For example, British economist Andrew Smithers observes in his new book, “The Road to Recovery,” that stock-related bonuses for executives encourage them to make decisions that boost their share prices in the short term, rather than in the long term. The harvest is that they spend corporate capital less on long-term investments, which will set their companies up for future profit, and more on shoveling dividends to investors, which props up their shares quarter by quarter.
The thrust of the business community’s attack on the CEO rule is its supposed complexity and cost. The Center on Executive Compensation, a corporate think tank, groused this summer that it’s inflexible and “unjustifiably complex.” The rule requires companies to calculate the median pay of all employees — that is, the level at which half are paid more and half less — rather than just a simple mean average, which would be easier. Other critics say it will make companies with lots of overseas workers earning Third World wages look especially bad.
Yet these fears may be unfounded. The rule under consideration by the SEC allows companies lots of flexibility in choosing how to calculate median compensation. And they would have more than a year to do so.
It may be true, as some critics say, that the rule doesn’t tell investors anything useful — or more precisely, it doesn’t tell them anything they don’t already know. The salaries of top executives already must be disclosed annually; it doesn’t take an advanced computer algorithm for investors in, say, JPMorgan Chase to know that Chairman and CEO Jamie Dimon is compensated immensely well ($62.6 million over the last three years).
But it doesn’t follow that serving investors should be the limit of the SEC’s mandate. Congress thinks that corporate disclosures also can serve a social purpose. Why saddle the SEC with the job of overseeing these rules? It’s because the SEC is the only agency with the legal power to mandate corporate disclosures; Congress is simply putting this preexisting authority to use. Nor is this the first time that’s happened. As far back as the 1970s, the SEC was ordered to force companies to make environmental disclosures.