Inside Financial Services

The S.E.C.’s New Rule on CEO Comp Makes No Sense

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Via the New York Times, the latest entry in the Annals of Dumb Regulation:

After a long delay and plenty of resistance from corporations, the Securities and Exchange Commission approved in a 3-to-2 vote on Wednesday a rule that would require most public companies to regularly reveal the ratio of the chief executive’s pay to that of the average employee.

Representatives of corporations were quick to assail the new rule, which will start to take effect in 2017, saying that it was misleading, costly to put into practice and intended to shame companies into paying executives less. [Emph. added]

I’m trying to think of a single worthwhile justification for the S.E.C.’s new requirement that companies disclose their CEO/median-worker pay ratio and . . . sorry, I’m coming up empty. As bad ideas go, this one deserves a bye in the first round of the bad-idea playoffs. First, why is the government meddling in what companies pay their CEOs at all? Both critics and supporters of the new S.E.C. rule agree that its main purpose is to try to put a lid on CEO pay, by potentially embarrassing CEOs whose comp is especially high relative to their companies’ workers’. But if you’re not a shareholder, why care? If the workers feel like they’re being underpaid, they’re free to find jobs elsewhere. Customers shouldn’t care, either, as long as they feel like they’re getting value for their dollar. As far as that goes, I invest for a living and am purportedly someone who’s supposed to put this new information to direct use in the course of doing my job–and I have no use for these new CEO comp disclosures, either. From an investment standpoint, they’ll be 100% irrelevant.

If I believe a company is attractive and especially well-managed, its CEO isn’t likely being paid enough, no matter how much he makes. And if it’s especially poorly managed, its CEO ought to be canned and not paid a dime. Meanwhile, the main practical effect of this crazy new rule will be to drive talented executives away from working at public companies (who’ll have to make the pay disclosures each year) to privately held ones (who won’t). How that’s supposed to be good for the country’s capital markets eludes me.

The quality of a company’s management can make a huge difference in the ability of that company to create value for its shareholders. If you doubt it, compare Apple prior to the return of Steve Jobs to Apple after he came back. Or if, you prefer an example with a CEO who gives off a less messianic vibe, look at what Patrick Doyle has done at Domino’s Pizza. I thought of Domino’s but it’s private]. Similarly, it’s not unheard of for a company to somehow become saddled with a CEO so incompetent he drives the enterprise straight into the ground. The point is that quality of management is crucial to the success of an enterprise, and a key way to attract high-quality managers is to pay them well. That the government has now decided to meddle in this crucial transaction is ludicrous.

The way companies decide how much to pay their CEOs is far from perfect. Too many CEOs are paid way too much, in my view. But that’s only my view! Let a given company’s board (and, by extension, its shareholders) figure out how to fix things when the numbers get out of whack. The government has no business getting involved–at all.

What do you think? Let me know!

13 Responses to “The S.E.C.’s New Rule on CEO Comp Makes No Sense”

  1. Avatar MICHAEL NESBITT

    How can shareholder knowledge of the ratio of CEO pay to median pay hurt. If the CEO is exceptional, shareholders will want him to be well compensated. If he is underperforming while being overpaid, this is merely a tool to help correct that situation.

    • Avatar Yudhie

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  2. Avatar Joe Pierce

    I suppose it can’t hurt to know the CEO’s shoe size or how much the company’s paying for paperclips either but the real issue for shareholders is results. If the results aren’t satisfactory, can the CEO and the board that’s not doing it’s job or sell your shares.

  3. Avatar SWPilgrim

    Obama and company payback to union supporters. Also jobs for government insiders. Has no relevance to investor value or corporate competitiveness in foreseeable horizon.SWP

    • Avatar Vag

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  4. Avatar Al Konig

    There are good CEOs and not so good ones, it is true. The CEO is in fact only the leader of a team and does neither originate all ideas nor implement all plans single handedly. Yet CEO pay tends not to reflect team effort. Declaring that the buck stops with the CEO does not justify the lopsided nature of his compensation which puts other employees as well as shareholders at a disadvantage.
    The new rule appears to be a step in the right direction. CEOs come and go. If a company collapses because it lost a CEO, then surely that person was not a good CEO in the first place!

    konig777@yahoo.com

    • Avatar Pitz

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  5. Avatar Nelson Lima

    I think you answered your own question in the last paragraph…”Too many CROs are paid too much” So obviously what’s going on now is not working if even you think that. Maybe this is way of holding those CEOs accountable to performance by highlighting when they are over paid.

  6. Avatar Nelson Lima

    *CEOs – It’s hard to type on these little phones.

  7. Avatar WallStreetCritic

    There has been and are numerous cases in corporate America where companies have done or are doing poorly and CEO’s and other top executives are taking home outrageous compensation. Nothing wrong with this new rule unless you have something to hide or are embarrassed by your greed.

    • Avatar Sundas

      I have not really cehosn what kind of specialists I would like to work under, but I do believe that it would be fun to work in a Psychiatrist’s office. I originally was going for my B.A. in Psychology, but switched. There are so many to choose from that sound absolutely interesting. Such as working under an Internist or going simple and working under a Family practitioner. Even Gerontologist sounds like fun. I love the “aging population” and they have stories and much to teach.For the moment I am going to take this degree one step at a time and try to find the place that fits me best.

  8. Avatar Martin

    I think that each professional sports team should provide the ratio of the average salary of the players to the average salary of the fans that buy the tickets. Additionally we can ask Hollywood to provide the average salary of the stars in the movies to the average salary of theatre goers. It is a worthless rule. What I will say is that Boards of all public companies should realize that hiring and firing CEO’s is one of their most important roles.

  9. Avatar Tom Copeland

    I agree with Tom Brown’s assessment. The government does not make anything, no product, no material, nothing. In fact everything the government has meddled in has inherent problems. The government has no business messing with the internal wages of a company other than to protect those workers by ensuring a minimum wage, not a maximum wage. This socialism crusade by the progressive liberals who think they know how to better spend everyone’s money better than they do is the decline of capitalism. This is just another attempt to redistribute wealth from those who have achieved it to those who have not so that they can say everyone is equal. The worker is not held accountable under Dodd-Frank, but the CEO is, there is nothing so unequal as the equal treatment of unequals (Dr. Ken Blanchard). Donald Trump is correct, our country is in trouble, and we need someone at the helm to stop the madness.

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