New SEC Rule Will Not Fix CEO Pay Gap
The regulators are at it again. Last week, the Securities and Exchange Commission adopted a rule that will force thousands of public companies to disclose the ratio of CEO-to-average employee pay. The regulation was mandated by Dodd-Frank – Congress’s gift to corporate America that just keeps on giving.
Of all the nonsense to come out of Washington since the financial crisis, this particular rule may very well achieve the distinction of having absolutely no practical use whatsoever. No wonder it’s been so many years in the making. There’s no telling how many bureaucrats it took to accomplish that rare result.
Yes indeed, I predict big things for the SEC’s latest and greatest disclosure requirement. Ostensibly a tool for institutional investors, it will more likely be used as raw meat for sensationalist media headlines and to give politicians more ammo to rile the masses over income inequality. More divisive rhetoric; just what we needed.
Make no mistake, the most distinguishing characteristic of the ratio is how incredibly useless it will be. Let me explain why.
Obviously, it’s a ratio of two numbers, chief executive compensation and median employee pay. The problem is that both numbers are remarkably subjective, rendering comparisons between companies essentially meaningless. And dividing the two numbers just compounds the problem by making the ratio pathetically worthless.
While CEO pay has long been reported on annual proxy statements – the much beloved SEC form DEF 14A – there’s so much variance in how companies compensate their executives, not to mention calculate and report the data, that its only real value is as clickbait for the media. Just look at a few examples and you’ll see what I mean.
Google CEO Larry Page earned $1 last year, same as the year before and the year before that. That’s because he’s a co-founder with a gazillion founder shares worth billions of dollars. So Google’s CEO pay ratio will be something like 0.0001 to 1.
Former Oracle (NYSE:ORCL) CEO Larry Ellison’s compensation, on the other hand, came from annual stock awards. So even though, like Page, Ellison made $1 in salary and owns a gazillion shares worth billions of dollars, his total comp was listed as $67 million last fiscal year, so Oracle’s CEO pay ratio will be some enormous number like 1000 to 1.
In other words, there will be a seven zero variant between the two company’s CEO ratios, making the average employee part of the equation completely meaningless.
Meanwhile, Apple (NASDAQ:AAPL) reports that CEO Tim Cook made about $9 million in 2014. But did he really? Turns out he’s been awarded over a million shares of Apple stock, but the complex vesting schedule means it only shows up as compensation in certain years. In reality, his net worth from Apple stock increased about $100 million last year, but that won’t even show up in the pay ratio.
And while the tech industry has aggressively tied executive compensation to share price or long-term shareholder value, other industries have not. Take Viacom CEO Philippe Dauman, for example. He made $44 million in 2014, even thought the company’s stock declined by 8%.
And GE (NYSE:GE) chief executive Jeff Immelt earned $37 million – little of which came from stock and option awards but half of which was derived from a large increase in the value of his pension. Don’t even ask me what that’s all about. I come from the tech industry. Nobody had pensions.
If you compare the SEC reported 2014 compensation of these five CEOs, you would conclude that Ellison made the most ($67M), followed by Dauman ($44M), then Immelt ($37M) and Cook ($9M). Page would bring up the rear with a paltry buck. Obviously, that’s nonsense. And comparisons of the ratios derived from that data would likewise prove futile.
While not quite as subjective as the CEO side of the equation, median employee pay will make matters even more convoluted. Even comparisons within the same industry will make little sense. Take the banking sector, for example.
I’m sure that at least a third of investment bank Goldman Sachs’ 35,000 employees are VPs, managing directors and partners who make big bucks. That will drastically skew the denominator of its CEO pay ratio compared with a retail bank like Wells Fargo, where the average worker is probably a branch clerk.
While both company’s bosses earned about the same amount last year, their CEO pay ratios will actually differ by a significant factor. If you viewed them side-by-side, you would conclude that Goldman chief Lloyd Blankfein’s compensation is reasonable compared with the rank and file. By comparison, Wells Fargo CEO John Stumpf will seem overpaid. Nonsense.
In the end, the rule will prove useless to investors and have zero effect on executive pay and the growing pay gap. But that won’t stop the media and the politicians from using it as advertising clickbait and partisan talking points.