that 36 of the 50 layoff leaders "announced their mass layoffs at a time of positive earnings reports," suggesting a trend of "squeezing workers to boost profits and maintain high CEO pay.”

The 10 "highest-paid CEO layoff leaders" ranked in the report include the CEO of Hewlett-Packard, Mark Hurd, who earned $24.2 million in 2009 as the company laid off 6,400 workers and Walmart CEO Michael Duke, who earned $19.2 million as the company laid off 13,350 workers. No Wall Street banks were included in this list, but three banks -- Citigroup, Bank America and JP Morgan -- showed up on the study's list of the 50 firms that laid off the most employees. Goldman Sachs announced that it boosted the base salary of its executives and partners for the first time since the firm went public in 1999, tripling Chief Executive Lloyd Blankefein's salary to $2 million. I suppose that's not enough for Blankenfein to live long-term so he also received restricted-stock awards as bonuses for $12.6 million. The stock award is 40 percent higher than his $9 million bonus for 2009.

Overall, the study found that executive pay remains astronomically high compared to previous decades: "After adjusting for inflation, CEO pay in 2009 more than doubled the CEO pay average for the decade of the 1990s, more than quadrupled the CEO pay average for the 1980s, and ran approximately eight times the CEO average for all the decades of the mid-20th century." Currently, CEOs of major U.S. companies average 263 times the average compensation of American workers, the study claims. Compare this with the UK (22 times), Canada (20 times), and Japan (11 times).

These statistics point to an unsustainable recovery over the long-term and give me great pause about whether the unrest that is sweeping countries all over the world might eventually infect the US. How long will workers stand idly by as the rich get richer and the poor, poorer while the middle class continues to get squeezed? Are we approaching a time when unions will demonstrate to protest the offshoring of US jobs? Hundreds of thousands have already been sent overseas. A December 2010 study by investors.com (www.rttsweb.com) indicates that more than 1.3 million additional Western jobs will vanish by 2014 due to "the accelerated movement of work to India and other offshore locations.”

President Obama spoke about investing in America in his state of the union address. Throwing more money at the problem is not the answer. A report by the EPE Research Center and the America Promise Alliance indicates that 1.2 million students drop out of high school every day and that in major city school districts only about 50 percent graduate. The rate of graduation at colleges has been reported to be between 50 and 66 percent. It is probably safe to assume that the students who might wind up with the lower skilled jobs are the dropouts. Does that explain the increasing trend to offshore US jobs? Or, is the motivating factor the desire by some CEOs to fatten their executive compensation packages by “controlling” employment costs? They are both part of the picture. The point is investing more money in America is not likely to reverse trends developed over a long period of time that reflect nothing less than a downward drift of the work ethic in the US.