I have posted before about how dumb it is to care about the ratio of a CEO’s pay to the median pay of all public company employees. Even dumb ideas also generate unintended consequences, and now it is open season on the unexpected.
A little history. After the 2008 meltdown, Congress tried to earn some public brownie points by shaming CEOs, whose salaries were either blamed for the recession or were held up as an object for further outrage, by requiring this disclosure. They needed someone to enforce it and chose the SEC, which after all was already in the business of demanding disclosures by public companies. Of course, the SEC mandate is to protect the securities market and the people who invest in it; nothing to do with shaming CEOs or setting implicit social policy.
So the SEC took years to finally propose a rule that the SEC itself had not asked for and did not want. About 8 years after the legislation was passed, this proxy season is the first time we get to see the ratio of CEO pay. It is unclear to me that investors actually care, and they should not.
Overly simple example to make my point: assume that there is a public company with two employees. Joe is the office gofer and makes $20,000 a year. Jane invented the app that earns the company $200,000,000,000 a year. Jane is paid a thousand times multiple, higher than all but one multiple heretofore reported in the press: $200,000,000. Leaving over $199 Billion on the table for the lucky shareholders. I just love my stock position in Jane’s company. As for my reaction to the ratio? For my money (and it IS my money), give her more. The securities markets and I the investor are safe and sound. Jane is not shamed; she is underpaid.
Who IS upset by the high ratios? Well, the press for one, it is headline news, see for example today’s issue of Boston Business Journal.
The compensation consulting firms. What an opportunity to develop new metrics and sell more advice.
Employees, but not about the ratio. They know they don’t earn like the CEO and shouldn’t. No, they are interested in the median number, which is just incidental to the intent of the SEC rule. Everyone earning less than the median feels underpaid; or so suggests the Boston Business Journal.
And now a member of the Massachusetts State Senate is proposing a tax law that will increase taxes on companies with a ratio exceeding 100. Not only unintended, but would discourage public companies from locating here in Massachusetts. And if one wants progressive income taxation, that should be imposed systematically, not in a way that punishes statistics based on happenstance or perhaps even efficient management.
Ironically, the only dog in this fight which is getting its intended result may be — the US Congress. They wanted to shame CEOs, and they may get their way. (Here’s a random thought: the Congress that mandated this rule in 2010 is NOT of the same make-up as today’s Congress– one might speculated that today’s Congress does not want to shame these CEOs.) Meanwhile, CEOs are looking at the ratios and, if they are ONLY paid 100 times the median, they may be planning to ask for a raise!