Companies will be forced to publish their highest earners pay under Liberal Democrat manifesto plans.
In a bid to encourage fairer wages, businesses with more than 250 employees will be required to release pay details of their top earner. Under manifesto proposals companies will also publish their median pay and consult employees on future executive salaries.
These proposals follow Liberal Democrat plans to legally require companies that employ more than 250 people to publish the average pay of their male and female workers, creating pressure to close the gender pay gap.
All of these are really bad ideas. First, disclosures about pay of top executives can actually backfire on those who seek to regulate pay via disclosure. Granted, sunlight is the best disinfectant and all that, but disclosure can still have unintended consequences:
... the drive for transparency has actually helped fuel the spiralling salaries. For one thing, it gives executives a good idea of how much they can get away with asking for. A more crucial reason, though, has to do with the way boards of directors set salaries. As the corporate-governance experts Charles Elson and Craig Ferrere write in a recent paper, boards at most companies use what’s called “peer benchmarking.” They look at the C.E.O. salaries at peer-group firms, and then peg their C.E.O.’s pay to the fiftieth, seventy-fifth, or ninetieth percentile of the peer group—never lower. This leads to the so-called Lake Wobegon effect: every C.E.O. gets treated as above average. With all the other companies following the same process, salaries ratchet inexorably higher. “Relying on peer-group comparisons, the way boards do, mathematically guarantees that pay is going to go up,” Elson told me. “Higher pay becomes a kind of self-fulfilling prophecy.”
This isn’t just an American problem. Elson notes that, when Canada toughened its disclosure requirements, executive salaries there rose sharply, and German studies have found something similar. ...
Transparent pricing has perverse effects in other fields. In a host of recent cases, public disclosure of the prices that hospitals charge for various procedures has ended up driving prices up rather than down. And the psychological causes in both situations seem similar. We tend to be uneasy about bargaining in situations where the stakes are very high: do you want the guy doing your neurosurgery, or running your company, to be offering discounts? Better, in the event that something goes wrong, to be able to tell yourself that you spent all you could. And overspending is always easier when you’re spending someone else’s money. Corporate board members are disbursing shareholder funds; most patients have insurance to foot the bill.
Median pay disclosure's also a really bad idea, as I explained in my book Corporate Governance after the Financial Crisis:
Dodd-Frank requires ... disclosure of “the median of the annual total compensation of all employees of the issuer” except the CEO, the CEO’s annual total compensation, and the ratio of the two amounts. This requirement is going to be hugely burdensome:
[It] means that for every employee, the company would have to calculate his or her salary, bonus, stock awards, option awards, nonequity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings, and all other compensation (e.g., perquisites). This information would undoubtedly be extremely time-consuming to collect and analyze, making it virtually impossible for a company with thousands of employees to comply with this section of the Act.
As for consulting employees on executive pay raises, what good will that do? If boards of directors who work closely with the CEO often have a hard time evaluating pay and performance, on what possible basis would line employees be able to do so fairly and objectively? They will lack the necessary information. As respondents to a UK government survey observed:
... around a third of those who made submissions indicated that members of the remuneration committee need to be full board members to be aware of the overall strategy of the company. One said that “executive remuneration demands deep understanding of the broader business issues and the economic context that the business is operating in over a long period”.
Given British labor history, they will often be in an adversarial role relative to management. In addition, if the problem of executive compensation is that it fails to align management and shareholder interests, employee involvement will only exacerbate that problem. As I have observed of employee involvement in corporate governance generally (quoting Mark Roe):
Because shareholders “could seek profits by getting highly motivated managers who sweat the labor force,” workers have an interest in supporting rules that free management from accountability to shareholders.
Lastly on this point, how would employees be consulted? A single worker representative would be problematic, as respondents to the UK survey indicated:
It might also be difficult to find an employee representative that would be truly representative of the interests of the whole workforce, particularly in companies with a large workforce spread over different countries.
An employee vote, however, would be equally problematic for reasons those survey respondents explained:
The majority of respondents considered that the benefits of an employee vote on executive pay would be outweighed by the costs. Many of them said it was not clear what the benefits of an employee vote would be. Around a tenth felt the opposite. One response said that “a FTSE 100 company with several hundred thousand employees in dozens of locations could incur significant costs”. Another said that “the costs are difficult to assess accurately but the provision of training and awareness on the wider issues to enable employees to make a judgement would be time consuming and costly”.
Finally, the proposal for disclosure of median pay by gender seems to implicitly assume that men and women do the same jobs or, at least, jobs of comparable worth. This is, of course, a highly contested proposition. In any case, as we have already noted, the costs of computing median pay-whether by gender or not-are significant. In light of the unlikely benefits of such disclosure, it is a game not worth the proverbial candle.
It's highly unlikely that I would be a Liberal Democrat if I lived in the UK. If I did live there, however, these proposals would make it even less likely that I'd support the Lib Dems in the upcoming election. they're all really bad ideas.
 Warren J. Casey & Richard Leu, United States: New Executive Compensation Disclosures Under Dodd-Frank (August 3, 2010), Mondaq.com, http://www.mondaq.com/unitedstates/ article.asp?articleid=106962. See also Jean Eaglesham & Francesco Guerrera, Pay Law Sparks “Nightmare” on Wall St, Fin. Times, Aug. 31, 2010, at 1 (“The rules’ complexity means multinationals face a “logistical nightmare” in calculating the ratio, which has to be based on the median annual total compensation for all employees, warned Richard Susko, partner at law firm Cleary Gottlieb. “It’s just not do-able for a large company with tens of thousands of employees worldwide.”).