SEC Steps Further Away from Its Mission
One of the strangest pieces in Dodd-Frank--and that is saying something--is a little provision that requires companies to disclose the ratio of the median pay of a company's employees to the pay of the company's CEO. Today, the Securities and Exchange Commission took the first step towards implementing the provision. From the perspective of the investors, it was a misstep.
The purpose of SEC disclosure requirements is to ensure that investors have access to information that enables them to make informed investment decisions. By contrast, the purpose of the pay ratio disclosure is, in the words of one of its supporters, to "shame companies into lowering CEO pay." While of great interest to CEO pay activists, for most investors, the pay ratio--which is based on an arbitrary calculation--simply is not material to their investment decisions. Yet investors will be forced to bear the significant cost of calculating the information.
The SEC's proposing release struggled to identify benefits that would offset these costs. Perhaps the ratio would be a useful measure of employee morale, productivity and investment in human capital. Perhaps it would put a brake on CEO pay increases. But, as the SEC pointed out, there is a lot of information already publicly available and there is not a clear market failure that the pay ratio disclosure would solve. The SEC received estimates suggesting that the costs of complying with the rule could be very high--in the multi-millions for large companies. The SEC estimated that companies would annually spend 545,000 hours of company personnel time supplemented by more than $72 million of outside help, but asked for data from commenters to come up with more informed estimates.
The pay ratio proposal was approved on a split commission vote. Dissenting Commissioner Daniel Gallagher pointed out that time spent preparing the proposal could instead have been spent on the SEC's "'day job' of doing the blocking-and-tackling work that actually protects investors, maintains fair, orderly, and efficient markets, and facilitates capital formation." Commissioner Michael Piwowar likewise objected to the misallocation of SEC resources, particularly because the proposed disclosure--far from helping investors--could actually harm them by distracting or misleading them.
Perhaps the SEC will next turn its attention to mandating disclosure of the menus at corporate cafeterias. Knowing what's for lunch is tells me a lot about worker morale and productivity and a company's investment in human capital.