It’s done. On August 5, the SEC adopted final rules that will require publicly traded companies to disclose the ratio of the CEO’s “total compensation” to that of the “median employee.” We’re still wending our way through the massive (294 pages) adopting release, but one piece of good news (possibly the only one) is that it appears that pay ratio disclosures won’t be needed until 2018 for most companies.
I’ve already posted my views on this rule (see “CEO pay ratios: ineffective disclosure on steroids”), so it’s no surprise that I’m not happy. However, what is surprising are the myths and madness that the mandate has already created. First, there’s the “median employee,” who may be a myth in and of him/herself. But that’s not all; the media (notably The New York Times) have begun to tout the rule and make all sorts of predictions about how it will impact CEO pay, many of which involve myths and madness of their own.
Myth: In an August 6 column, Peter Eavis wrote about the rule, saying “the ratio, cropping up every year in audited financial statements, could stoke and perhaps even inform a debate over income inequality”. Really? In the audited financial statements? I haven’t finished reading the rule, despite its being such a page-turner, but I didn’t see that in there and don’t think I will. Someone better tell the audit firms – and also tell Mr. Eavis that the ratio is not auditable.
Myth: Will the rule, as Mr. Eavis puts it, really “inform a debate over income inequality”? As noted in my earlier posting, the rules will not be comparable across companies, much less industries, and we won’t know the underlying facts (such as the numbers of a company’s US vs. non-US employees), so all we’ll be left with is the fact that some CEOs are making lots of money – which, of course, we already know.
Madness: If the definition of madness is to keep doing the same thing in the belief that it will lead to different results, it’s surely madness to think that the rule is going to change CEO compensation. Pearl Meyer herself once stated that every time the government does anything to limit executive pay it goes up. Why does anyone think this will be different? Gretchen Morgenson of the Times wrote a column to the effect that this time it may be different, but I don’t buy it. At least some CEOs of my acquaintance are proud that their compensation is publicly reported; will any of them be shamed by having a high ratio? Or, instead, will the CEOs with low ratios be afraid to show their faces at their country clubs? Even worse, as some have commented, companies may take actions to lower their ratios, which could include leasing, rather than employing, people at the bottom of the pay scale – in other words, harming the very people this rule was (illogically) intended to help.
I could go on, but I’ll stop there with the caveat that several other media outlets have been making similar noises. And it’s very early days where this rule is concerned, particularly given that there is a presidential campaign underway in which executive pay will be a populist football for candidates of all stripes. I’m not saying that executive pay is not an issue; however, this is no way to deal with it.