The mixed bag that is the Dodd-Frank Act has many provisions that are extraordinarily sensible and many others that are not. Some are just plain nutty, none more so than the requirement that public companies disclose in their proxy statements the ratio between CEO compensation and workers’ median pay.
Work hasn’t begun on regulations that would trigger the rule’s implementation. Let’s hope things stay that way — which is possible, considering there is no deadline by which the regulations must be ready, and literally hundreds of other Dodd-Frank provisions are still awaiting regulators’ attention.
There’s no doubt that corporations need to be reined in, on many counts. I mean, book-cooking seems still to be a somewhat popular sport, despite the prison-wrecked lives of so many executives. But the very existence of the rule in question here is the basest imaginable pandering to the knee-jerk, ill-informed fear and hysteria that grips John Q. Public regarding corporate excess.
The fact is, the so-called pay ratio does not tell investors anything useful about a company. I found a letter sent last Thursday to Securities and Exchange Commission commissioner Luis Aguilar by Timothy Bartl, president of the Center on Executive Compensation, to be persuasive.
Writes Bartl, whose organization represents the interests of senior human-resources leaders at 330 of America’s largest companies: “The pay ratio is the result of a company’s size and global reach, competitive and geographic market forces, the industry in which a company operates, the mix of jobs within a company, and other factors. For these reasons, it does not reflect differences in risk but rather differences in markets.” Is that arguable?
(By “risk” Bartl means the risk that a CEO with a pay package calling for a big upside in performance incentives may pursue excessively risky strategies in a gambit to hit the target.)
His letter was a response to a written statement Aguilar issued the previous day. In that rambling document, which touched on assorted disclosure matters in advance of proxy season, the commissioner strongly implied that companies would do well to disclose pay ratios even before the SEC promulgates regulations.
“The ratio between CEO compensation and median pay can create risks to an enterprise, including the risk of employee, customer, and shareholder discontent. . . . Companies should consider whether additional disclosure is necessary to enable stockholders to assess such risks,” the commissioner lectured.
That’s interesting. Because while shareholders are very hot on pay for performance, they don’t give a whit about pay ratios. In 2010, when there were nine shareholder proposals to force companies to disclose pay ratios, the average level of support from all shareholders of those nine companies was 6.4% (and in no case was higher than 10%). Since then, such proposals have been few and far between.
How about customer discontent? Is that a valid concern? Let’s see. “I want to buy a product that meets my needs and fits my budget. But wait: at the company that makes the product, the difference between CEO and median-worker pay is really big! I’m not gonna further enrich that guy!”
Nah. I don’t think so. There’s understandable outrage when companies are found to have abused overseas workers by forcing them to slave for brutally long hours in exchange for a pittance. Otherwise, there are many other, more worthy outlets for social activism.
Is employee discontent a concern? Well, maybe. Just a tiny bit. But most minimum-wage earners are unlikely to earn more by switching to a different employer. In any event, I doubt too many are motivated to leave a satisfactory job because of what the CEO earns.
Anyway, why is an SEC commissioner wasting his breath cajoling companies to comply with a rule that hasn’t even been written yet? (Neither Aguilar’s office nor the SEC staff responded to a request to discuss the matter.)
The Center on Executive Compensation isn’t pushing for a rollback of existing disclosures. “There are best practices for clear and concise executive summaries that give investors a clear road map as to a company’s pay programs, and well-laid-out detail behind that,” Bartl tells CFO. “At the end of the day, companies need to tell their pay stories clearly to investors.”
Look, I’m hardly a corporate hawk (as some assume I am whenever I write something that supports corporations). Dodd and Frank, both now retired from politics, were on my side of the aisle. But the pay-ratio requirement is senseless, all the more so given that when (if?) it takes effect, large multinational companies are going to have a devil of a time figuring out just what their workers’ median pay is. Bartl, noting shareholders’ apathy, called the exercise “unjustifiably complex.”
There are efforts afoot in Congress to repeal the provision (Section 953(b) of Dodd-Frank). I hope they succeed and free up time for the SEC commissioners and staff to focus on more useful activities.