CEO Pay Ratios and the Investors

Confusion reigns.  And that is an optimistic summary.

You will not doubt recall that no one except the US Congress wanted to impose a disclosure requirement that public companies calculate and report the ratio of CEO pay to median pay in their company.  Among the reasons: meaningless data;, some companies have low paid employees overseas (or even domestically) and the CEO pay will look absurdly high as a punishment for effectively keeping down costs; impossible to calculate for large companies; no one cares.

So the SEC dragged its feet and, several years late, promulgated the Congressionally mandated Rule of disclosure, but delayed its effect for a couple of years until the 2018 proxy season.  Many of us thought the new administration would kill the disclosure, so why worry?

Get worried. Look at the calendar.  Note that the SEC has announced they are not reconsidering their effective date.  Guess if the Congress is going to allocate band-width to this issue.

It gets worse.  ISS, the major proxy advisory firm, has advised it will not even consider the ratio this year in its proxy guidance.  And surveys of company management and boards indicated that they were sure that investors would not care.

BUT then, someone (ISS in fact) surveyed the investors and guess what: a clear majority of investors are interested to compare the ratios within industry sectors.  Surprise!

Now the SEC has issued a rash of recent rulings softening the permitted procedures for calculating the ratio, and promising not to prosecute erroneous reports provided the companies in effect “tried to do their best.”

But still…. There is one hope.  Perhaps the investors will be looking at the ratios not in an effort to cap CEO comp based on a great disparity (the Congressional intent).  Perhaps they will be looking, rather, for an INCREASE in the disparity of pay over time, as evidence that the good CEO will be dropping the cost of labor, and that the CEO should be rewarded for that by even-greater pay disparity.

Anyone out there willing to bet on that?

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