Matthew Nemeth writes:
The S.E.C recently provoked a storm of controversy when it voted to amend the executive compensation reporting requirements for public companies under the Dodd Frank Act. ...
Under the proposed rule, a company would be required to report not only the amount of compensation that the Chief Executive receives, but also the median compensation that the rest of that company’s employees receive. The company is then required to report the ratio between those two figures as a measure of the gap between executive and employee compensation at that company. The 3-2 vote approving this proposed rule split down party lines, with the three Democrats voting for the rule, and the two Republicans voting against.
While this new requirement is fairly simple and seemingly straightforward on its face, many in the business community are concerned about the potential for any of these statistics to be twisted and misconstrued. The rule’s Republican opponents on the Commission suggested that “the proposal is an attempt to shame corporations into reining in executive pay by forcing companies to calculate compensation in a way that is designed to yield eye-popping results.”
I wonder, however, whether pay ratio disclosure may end up backfiring on its proponents. David Brooks observed that "When newspapers started publishing outsized CEO compensation, they expected the exposure would cause the CEOs to ask for less. It didn’t work." (I note in passing the arrogance of the mainstream media implicit in Broks' comment. Journalists really think they are engaged in social engineering.)
Instead, experience has taught that increased disclosure leads to higher levels of executive compensation. Why? First, shaming doesn't work -- or at least not very well -- in this context. Second, the more information is available about what other companies' CEOs are paid, the stronger the Lake Wobegon effect becomes. Third, if greater disclosure leads to more effective monitoring that threatens to adversely affect managers, managerial compensation will rise to compensate them for that risk.
It will be amusing if pay ratio disclosure blows up in its proponents' faces, as have prior efforts to rein in CEO pay. Will they ever learn?
