06 Aug 2015, 11:53

Will the new CEO pay ratio rules by the SEC be effective?


graph of ceo compensation

Image source Wikipedia

I was reading this article in the NY Times today that the SEC just passed a new rule requiring public companies to disclose the ratio of the CEO’s salary compared to that of the average worker. The article covers some of the arguments for and against. Transparency against logistical difficulties for multi-national corporations (where pay may vary wildly). There was also the question of whether or not the shareholders will find the data useful.

One issue that I did not see addressed was the problem with CEO compensation disclosure in general, which is that instead of tending to put downward pressure on executive compensation, it has done the opposite. Since the previous disclosure rules went into effect in the early 1990’s, executive compensation has skyrocketed, increasing faster than it had before. This may seem counterintuitive, until you realize that executives are highly competitive people. When they see that their competitor is offering higher pay, they can pressure their board to increase their salary. When they are approached by another company offering better compensation, they can leave if their current company can’t counter. Since companies need CEOs, and the board is going to want the best CEO they can find, compensation goes up.

I wonder if this new rule will have a different effect, though I can’t honestly think of why it would, when the compensation was already known, against a lot of additional data.

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