Unintended Consequences of CEO Pay Reform
Dominic Basulto argues that, if it forces companies to publish CEO pay as a single dollar figure, it may have the ironic effect of escalating executive compensation.
[B]y attempting to quantify CEO compensation (including hard-to-value items like retirement benefits, severance packages, deferred compensation, perquisites and stock option grants) with a single number, the SEC may be unleashing the Law of Unintended Consequences. In other words, by focusing on a single number for annual executive compensation, the SEC may actually inflate future executive pay packages.
By attempting to reduce executive compensation to a single number, the SEC runs the risk of actually fanning the flames of compensation envy. ItÃ¢€™s a topic that has been broached more than a few times by academics, compensation experts and bloggers. Just last week, Peter Lattman of the Wall Street JournalÃ¢€™s law blog and others — such as law professors Larry Ribstein and Gordon Smith — raised the prospect of a Ã¢€œratcheting effectÃ¢€ if the SEC rule goes into effect. Ratcheting is not some arcane corporate governance term — itÃ¢€™s probably better known as Ã¢€œKeeping up with the Joneses.Ã¢€ In this case, itÃ¢€™s a matter of keeping up with the CEO next door.
That strikes me as quite plausible. Indeed, it is rare for any sweeping legislation, however well intended and studied, not to produce a number of responses that a) were not anticipated and b) would be considered undesirable by those who sponsored it.
This is not, by the way, an argument against the policy. While I have no strong view as to whether Congress needs to regulate compensation disclosure, my general view is that more information is a good thing. If greater availability of comparative pay results in the market pushing it up, so be it.