The Fix for Misleading ‘CEO Pay Ratios’ – Robert Pozen and Kashif Qadeer

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan MBA ’18, Kashif Qadeer

From The Wall Street Journal

In the coming weeks, many public companies in the U.S. will disclose for the first time their “pay ratios”—the CEO’s compensation divided by the median employee’s. The requirement to provide this ratio was included in the Dodd-Frank Act of 2010. But comparing the figures among different companies—and particularly different industries—will hardly be a straightforward task.

The consulting firm Equilar estimates that the pay ratio will be two or three times as high for retailers as for drug, financial or tech companies. But the reason isn’t soaring CEO pay in the retail industry. For one thing, midlevel retail workers simply make less, on average, than their peers in pharma, finance and tech, which skews the ratio.

Another issue is that 31% of retail employees work part-time, compared with 17% for the rest of American employees. When computing the CEO pay ratio, the Securities and Exchange Commission prohibits companies from adjusting part-time earnings to “annualize” them—to show what these employees would have earned if working full-time. The SEC also bars companies from counting several part-time employees as a single full-time equivalent. Because of this, having many employees who work only a few days each week drags down the median.

To understand how much this might overstate the pay ratio, we examined data for a midsize retail company that operates about 1,200 stores, primarily in the U.S. The company had more than 25,000 employees in 2017. Almost half worked less than 30 hours a week. The median pay of these part-timers (without annualizing) was less than $6,000 a year. By contrast, the median pay of full-time employees who worked for the whole year was approximately $30,000. Read More »

Here’s proof that Wall Street regulators listen to you — Andrei Kirilenko

MIT Sloan Professor Andrei Kirilenko

MIT Sloan Professor Andrei Kirilenko

From MarketWatch

Especially concerning business regulations, critics argue, an inside the Beltway mentality prevails. Only the lobbyists and industry insiders are heard.

I am sensitive to this criticism. Five and half years ago, the United States experienced the worst financial crisis since the Great Depression. In response to the crisis, Congress passed the Dodd Frank Wall Street Reform and Consumer Protection Act. One part of the legislation instructed a financial regulatory agency called the Commodity Futures Trading Commission (CFTC) to write rules that regulate “swaps” — the same derivatives that had been implicated in the financial crisis. As the Chief Economist of the CFTC during 2010-2012, I helped with the rulemaking process.

After leaving the federal government in December 2012 to join MIT Sloan School of Management as a finance professor, I set out to study the work that I and other staff members had done on designing new Wall Street regulations.

My goal was to create a scientific tool to evaluate whether thousands of public comments that were delivered in response to the rules proposed by the CFTC were meaningfully taken into account. I wanted to study how responsive the government is to its constituents. Is the government really for the people?

Read More »

Saving the Dodd-Frank Act derivatives reforms—John Parsons

MIT Sloan Sr. Lecturer John Parsons

The Dodd-Frank Act included important reforms of the derivative market. Nearly three years after passage of the Act, Congress is now considering amendments. I’m testifying this week on the derivatives reform amendments before the U.S. House of Representatives in opposition of several of the amendments as a reversal of the needed reform.

Title VII of the Dodd-Frank Act mandates important changes in U.S. derivative markets, but many of these changes are not yet fully implemented. As Americans remain threatened by the same dangers that exploded on the country in 2008, Congress should consider ways to encourage and enable the full implementation of the Dodd-Frank derivative reforms. Read More »

Dropping the Ball on Financial Regulation — Simon Johnson

 

MIT Sloan Prof. Simon Johnson

From the New York Times

With regard to financial reform, the outcome of the November election seems straightforward. At the presidential level, the too-big-to-fail banks bet heavily on Mitt Romney and lost; President Obama received relatively few contributions from the financial sector, in contrast to 2008. In Senate races, Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio demonstrated that it was possible to win not just without Wall Street money but against Wall Street money. Read More »