CEO Pay Ratio Legislation Up For Repeal

The Dodd–Frank Wall Street Reform and Consumer Protection Act has1. I love the requirements around disclosure of pay versus performancehave mixed feelings on the clawback policy, and think the say on pay vote provision causes more problems than it solves. both positive and negative components 1, but one thing I definitely hate about the act is the pay ratio mandate.

The HR Policy Association does a fantastic job of explaining what the pay ratio mandate is, so rather than bloviate about the concept I’ll share its simple(r) explanation below:

The pay ratio provision requires publicly held companies to annually calculate the median total compensation for all employees globally, as defined under the SEC’s executive compensation disclosure rules, and disclose a ratio of the median employee’s compensation to the CEO’s compensation.

I want to point out that I get the public outrage around executive pay (although I don’t agree with it). I also want to say that contrary to the claims on many large-cap companies, I don’t think that it would be that difficult for2. To get an employee population median, a company need only pull a listing of their population’s salaries, sort by country, and do a currency conversion to USD. From there, it’s just a matter of querying the median salary from the data set. Any company with a half-decent HRIS could get a reasonable approximation of this number in under a day or so. most organizations to calculate the ratio.

A gambler counts out cash while making a proposition bet on Super Bowl XLV at the Las Vegas Hilton in Las Vegas, Nevada January 27, 2011. The Pittsburgh Steelers and the Green Bay Packers will compete in Super Bowl XLV in Arlington, Texas on February 6. REUTERS/Las Vegas Sun/Steve Marcus (UNITED STATES – Tags: SPORT FOOTBALL)

Yet I am still against the pay ratio mandate for two reasons:

1. I don’t think investors really care about the number

2. The number literally doesn’t matter as it concerns the health of an organization

The 2nd point isn’t an exaggeration. In a May 23rd testimonial before a House Subcommittee, in response to an AFL-CIO claim that “[the bill to abolish the Dodd-Frank pay ratio mandate] is designed to hide material information from investors, encourage runaway CEO pay and increase economic inequality,” Center On Executive Compensation CEO Charlie Tharp pointed out that there is no correlation between company performance and the CEO Pay Ratio. Tharp drew attention to the fact that based on data on the AFL-CIO’s own website, companies it considers to be “great” have a 412.5 average pay ratio compared against a 354 average pay ratio of all S&P 500 companies.

If anything, the evidence points the other way here.

Further, CEO pay represents only a few basis points for most large-cap companies. Ergo, the cost isn’t a concern either.

The only point of the ratio at this point is to satiate a small slice of the public that is (pointlessly) upset about what executives makeIn my opinion, that isn’t a good enough reason to enforce the mandate.

…With all that said, this is going to be a hot button issue for some time to come. I’d ultimately like to see the pay ratio issue put to bed so that companies (and the consultants they employ to advise around this stuff), investors, the media, and analysts can focus on more important things.


Categories: Compensation