More Executive Pay Disclosure: False Reform
The Securities and Exchange Commission is about to propose a rule requiring public companies to show the difference in compensation between a company’s CEO and its median employee. The requirement is contained in the Dodd-Frank reform law and was added by Senator Robert Menendez (D-NJ) at a markup session before the Senate Banking Committee. Presumably, Senator Menendez was interested in drawing further attention to the wage disparity between top management and the average employee. It turns out that calculating total compensation for the median employee can be an expensive undertaking, especially for multi-national companies. As a result, corporations are hoping to defeat, or at least narrow, the SEC’s proposed rule.
I think the requirement, contained in section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act, is a complete waste of time and effort. The gap between senior executives and rank and file employees isn’t going to narrow because companies will now be required to make this disclosure. Corporate proxy statements (the materials shareholders receive before a company’s annual meeting) already contain page after page about every aspect of executive compensation. We know exactly how much executives make, the size of their stock options, and the details of their severance arrangements. We even can find out if they receive country club memberships, tax counseling, or home security systems. None of these disclosures has had any discernible impact on executive compensation. While the average American worker continues to lose in terms of real wages, executive pay gets better and better.
Disclosure represents the easy compromise. On the one hand, market-oriented conservatives oppose most substantive regulation. On the other hand, liberals prefer it. When the two sides can’t agree, we wind up with more disclosure. The conservatives don’t like the disclosure, but realize that it is better than substantive regulation. The liberals hope that disclosure will create some combination of public outrage or corporate embarrassment, thereby addressing whatever it is that they find offensive. At least in financial matters, disclosure doesn’t change any behaviors. Proxy statements, prospectuses, and annual reports just get lengthier and harder to decipher.
In my view, we need more substantive regulation in a variety of areas when it comes to finance. Free markets tend to lead to bubbles and excesses. While a certain level of disclosure is helpful, it does little to change corporate behavior. Nonetheless, progressive politicians claim victory when they can require a company to add several pages or more to their legal filings. Section 953(b) of Dodd-Frank is merely one more example of disclosure masquerading as reform.