Why is ratio disclosure so important? The debate over compensation usually turns on vertical comparisons. Being over or underpaid is often determined by looking at a peer group of officers in similar companies. This has a tendency to push compensation up because no CEO likes to admit that he or she is average or below average in any given pool, irrespective of the company's actual performance.
Ratios provide another perhaps more accurate method of assessing the relative worth of a CEO. The approach relies on a vertical comparison, assessing compensation in relationship not to other companies but to employees within the same company. Moreover, it provides a benchmark for analyzing increases in CEO compensation over time that does not turn solely on the amount paid to comparable officers.
There is also data that suggests that the disparity between CEO and average employee compensation has worsened in recent decades. As one study described: "In 2005, the average CEO in the United States earned 262 times the pay of the average worker, the second-highest level of this ratio in the 40 years for which there are data.In 2005, a CEO earned more in one workday (there are 260 in a year) than an average worker earned in 52 weeks." A more recent study put the number at 263 times the average compensation of American workers.
The importance of the provision can be seen from the growing crescendo of opposition that it has engendered. The opposition has even reached the ears of Congress. A bill has been introduced in the House that would repeal the requirement. HR 1062, the Burdensome Data Collection Relief Act, has been introduced. Introduced by Congresswoman Nan Hayworth of NY (with seven other Republican sponsors), the approach taken by the proposed legislation is direct and pithy (compare it, for example, to the bill that calls for the repeal of Dodd-Frank in its entirety).
It provides, in its entirety, that "Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) is hereby repealed and any regulations issued pursuant to such subsection shall have no force or effect." The provision has been passed in a Subcommittee on Capital Markets and is awaiting action by the House Committee on Financial Services.
We will look at the arguments that have been used to justify repeal in the next several posts.