The Securities and Exchange Commission is soliciting comments on a proposed new rule that would require companies to publish a measure of median pay and how it compares with compensation for the chief executive—including stock options and all the other C-suite sweeteners.
(Here’s the full text (pdf).)
At the moment, publicly traded U.S. companies are required to disclose compensation for their five highest-paid employees. Some go a step further and voluntarily break out average pay per employee (or at least head count and total compensation, so the curious can crunch their own averages).
A median measure, however, will probably more closely reflect what the rank and file actually take home, because it won’t be distorted by a few seven and eight-figure executive paychecks.
Sounds like a decent idea, but the proposal, which the 2010 Dodd-Frank legislation called for, has been controversial. Two of the five SEC regulators voted against it. Commissioner Michael Piwowar (one of the “nays”) got all literary and led off his remarks by quoting Charles Dickens: “It was the best of times, it was the worst of times ….”
Commissioner Daniel Gallagher (the second “no” vote) called the rule a “gimmick.” He said: “Its only conceivable purpose is to name and, presumably in the view of its proponents, shame U.S. issuers and their executives.”
Victorian literature aside, the dissenting commissioners have a point. Those who care about corporate governance—a group that includes big pension funds and other institutional investors—pay a lot of attention to executive compensation. But how gold-plated packages compare with the pay of rival executives is more telling than how they compare with rank-and-file salaries—outlining fairly comprehensively the market for top talent in a particular industry or sector. Of equal importance is how the pay is structured and how efficiently it ties financial reward to the company’s performance.
Take JPMorgan Chase (JPM) CEO Jamie Dimon. The whale trading scandal took about half of his compensation last year. That penalty was likely more important to shareholders than how the $11.5 million he did collect compared with, say, the salary of a Chase teller.
A huge group of people, however, would find a median pay figure more useful than investors and corporate-governance watchdogs: employees bucking for a raise. The median data point would immediately split the workers in every public company into two groups: those who make less than most of their co-workers, and those who make more. With that frame of reference, a lot of HR tactics would prove far less effective: namely, talking about “value” in nonmonetary terms and keeping peer pay levels tightly under wraps.
Indeed, those who voted in favor of the measure, cited employee morale, productivity, and labor relations as major parts of their rationale.
After yesterday’s vote, the proposed rule is now open for 60 days of public comment. It’s hard to imagine the rank and file being outnumbered in that forum.