The SEC Rule requiring disclosure of the ratio of the compensation of the CEO to the median salary paid the company’s other employees was slow in coming; the law demanding such a Rule was a Congressional response to public pressure about growing pay disparity. The SEC from the beginning questioned the value of such a disclosure and the adoption of the final rule was long delayed.
It looks like the CEO pay ratio disclosure is going to be eliminated by the Trump administration.
The panel at the NACD Boston breakfast forum in November, all members of compensation committees, joined in the criticism of the Rule as a meaningless and incendiary disclosure. I believe it is fair to say that the panel concluded that future deliberations of compensation committees, although complex, will remain “business as usual.” Compensation committees are going to continue to apply common sense, informed to some degree by metrics and approaches suggested by the proxy advisory companies, to fix compensation for CEOs (and executive management) which they deem appropriate in the discharge of their fiduciary duties.
A question from the floor raised one heck of an issue: how smart is that approach (it was of course phrased politely)? Various people agreed, after the meeting, that the press, and perhaps consumers buying products from companies which have enormous disparities between CEO pay and median pay, could generate substantial negative reputational impact. There seemed to be a lack of panel sensitivity to this issue; it was a matter of “how to present disparity so it doesn’t hurt us” combined with an acceptance of disparity.
The panel did suggest that for retail companies, sales on the internet will skew the nature of the work force and decrease disparity between sales people and the CEO. It was also suggested that low-paying jobs are disappearing anyway. Not mentioned is the fact that manufacturing flight from the United States may create unemployed workers but will make the pay ratio seem better as lower paid workers will disappear. The “new economy” compared with the old economy also will tend to decrease the ratio.
Not mentioned at all was to attack the problem directly: drive down pay at the top and raise the lower wage.
So if it is business as usual with well-meaning and well-advised compensation committees, what happens in the macro world in the future? If there is enough public outcry about the pay disparity (which was part of the anger driving the Trump triumph), and if our larger employing companies don’t do much to address that disparity, and if we come upon another election, what will the politics of that election look like?
This issue presents tremendous tension for the implicit social contract in the United States. There is risk here; the Trump revolution may in fact be only the first, and perhaps one of the mildest, of the working class political revolutions we will encounter if current pay disparity trends continue.
(I held off posting this, written about a month ago, to consider its content and to see if passage of a month’s time would bring greater clarity to the issue. I post it today as part of a discussion which might take place at Compensation Committees as we move into year-end.)