The Government Regulation Corporate America Hates Most

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This week the Securities and Exchange Commission announced a rule proposal that would require companies to disclose the median salary of their workers and show how that compares to how much its CEO makes. And Corporate America isn’t the least bit pleased.

Though the rule is mandated by the Dodd-Frank financial reform act, it’s a provision that has little to do with promoting financial stability. It was added in to the bill at the behest of New Jersey Senator Robert Menendez who pushed for the rule in order to get, “a better understanding of the factors that have contributed to the stagnation of the wages and incomes of American workers.”

But ever since the passage of Dodd-Frank, corporate lobbyists have pulled out all the stops in convincing the SEC to water down their enforcement of the provision, helping to delay the rule proposal by roughly two years. And when the rule proposal finally did get the SEC’s approval this week, it just squeaked by on a 3-2 party line vote, with both of the Commissions’ Republicans voting against the proposal.

So what exactly is the big deal? After all, the explosion in CEO pay in recent years is a well-documented phenomenon, surely a little disclosure as to how the typical worker’s pay compares that of the CEO would allow investors to judge better how CEOs are being compensated. Opponents of the new regulation raise three basic objections to the law:

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1. The costs outweigh the benefits: While public firms are required to disclose the salaries of their top five executives, they aren’t made to disclose much else about worker salaries. For large, global firms, it could be costly and time-consuming to assemble and analyze information on the salaries of all their employees. As Charles Tharp of the Center On Executive Compensation puts it:

“Under the pay ratio provision, the scope of the information-gathering requirement presents significant hurdles for companies. Accuracy is a significant concern, since compensation data is housed in dozens of computer systems and subject to the compensation and benefits rules of different countries worldwide.”

2. The rule won’t do anything to lessen income inequality: Matt Levine at Bloomberg news argues that executive compensation disclosure requirements have actually helped to increase CEO pay by giving executives fodder to argue for salary increases. After all, no board of directors wants to believe that it’s CEO is below average. Surely, their guy is one of the best, which of course requires paying top dollar. Furthermore, investors like keeping labor costs low, so a high CEO-to-median-worker pay ratio might actually end up being more attractive to investors.

3. The information isn’t useful to investors: Another line of argument is that information about median worker pay would be pretty much useless to investors and therefore run counter to the spirit of disclosure requirements. Even companies of comparable size and global reach within the same industry might have wildly different median pay figures because one firm might outsource certain activities while another keeps them in-house. Comparing firms of different size or between industries would be even more difficult, as labor costs across industries and regions vary widely.

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To my eyes, the second and third arguments are more convincing than the first. For some very large and complex firms it might be costly and time-consuming to report this information at first, but the SEC is being flexible in allowing firms to use statistical methods to estimate the median pay of their workers as long as they are upfront about their calculations. After a company has come up with a reasonable method for measuring median pay, it shouldn’t be too costly to continue to track it.

Furthermore, the main reason why public firms are so squeamish about this rule is that they’re simply trying to avoid PR headaches. Taken out of context, some of these ratios could be used to shame corporations that take advantage of low-wage labor. McDonald’s is going to have a much higher CEO-to-worker ratio than JPMorgan, for instance. But does that mean McDonald’s executive compensation is out of line while JPMorgan’s is not?

And public embarrassment is really the goal of the policy for many of its supporters. The AFL-CIO, one of the biggest proponents of the rule, has urged the ratification of the rule in order to “shame companies into lowering CEO pay.”

But will that actually be the effect of the rule? There’s no lack of information out there about escalating CEO pay, the stagnation of the median worker’s wages, or rising income inequality. None of this has shamed investors or companies into changing their behavior. Indeed as I mention above, investors like to keep wages low. Furthermore, it’s a lot cheaper to overpay your top employee in order to try ensure competence in that area than it is to make a commitment to above-average wages for your entire workforce.