SEC Pay Ratio Revisited

Years ago (six? more?) Congress legislated that the SEC should design a mandatory disclosure comparing CEO comp to the median compensation of all entity employees.  It took the SEC years to institute that disclosure requirement, during which time its bald impact was softened to permit companies with odd situations to, for example, make estimates or report sampling in some instances.  But even as enacted, the rule seemed to many (and to me) silly.  Using disclosure to control what was perceived to be runaway executive compensation seemed likely to be ineffectual as proposed, not to mention possibly just unwise; perhaps a CEO should even be rewarded for creating a vast difference between his or her comp and that of the other employees, having found inexpensive labor sources, perhaps even overseas.

So now we have an SEC requirement to effect a relatively complex computation comparing CEO comp to the median cost of labor in an entity, and no one is paying attention, right?

Well, not quite right; but, there is a twist.

Today, there is as much interest in income disparity across all of society is there is concerning CEOs within one company.  Investors, worried about the long-term societal implications of growing income discrepancies across our whole society, now are suggesting that the statistic be used as a window into the company’s approach to its entire workforce.  That kind of interest, perfectly logical, once was viewed as wholly operational and thus shareholders were to hold their tongues; the ratio was a way for shareholders to get a voice in this key operational metric.

Meanwhile, the prestigious Corporate Counsel blog, which I swear I recall at one time derided gathering the ratio statistic, now wants comp committees to pay attention because the effect of detailed disclosure of CEO pay has, to date, simply driven boards to continue to pay CEOs in the top quartile, in a rush to the top.  What board wants to tell shareholders, in effect, “we have chosen to lead your company a person who is average”?

People who slam-dunk or hit 40 home runs out-earn most CEOs.  The market-place speaks to us.  It may be that the solution to leveling comp in our overall society lies with the taxing authorities, as unsettling as that prospect always has been.  Or adoption of an enlightened social policy that recognizes the risk of social upheaval as outweighing what has become our sense of the free labor market.  Neither of those discussions is much informed by the SEC ratio disclosures.

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