The SEC has finally proposed a rule on the infamous “CEO Pay ratio,” i.e., the ratio of CEO pay to that of the median worker. There has been plenty of debate about the pros and cons of this requirement. The primary criticism is that this ratio will not pass any cost/benefit analysis. Every company knows this is true. Most institutional investors know it, too, and don’t really care for this rule. In fact, the only people likely to benefit from this rule are the unions that pushed for it. Even their benefit is speculative since the unintended consequences of this rule are difficult to fully predict. For instance, it might encourage further outsourcing of relatively low-wage work to foreign companies, depressing employment. In other words, we could very well see the average pay of the median worker go up, but only if you don’t count the zero wages being earned by those who are laid off as a result of this law.
Given how dubious are the benefits of this rule, let’s turn to the costs. I have seen estimates of calculating this ratio for a large, multinational firm as high as $7.6 million. Being in the advisory business, that seems pretty excessive to me. By comparison, the average cost of complying with the dreaded SOX Section 404 was about $2 to $3 million for the typical company (which was about 10 times higher than the SEC estimated it would cost when they published its rules).
So, let’s say it costs about $2 to $3 million for a large company, which is a reasonable estimate for a multinational given the way the rules look right now. Well, about 10 percent of Fortune 500 CEOs made less than that in 2012. That’s right, we are almost certain to see quite a few companies paying more than they actually pay their CEO to figure out how much more their CEO makes than their median worker.
If this rule was really being implemented for the benefit of the shareholders, then Congress could have let each company’s shareholders opt in or opt out of this disclosure regime. Clearly, the people pushing this ratio had no interest in giving actual shareholders a veto over this racket.