One Word for the SEC’s Pay Ratio Rule and Portland’s Pay Ratio Tax: Hogwash.

 

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The pay ratio idea just doesn’t add up.

The May 27, 2018 print edition of The Oregonian devoted 1600 words to a story about an SEC requirement that companies report on the pay ratios of their CEO and other workers and on a new Portland tax tied to CEO pay ratios. The New York Times, the Wall Street Journal and other media have played the SEC rule story prominently as well.

Why so much attention to such foolishness?

The Dodd-Frank Act required that the Securities and Exchange Commission (SEC) enact a rule requiring that about 3,800 publicly traded companies disclose the ratio between how much they pay their CEO and how much they pay their median worker.

Passed in 2010 during the Obama administration, and set to take effect in 2017, the requirement was ostensibly to ensure that the devastating 2008 financial crisis won’t be repeated, to increase the transparency of executive compensation and to provide investors with another piece of information to consider when determining whether the compensation of their CEO is appropriate.

Sen. Robert Menendez (D-NJ), who introduced the pay ratio provisionin the Dodd-Frank Act., said ,“This simple benchmark will help investors monitor both how a company treats its average workers and whether its executive pay is reasonable.”

The AFL-CIO said the law was needed to enable corporate boards and the public to evaluate the reasonableness of CEO pay and to show which companies are investing in their workforce to create high-wage jobs.

But as a former business colleague who worked for a U.S. Senator used to tell me, “In politics, nothing is about what it’s about.”

The real motive of the pay ratio advocates was to give the left a tool to propel its inequality agenda, to promote envy and  class warfare, and to argue that the once-great America as a land of opportunity is vanishing and that more aggressive government intervention guided by liberal principles is necessary.

But as the media have been rolling out breathless stories on how flabbergasted, appalled and outraged they are by a lot of the pay ratio disclosures, they are ignoring the fact that the ratios are, by and large, both misleading and meaningless. The SEC is mandating that flawed methodologies be used by companies to report meaningless data in order to advance a political narrative.

As SEC Commissioner Michael S. Piwowar said in a dissenting statement on the pay ratio rule, “Today’s rulemaking implements a provision of the highly partisan Dodd-Frank Act that pandered to politically-connected special interest groups and, independent of the Act, could not stand on its own merits. “

“The bottom line is that this is one of the sillier and more pointless disclosures that I have ever seen,” David Yermack, a professor of finance at NYU’s Stern School of Business, told The Atlantic.

As noted in the Texas A&M Law Review, “The pay ratio disclosure will likely do nothing to further any aspect of the SEC’s mandate to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

One reason the SEC rule is pointless is because every company calculates the pay ratio differently, partly because it gives companies wide leeway in identifying median workers. To illustrate, companies don’t have to account for independent contractors if they don’t set their pay. So a company with a highly paid CEO and loads of low-paid independent contractors can massage its numbers to look better.

Companies can also manipulate the numbers by identifying their median worker in a variety of ways. One could use cash compensation alone, another salary, equity grants and other types of pay. Companies have to disclose which components they used to determine the median worker, but that can be buried in the fine print.

The pay ratio numbers also can fluctuate because of different types of businesses. To illustrate, at Goldman Sachs, an investment banking, securities and investment management firm where most employees are highly educated and highly paid professionals, the pay ratio figure will obviously be lower that at McDonalds and other fast food outlets where most employees are less educated and earn modest wages.

Businesses that employ a lot of part-time or seasonal workers, or that employ a lot of foreign workers in countries with comparatively lower wages, will also have high ratios.

To top it all off, the disclosures required by the SEC rule do little to help investors make decisions on trades. Not only is the pay ratio calculation based on wildly different data used by different companies, but CEO-worker pay ratios are not especially reliable indicators of how a company will perform.

It’s not that reporters and editorial writers don’t know the pay ratio numbers are pretty much worthless and politically motivated. It’s just that a story that gives them a chance to rail about inequality is too much to miss.

As Stanford University Professor Joseph Grundfest said when the SEC rule was finalized in 2015, “Ultimately, the ratios that companies will disclose in their SEC filings will not be grist for meaningful debate so much as fodder for shocking headlines. Individually, factoids about executive compensation can be truly, deeply bananas, and some media outlets capitalize on that.”

Portland’s pay ratio surcharge is foolish, too

greedygovernment

Government greed at work.

Given the unreliability of the pay ratio numbers, Portland’s pay ratio tax is a farce, too, just another tool to raise revenue.

And a clear message to businesses considering locating in Portland: fuhgedaboudit!

In December 2016, the Portland City Council voted to impose a surtax on CEO compensation that would be added to the city’s business tax on publicly traded companies whose chief executives earn more than 100 times the median pay of their employees.

The surcharge was set at an additional 10 percent in taxes if their CEO’s compensation is greater than 100 times the median pay of all their employees and 25 percent if the pay ratio is greater than 250 times the median.

The city figures the surtax will generate about $2.5 to $3.5 million per year.

Only Commissioner Dan Saltzman showed wisdom in voting against the proposal by then-Commissioner Steve Novick.

The fact is Portland’s tax is based on unreliable data and will fail miserably in meeting Novick’s hope that it “would prod corporate America back to equitable pay scales.”

