The Unintended Consequences of SEC Proposed Pay Rule
The SEC has just proposed a rule that will require all public companies to report the ratio between the total pay of the CEO and the median pay of all other employees (excluding the CEO). Some of the unintended consequences –particularly for employment– will be severe.
September 20 2013 by ChiefExecutive.net
“While not surprising, it is disappointing the SEC took this action,” states Bruce R. Ellig, author of the soon-to-be published 3rd edition of The Complete Guide to Executive Compensation. Although the action is in compliance with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Ellig says, “the disclosure of the compensation of publicly traded company CEOs is already required in great detail in the company proxy statement. The ratio calculation is complex, costly, and time consuming.”
“Since the SEC is permitting companies themselves to determine how to measure the median, the results are of questionable value,” Ellig notes. “It will also mean company-to-company comparisons are of no value,” he adds.
Many observers point to the law of unintended consequences: companies will be incentivized to remove the lowest paid of their workforce from their payrolls, and contract out the work. The result will be an increase in the median worker pay and the lowering of the ratio to CEO pay. Those who believe this will result in lowering CEO pay still believe in the tooth fairy.
John Alan James, executive director of the Center for Global Governance, Reporting and Regulation at Pace University’s Lubin School of Business in New York City says, “The proposed SEC ruling, based on a fragile and confusing mandate from Congress, is another example of how the federal government is attempting to subordinate state corporation oversight of boards to achieve administration social goals.”
There is a 60 day period for comment before the SEC takes a binding vote on the rule.
“The million-dollar question that remains unanswered is how this ratio, once published, will affect executive compensation practices,” observes Andrew Liazos, head of the Executive Compensation Group at international law firm McDermott Will & Emery. “Some have stated that the rule will increase transparency on pay discrepancy, but since companies have considerable latitude in the calculation, I question if it is worth the time and expense to meet this requirement,” Ellig concludes.
“Many legal authorities have criticized the move at the federal level to gain more control over the nation’s major corporations,” adds John James. “Recent threats by the Attorney General to file criminal indictments against a corporation and now the SEC’s interference in the corporate board’s oversight of internal corporate policies are clear evidence of the Administration’s goal of diminishing states’ rights and gaining greater control over how big companies are managed.”
A word of caution for leaders of non-public companies and those who think this proposed ruling won’t get very far: The Sarbanes Oxley Act of 2002 demonstrates that there is no law, however, counterproductive or nonsensical that some lawmakers won’t seek to impose it on business if it can be seen to advance a pet cause even if the lawmakers know that the connection of the law to the perceived remedy or social good is dubious. One might add Dodd-Frank to the list. Income inequality is the next cause du jour among certain segments of the political class (not just politicians). Many with a strong redistributive bent see such measures as a way of “doing something” to advance their agenda and could care less about the chaos that would ensue.