Make Them Show The Math! (image: zooboing/flickr)

Make Them Show The Math! (image: zooboing/flickr)

Insanity! That’s how Thomas Sternberg, co-founder of Staples, describes Section 953(b) of the Dodd-Frank Act. “Incredibly wasteful,” adds John A. Allison IV, a director of BB&T Corp., the ninth-largest U.S. bank. For the past year or so, CEOs and business lobbying groups like the Business Roundtable and the National Investor Relations Institute have been fighting “tooth and nail” against 953(b). With the SEC preparing to issue its proposed rules sometime this spring, expect a lot more noise.

Why all the fuss over 953(b)? This section of Dodd Frank deals with disclosure of executive compensation – always a touchy subject. Specifically it would mandate public companies to disclose, in their SEC filings:

(A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;
(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and
(C) the ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B).

Issuers — public companies — advance a number of arguments against having to make this dread calculation. The one repeated most often is that it is cumbersome – a burden, just too difficult, a waste of everybody’s time and money. (They respond in the same way when they are asked to report on human rights, by the way.) But compensation data can’t be all that hard to gather, can it? What would it really take to calculate the median of the annual total compensation of all employees? Are we to take seriously the claim that companies do not have these numbers already available? And if they do not, isn’t that a sign of seriously poor fiscal management, or negligence? Time to demand better housekeeping.

Second, we are told, 953(b) disclosures wouldn’t be of value to investors; the measure is just politically motivated. “Everyone recognizes that this is a political disclosure, not an economic one,” writes Michael S. Melbinger, partner at Winston and Strawn; 953(b) is “intended to give unions and certain media folks a tool to bash corporate America”.

The unions and the media? Melbinger’s argument is specious at best. You can only bash corporate America, and these disclosures will only count against companies, if there is something disclosed that is embarrassing, or worse. And of course there is. The research of Duke University’s Dan Ariely suggests that these disclosures would reveal gross inequities: in the past 20 years, CEO pay has increased from 130 to about 350 times that of the average worker. Does that give people a bashing tool? Or does it reveal that ordinary people are regularly getting bashed by a bunch of corporate tools?

Third, some companies argue that the disclosures should be restricted to employee compensation in the United States. The fear is that employee compensation in foreign countries will drag down the median. Strange that companies that are usually so bold about their global reach or their smart outsourcing strategies are suddenly so shy. But shareholders (and customers) are increasingly concerned about the treatment of foreign workers – how much they are paid, and what their working conditions are – and are demanding transparency and accountability across the supply and service chain. Witness Apple.

These arguments are merely blinds. The question is whether the SEC, after so much heavy lobbying, will be able to see them for what they are. Maybe shareholder demands for greater transparency can eventually make up for any shortcomings of the SEC’s final ruling, but that will, of course, be a longer slog.

It would be difficult to argue that a CEO earning 350, 250, or 100 times the average worker is really a model of good corporate governance. A study [pdf] by Michael J. Cooper, Huseyin Gulen and P. Raghavendra Rau shows that highly paid CEOs are not necessarily more effective CEOs, and that CEO pay does not correlate with company performance. And a recent post by Christopher Swann and Agnes T. Crane gives the lie to the usual excuse for bloated compensation packages: the “global war for talent” has not brought global talent to the C-Suite; American companies still hire American-born CEOS, even though American CEOs have lagged behind their European-born peers in delivering performance.

In any case, we need a better understanding of how pay ratios and the hierarchies they perpetuate affect performance, especially in an environment where command and control hierarchies can seriously limit agility and hamper innovation. 953(b) provides a good opportunity to have that conversation.

Finally, my guess – and right now I don’t have any research to back this up, so I will have to rely on behavior I’ve observed – is that overpaid CEOs tend not to attract, retain or inspire innovative thinkers in their immediate circle. There are, of course, notable exceptions; and this is not to say that overpaid CEOs cannot preside over innovative companies. But like mafia bosses and politicians, most SuperCEOs tend to prefer polite indulgence or deference, even if what they are saying is wrong, ridiculous, or just plain boring. Talented people, on the other hand, need to follow their own course and will dissent, or just leave and start their own thing, rather than keep silent, tolerate gross inequities, or toady up to the big bad boss.