First, as noted above, the pay ratio numbers on which the tax is based are inconsistent and unreliable. The leeway given to companies in determining the pay-ratios is so great that the numbers are meaningless.

Second, the tax on Portland companies will be irritating, but probably not burdensome to the affected companies, so it’s not likely to change their compensation practices.

Third, even if some shamed companies reduce their CEO’s pay and spread around the cut, it won’t mean much to other employees.

For example, Kroger, which owns Fred Meyer, reported its CEO’s pay as $11,534,860, which Kroger said is 547 times its median worker’s pay of $21,075.

Even if Kroger reduced its CEO’s pay to $2 million, and distributed the rest equally to Kroger’s 400,000 employees, they would each see an annual raise of just $23.84.

In other words, the Novick surcharge is just another way to pad the city’s coffers.

 

 

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Oregon Connections Academy: still a virtual calamity

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Real learning? Not so much.

They’re back!

The slick television commercials extolling the virtues of Oregon Connections Academy (ORCA), Oregon’s largest online public charter school, are popping up on local TV again. But don’t be fooled. ORCA, which draws in kids from across the state, is still failing its students and undermining Oregon’s commitment to a quality education for every child.

“Parents gave high marks for our academic rigor, program flexibility, the high quality of our teachers, and for delivering high levels of student achievement,” ORCA Principal Allison Galvin said in her most report to students and parents.

I don’t know why the parents are so thrilled. Perhaps intoxicated by ORCA’s technical, non-traditional approach, they overlook ORCA’s academic numbers, which have been getting worse in recent years, not better.

Or itmay be because the debate about online charter schools is more about people’s values than academic performance. To a lot of parents and students, online charters are really about independence, bonding with like-minded parents, having the option of choice, and escaping from what are perceived as stifling, monopolistic government bureaucracies.

Living in a cocoon of misinformation, they’re not interested in contrary data. And as neuroscientist Tali Sharot observed in her book, “The Influential Mind,” it’s hard to convince people with just data. When presented with hard evidence that contradicts their deeply held beliefs, people often work overtime to find reasons to defend those beliefs rather than modify them.

Charter schools in Oregon, including online charters, are publicly funded, so parents don’t pay tuition. Instead, the Oregon Department of Education distributes State School Fund money to each school district that sponsors a charter school.

ORCA’s sponsor is Santiam Canyon School District 129-J, which serves the communities of Mill City, Gates, Detroit and Idanha.

For the past three school years Oregon K-12 schools have assessed their performance in English Language Arts, Mathematics and Science.

ORCA’s numbers tell a dreadful story of failure, and it’s getting worse.

The numbers below show the declining percentage of ORCA students meeting the state’s standard for school and district accountability in every category over the past three school years.

English Language Arts

2014-15   61.3 %

2015-16    61.5%

2016-17    54.2%

 

Math

2014-15     37.6%

2015-16     30.6%

2016-17     27.5%

 

Science

2014-15    62.7%

2015-16     59.3%

2016-17     56.2%

ORCA officials have blamed the academic problems of their students on the fact that ORCA takes on many students who stumbled at their former traditional brick-and-mortar public schools.

But research reveals that it’s the struggling learners who are least likely to be well served by online coursework. In other words, while struggling students are the ones most in need of traditional in-person courses, they are often shuttled off to online schools, which is exactly what they don’t need.

Because they are public schools, online charters are required to meet the same diploma requirements as Oregon’s traditional brick-and-mortar Oregon public schools.

Graduation rates at all Oregon public schools, including online charters, are calculated the same way by the Oregon Department of Education (ODE) as an “adjusted cohort graduation rate.” That rate is the percentage of all students who graduate from high school with a diploma within a four-year cohort period after they start 9th grade.

The graduation rate of all Oregon public schools in 2017 was 77 percent. ORCA’s graduation rate that year was just 64 percent.

Making things worse, the transfer of many struggling students to ORCA may, in a perverse sort of way, have helped the traditional public schools they came from. That’s because it removed academically challenged students from the rolls, improving graduation rates.

Encouraging struggling students to transfer from their brick-and-mortar school to an online school also can make their former schools appear more successful:

“When low achieving students leave, for instance, average school test scores increase,” concluded a report rom the California Legislative Analysts’ Office raising concerns about alternative schools. “This gives the appearance that the school is improving, and it allows the school to focus on the education needs of the more motivated students that remain. In addition, when students marked as ‘problems’ or ‘trouble makers’ drop out, they relieve educators of administrative headaches. As a result, inattention to the needs of these types of students can actually make schools appear more successful.”

Research suggests this is a national problem.

 “School officials nationwide dodge accountability ratings by steering low achievers to alternative programs,” ProPublica, an independent, nonprofit newsroom, reported in February 2017.

 If education is a public good—one whose results bear powerfully on our prosperity, our safety, our culture, our governance, and our civic life—you have to recognize that voters and taxpayers have a compelling interest in whether kids are learning what they should, at least in schools that call themselves public, Chester Finn Jr., President Emeritus at the Fordham Institute said in June 2017.

Oregon’s governor and legislators should recognize their compelling interest in taking ORCA and other failing online public schools to task.