Why Can’t CEOs Do the Math on Their Pay?

The SEC is dragging its feet implementing a section of the Dodd-Frank reform that would require publicly traded companies to calculate the ratio between the CEO’s pay and that of the firm’s median pay package. The New York Times editorial board urges them to push forward.

Corporate lobbyists say it’s too complicated to figure out the math. They figured out how to create uber-complex financial products that untangled the global economy, but aren’t able to divide the CEO’s earnings (they must know) by the median employee pay?

Of course, the real reason they oppose the law is that they don’t want to add fire to the public debate about excessive CEO salaries – certainly while the rest of America struggles to pay bills, put kids through college and afford mortgage payments. Obscurity, not transparency, benefits the privileged.

Their opposition to useful information for investors and consumers is a replay of earlier legislative battles. Fifty years ago, banks, retailers, manufacturers and almost every corner of corporate America argued that a clear description of finance charges on a range of consumer credit purchases simply wasn’t possible. The Truth in Lending Act (TILA), first proposed in 1960 and ultimately passed in 1968, created some simple rules that seem like no-brainers today.

TILA required that finance charges be stated in easily comparable standard annual rates with clearly stated extra fees rather than monthly percentages with confusing hard-to compare terms that were the norm. Consumer credit were referred to as “3 ½ percent loans” that sounded far less intimidating to the family buying a new car or refrigerator then the 42 percent annual rate it added up to. The bill also required that interest payments should be calculated on the outstanding loan amount rather than the original loan amount – a common sense change that would save consumers millions of dollars.

Opponents of Truth in Lending used the same arguments to keep consumer credit profits flowing as today’s corporations use to protect their outsized executive compensation packages. Retailers and banks said it would be too difficult – even impossible – to calculate annual finance charges. They went even further to conclude that more information would simply confuse the consumer (in particular the housewife that struggles with math); better information would cause retailers to increase prices since they wouldn’t be able to easily gouge consumers with exorbitant finance charges; and, of course, the companies were was responsible actors that didn’t need government rules.

These were simple changes fought bitterly by those who feared the truth would help consumers but hurt the bottom line. The U.S. Chamber of Commerce in 1966 in its magazine, Nation’s Business, described the dangers of unbridled government action with remarkable candor:

“The old practice of some loan companies advertising money ‘at 6 percent’ when actually borrowers pay 20 or 30 percent, could be ended by the so-called truth-in-lending bill. This legislation moreover would be an impractical burden on all sorts of businesses and institutions that lend or extend credit.”

Obscurity and confusion for the consumer protected profits in the 1950s and 1960s until the Truth in Lending Act passed. The law helped consumers and disaster predicted by American businesses turned out to be yet another empty threat. CEO’s in 2012 want to hold on to their pay packages by hoping the rest of us don’t really notice just how far ahead and away they are pulling from the rest of us.