Comment: Dodd-Frank's gift to editors

Oct 07, 2010
<p>The pay disparity ratio has got a lot of people worried but will it make any difference?</p>

Editors love pay stories. They make the general public hopping mad and they often find their way out of the business section and into the main newspaper pages. Insert ‘executive pay’ into a headline and bingo: instant headline kudos.  

Little surprise, then, that editors up and down the land can barely contain their excitement about the possibility of the Dodd-Frank pay disparity ratio. No longer will they have to rely on flimsy evidence of alleged investor revolts over executive pay. Instead they will be supplied with a greediness ratio that provides awesome fodder for reams of league tables naming and shaming the most grotesquely paid executives.

As many of you know, the ratio will reflect executive pay as a factor of average employee pay. The precise composition of the equation is still to be determined but it has CEOs everywhere quaking in their boots.

The only way it could be bettered (from a reporter’s point of view) is by ensuring that banking chiefs dominate the top of the table – something that looks decidedly unlikely. In fact, this ratio could actually end up making bank CEOs look poorly paid compared with other sector chiefs because their staff members enjoy a significantly higher starting salary. 

Additionally, if the ratio takes into account companies that outsource large portions of their business to developing markets where labor is cheap – such as large clothing manufacturers – CEOs at those firms could end up looking very greedy indeed. 

In an article for the November issue of IR magazine, the IR community seemed somewhat polarized by the proposed new rule. One suggested that disclosure of the pay disparity ratio is a great idea because it is ‘another opportunity for companies to be able to explain and support their position', while another warned that the provision could make it harder for IROs to tell the story because it will give an incomplete picture to the investment community. 

It’s hard to deny that it will make some executives look disproportionately well-paid vis-à-vis others, and it is unlikely to be fair due to its somewhat arbitrary nature, but it wouldn’t half make good reading. Whatever happens, IROs shouldn't lose too much sleep about the provision – professional investors are unlikely to be basing their investment decisions on such a flawed metric.


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