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The politics of remuneration and envy
Aug 8th 2015 | NEW YORK
FIGHTS over splitting the loot have gone on for as long as there has been loot
to split. In America, those brawls are now part of the remit of the Securities
and Exchange Commission (SEC). After heated arguments and a vote that passed by
three ballots to two, on August 5th the SEC approved rules (themselves tied to
provisions in the Dodd-Frank act of 2010 that overhauled financial regulation)
which will require public companies to publish the ratio of their chief
executive s pay to that of their median earner, starting in 2017.
To say that the views on the pay-ratio disclosure requirement are divisive is
an obvious understatement, acknowledged Mary Jo White, who chairs the SEC. A
mind-boggling 287,400 letters commenting on the proposals were sent. In a
reflection of how the issue had become the subject of an organised political
campaign, only 1,500 of these were unique.
Shareholders have an interest in compensation, in as much as it is a
significant cost under management control. Pay therefore raises issues of
agency that arise from the delegation of power by shareholders to bosses.
That, at least, is the pretext for squeezing the issue into the SEC s
jurisdiction under its authority to protect investors. The reality is that the
proposal was included in Dodd-Frank after lobbying by trade unions aiming to
shame bosses into paying themselves less and lowlier workers more. A broader
debate on inequality has added to the momentum.
Commissioners supporting the rule said they had no choice but to put into
effect the provisions of Dodd-Frank; and that the rule would provide valuable
information that could be used for the say-on-pay provisions permitted in
proxy votes, as well as generating insights into a company s governance and
health. It will allow investors to see, says Commissioner Kara Stein, how a
company manages human capital .
Dissenters characterised the vote as a capitulation to interest groups who have
no interest in protecting investors nor, for that matter, orderly markets and
capital formation (the SEC s other goals). Critics reckon that the information
will be expensive to collate (an unpersuasive argument) and unhelpful in
identifying corporate excess (a more convincing one). An investment bank, where
pay is generally high, may appear far more egalitarian than, say, a cleaning
company with predominantly low-paid staff and a modestly-paid boss.
As well as the battles over principle, there were grittier fights over how the
data would be derived. The final version of the rules seems riddled with
potential loopholes. Companies will be able to use statistical sampling to
derive median pay. Firms will also be allowed to exclude 5% of non-American
employees. Allowances will be made for differing costs of living in foreign
countries and for countries banning the collection of data. Meanwhile, foreign,
private and even some publicly-listed American companies will be exempt.
The AFL-CIO, America s labour federation, said the new rules would shame
firms into cutting bosses pay. Not everyone agrees on the likely losers. The
real-world effects, if any, says James Copland of the Manhattan Institute, a
think-tank, will be for managers of public companies to offload lower-cost
employees.