Academic

The front page of today's Financial Times trumpets "Pay law branded 'logistical nightmare, '" i.e., the Dodd-Frank Act's requiring disclosure of the ratio between the CEO's pay and median employee pay (Sec. 953).  The pay ratio disclosure is probably the most nakedly populist provision in Dodd-Frank.  It tells investors "Look at how much the fat-cat CEO makes compared to the poor schmucks in the rank and file."  The FT quotes an aide to Sen. Robert Menendez (D-N.J.), sponsor of the provision: "The idea behind the new rule is that sunlight is the best disinfectant.  Disclosure will help encourage fair pay for workers at a time when middle-class pay has stagnated while CEO pay has skyrocketed." 

I'm as much of a fan of Brandeis' sunshine as much as the next girl, but there's something of a disconnect between problem (outsized CEO pay) and solution (disclosure).  Brandeis' sunlight works best when it's pretty clear that the darkness is hiding something.  The classic example is related party transactions: if a company has to disclose whenever it engages in a transaction with its executives, the market will either punish it for engaging in management-enriching activity at the expense of the shareholders, or it will be less likely to engage in that activity in the first instance.   

It's not at all clear that disclosure of CEO/average employee pay ratios will trigger the same reaction.  On the contrary, the history of executive comp regulation by disclosure has taught us that disclosure can result in an arms race as executives demand pay packages at least as good or better than that of their peers.  Even the most populist of shareholders will generally agree that you have to pay CEOs more than the average employee, and the intrafirm ratio seems like an odd metric for determining how much is too much.  If  a company has low-wage employees (e.g., Wal-Mart) the ratio will be higher than if it's a company with high-wage employees (a bio tech firm); does that mean the Wal-Mart CEO is being paid "too much"?  Even more problematic for populist reformers, the FT article points out an unintended consequence of the new regulation: it favors companies that outsource or even off-shore jobs, since those low-wage earners won't be counted in the median employee pay numbers.  Ooops. 

The article says companies are gearing up to lobby the SEC on how the pay ratio rules are implemented.  Let the games begin.