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!