On August 5th, SEC will vote on a rule that would publish the ratio of CEO compensation to the typical worker of their own firm. This disclosure is required by Dodd-Frank, but, as with many laws, the details and implementation makes all of the difference in the world. SEC has delayed the implementation of this requirement, but I don’t really know why, other than CEO’s don’t like the idea.
I don’t like the idea because it unnecessarily target the CEO over other top executives. The likely comparison will be made between the CEO and an average of some pool of individuals, which is unfair. The better comparisons are with individuals against individuals or pools against pools.
I’m in favor of pools. The pools should be large and the distinction should be simple and indicative of something important. If the pay disparity is what the SEC wants to highlight because it feels that bigger disparities lead to more compliance issues, then they need to identify what is driving the disparities within the organization. Across the board, the biggest portion of disparity is equity compensation. The two pools should something quite simple. My suggestions: compare average total compensations where more than 50% of the total compensation is equity versus less.
Here’s the other problem with this disclosure: what is defined as the organization. I’m assuming Goldman Sachs does not hire any janitors. Janitors are employees of an outside firm. But Goldman Sachs wouldn’t exist without working in buildings of some sort. So, in terms of running the company called Goldman Sachs, some manager has to decide what janitorial company will be responsible cleaning their offices. As long as having offices is part of Goldman Sach business model, office cleaning services are part of its business. But legally, those janitors don’t work for Goldman Sachs. These types of outsourcing is usually on the low end of the payscale, unnaturally raising the average of the lower pool.
Similar pool problem are labor market disparities. A company whose employees are primarily in Bangladesh will be paying their lower pool significantly less than the upper pool. At the same time, the disclosure is actually made worse but hiding the disparity it is actually trying to reveal: American disparity. So, does one exclude foreign employees?
Still, the greatest benefit to my proposal is getting an understanding about how what the pay disparity is between those who are working to pump up the value of their stock and those who are trying to increase their cash compensation. This will also require the firm to put everyone in two buckets, forcing them to make a decision about what roles should be trying to pump up the stock and what roles are to be productive.
But these are implementation problems. Politicians and interested parties are still arguing over whether such information in important to shareholders. Republicans are saying that the purpose of the rule is to produce societal pressures on corporations, not actually add informational value to shareholders. I don’t have a problem with putting societal pressures on corporations, but I do wonder if this really should be the role of the SEC or if it should be the role of the DOL. Democrats and Labor are saying that the information is going to be important for shareholders because they will be given another key piece of information about how to pay their executives, which shareholders do in a vote each year.
Should corporations be required to disclose the pay ratio between its top executive and the average worker in the firm?
About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.