EDITORIAL: The Class Envy Commission

The government takes aim at ‘excessive’ CEO pay

President Obama thinks some people make too much money, and he intends to do something about it. Armed with the Dodd-Frank Wall Street regulation bill he pushed through Congress in 2009, the Securities and Exchange Commission is poised to stoke the flames of class envy by shaming CEOs who earn “too much” money.

The commission is taking comments on proposed implementation of rules that will force companies to disclose the “compensation ratio” of its top employees. If the average salary at Acme Widget Corp. is $50,000, and the CEO makes $605,000, a ratio of 12.1 to 1 would be reported. It sounds simple, but for large multinational corporations the mandate becomes complicated very quickly. Payment of foreign-based employees changes with exchange rates for various currencies. Companies with subsidiaries often use multiple payroll systems. Seasonal employees wouldn’t be counted unless they happen to be on the payroll on the day the report is calculated.

Companies would have some discretion in figuring the pay-ratio formula, such as deciding whether to “annualize” certain hourly employees. As SEC Chairman Mary Jo White explains, “This proposal would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate.”

This means the human resources departments will run the numbers in whatever way to make the company look good. The exercise is pointless. A salary ratio of 12.1 to 1, or 121 to 1, or 1,210 to 1, has no bearing on a company’s market performance. CEO salaries are already on the record for public companies, so this requirement doesn’t disclose anything new, except mountains of compliance paperwork. This is a scheme to force companies to generate a statistic to argue for higher taxation on the “evil rich.”

Sheryl Sandberg, the chief operating officer of Facebook, earned a salary and bonus of $605,000 last year, but her actual pay was far more generous: $821 million from shares of Facebook that vested in that year, as well as an additional $25.6 million in stock. So the ratio of 12.1 to 1, assuming a “median” Facebook employee salary of $50,000 a year, would be meaningless if it didn’t include Ms. Sandberg’s stock value.

Shareholders are generous with CEO pay, for what they consider good reason. The assembly-line worker’s day ends when the whistle blows. Top management officials take on legal responsibilities for the entire enterprise; a wrong decision can land them on the street or even in prison. A CEO’s role is so crucial to the company that the Securities and Exchange Commission considers the health of top company officers a “material” fact that must be fully disclosed.

This rule promises to be about as useful as a tissue-paper umbrella. It’s the job of shareholders, not the government, to determine how much pay for a CEO is too much. Greed is a natural part of human nature, and CEOs are as subject to temptation as any of their employees, but the government could save money by leaving business unencumbered by unnecessary regulation, such as this ratio rule, and enable them to grow, flourish, create profits and jobs.

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