CEO Vs. Worker: New Rule Requires Pay Ratio Disclosure

by Jan Cottingham  on Monday, Oct. 28, 2013 12:00 am  

Randy Hargrove, a spokesman for Wal-Mart Stores Inc. of Bentonville, said the retailer wasn’t taking a position on the SEC’s proposed rule. Julie Bull, a spokesman for Dillard’s Inc. of Little Rock, declined to comment.

Michael Pakko, the state economic forecaster and chief economist for the Institute for Economic Advancement at the University of Arkansas at Little Rock, said he didn’t see a sound economic rationale for the rule.

“Perhaps the notion is that this would tend to shame some companies into not paying their CEOs as much as they do or something like that,” he said. “[But] the point of disclosure rules, particularly by the SEC, is to provide information to investors and potential investors, and the compensation for CEOs and other corporate officers is already a matter of required full disclosure.”

Josh Bivens, the research and policy director of the Economic Policy Institute, said pay ratio disclosure provides more “transparency” about the issue of chief executive compensation. It also gives those who think CEO pay is excessive and that CEO pay practices don’t further efficiency “a tool with which to make their case,” he said.

Bivens, asked whether there was a sense that just forcing companies to disclose the pay ratio would shame them, said, “I think so, yes.

“Disclosure alone will not do the job for sure, because it’s true: Anyone who is really interested can figure out what CEOs are generally paid. The way I see it is: CEOs have substantial market power over their own pay. And one of the things that provides a check on them demanding ever-greater pay increases is kind of a vague outrage constraint.”

Pakko fears unintended consequences. “If there’s a problem with CEO pay being out of control or rising too rapidly, that’s really something for the shareholders of a company to address,” he said.

In fact, Dodd-Frank includes a provision that requires companies to routinely give shareholders a “say on pay,” and after three years, shareholders haven’t had much to say.

Steven Hall & Associates, a New York executive compensation consulting firm, reported last week that 3,047 companies had held say-on-pay votes in 2013 and only 65 — about 2 percent — failed. That’s consistent with the first years of the provision.

“If there’s a particular problem, you would think that there’s some market failure that you need to address,” Pakko said. “And it would make more sense to directly address that market failure than to address the symptom, which is the salary difference itself. And if there is no market failure, then introducing any sort of government intervention is likely to lead to a less efficient allocation of resources.”



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