SEC Thinks Disclosing Worker Pay Will Shame CEO's?

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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There's an obvious illogic in efforts to use disclosure to shareholders as a way to stop things that politicians dislike. Shareholders love things that politicians dislike. Conflict diamonds? Oh, sure. Giant executive paychecks? Why not. In fact, the last time regulators tried to shame companies out of paying their chief executive officers too much -- by requiring them to disclose how their pay compared to that of their peers -- they ended up driving up executive pay. Why would any company want an average CEO? Everyone has to get top-quartile pay.

Now the SEC proposed a rule requiring every company to disclose the ratio between what it pays its CEO and what it pays its median worker. I predict this will not lead to a massive groundswell of shareholder anger. Shareholders are not generally in it for the workers. If your company pays its CEO 1,000 times what it pays its average worker, and your competitor pays its CEO 2,000 times what it pays its average worker, guess you'd better give your CEO a raise. You don't want him underpaid compared to his peers.*

I confess I don't entirely understand the level of emotion invested in this rule. It was "vilified [vilified!] by the agency's two Republican members, who called it a political sop for left-leaning interest groups," which it is, though it's not much of a sop since it's just a disclosure rule and it's not like companies otherwise evince any notable shame when disclosing executive pay.**

On the other hand, the main objection to the rule seems to be that it will be difficult to calculate the median worker's pay, which is a somewhat absurd objection. You are a public company. You have professional accountants. You probably keep track of how much you pay people. Like, on a computer even. How hard can it possibly be to compute a median? Excel actually has a function that will do that, =MEDIAN(), it will take you like two seconds, I have faith in you. If you are having real trouble keeping track of how much your employees are paid, you might have bigger problems than this rule.***

Actually the more interesting part of this rule may be not that it requires companies to disclose the CEO-to-median-worker pay ratio, but that it requires them to disclose the denominator of that ratio. My colleague Jonathan Weil wrote a couple of weeks ago about the odd fact that many companies disclose pay only for their top five executives, with little information about how much they pay the rest of their workers. Labor costs for many companies are now unlabeled and split up confusingly among different expense and asset accounts on the financial statements. Disclosing median pay is not the same as disclosing total (or, equivalently, average) employee compensation, but it's a decent approximation for a lot of companies. And knowing how much companies pay their workers probably is useful for investors.

And for companies that do disclose total (and, thus, average) pay, like the big investment banks, adding disclosure of median pay will help create a picture of what the pay distribution looks like, which if nothing else is of voyeuristic interest. Having a sense of how much companies pay their employees, and how much or little disparity there is among those pay packages, is actually pretty interesting. Probably more interesting than just another data point on how much they overpay their CEOs.

* Incidentally, this rule is on its face about CEO/worker pay disparity, but it can obviously be used to get at other things too. For instance the rule "doesn't allow companies to exclude part-time workers or employees based in foreign countries from the calculation." So two similar companies with similarly paid CEOs will have different ratios if one employs only full-time American workers and the other offshores most of its labor to a low-cost foreign country.

Good, politicians and union leaders might say: That'll shame the company with a higher ratio into employing more Americans. Welllllllllllll. Remember that the main readers of these disclosures, and the people most likely to act on them, are shareholders . The shareholders like cheap labor. This rule might shame the company with the lower ratio (and higher average-employee costs) into offshoring more jobs.

Same with unions, etc. Where Gawker sees "acceptable" pay disparities, shareholders might see overpaid unionized employees.

** I mean: if you pay your CEO $40 million, that's a lot. You know it's a lot, shareholders know it's a lot, everyone knows it's a lot. The point of this rule is in part to find comparisons to make clear how much of a lot it is, which, fine, but you already know it's a lot. A compromise, easier to calculate rule could be like, instead of making companies disclose how many median workers' salaries one CEO salary could pay, you make them disclose how many swimming pools you could fill with $1 bills on the CEO's salary, or like how many times those dollar bills would go around the globe if you laid them end to end, or some other unhelpful but popular comparison.

*** I'm sure this is overstated and unfair, tell us about it in the comments, but, really, come on. You make your widgets and then you fly them all over the world and sell them in different places and for different prices and you keep track of inventory and cost of goods sold and it all feeds into your financial statements, you can't do that with your payroll? It seems pretty silly.

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Matthew S Levine at