Odious Pay Ratio Disclosure Law (2015 Sep)

by Barry A. Liebling

Animated by the Dodd-Frank Act of 2010 the Securities and Exchange Commission (SEC) recently voted to require public companies to disclose the ratio between the pay of CEOs and the median pay of employees. As is typical of most laws that relate to business practices opinions are sharply divided. Leftists and progressives are applauding the action, while conservatives and free market advocates recognize it as an odious law. http://www.wsj.com/articles/a-misbegotten-political-jab-at-ceo-pay-1439249624

The official rationale for the law relates to the mission of the SEC – to protect investors and help them make better decisions. But the designers of the regulation are playing a bigger game. They are intent on pushing mainstream American culture further to the left and on vilifying the concept of free markets.

Consider the investor angle first. Professional investment analysts have not been particularly interested in scrutinizing the ratio between what the CEO makes and how much the median employee is paid. They rely on a large set of other indices when they evaluate a firm. If they regarded how much the CEO makes compared to the median employee as important they would have asked companies for this information. And public companies are always sensitive to the opinions of investment analysts. The price of a company’s stock can rise or fall according to the pronouncements of experts who have a good record of predicting business success.

Naive opponents of the disclosure law have been quick to assert that it is not necessary. The new rule requires companies to spend a lot of money to comply, and historically investors have not focused on this information. But, in fact, as soon as the new law goes into effect the ratio will provide investors with potentially useful information. A company that pays its CEO proportionately more is at risk for coming under the unsympathetic gaze of government. You can bet that firms with high CEO to median employee ratios will be more likely to be investigated, audited, inspected, and persecuted by government agencies that are looking for easy targets in the private sector.

Of course public companies will quickly know how to play the game that is forced on them by the SEC rule. One way to easily reduce the CEO to employee ratio is to eliminate employees with low salaries. Publicly traded companies will find it increasingly more attractive to outsource as much low-paying work as possible. Vendors that provide services – such as maintenance, routine clerical, food preparation, and cleaning – to large companies will see additional business opportunities when the law goes into effect.

Now let’s turn to the bigger issue, the damage the new law is likely to have on mainstream culture. For more than a century leftist pundits have been whining about income inequality. If some people make more money than others, leftists regard it as their sacred duty to “fix the problem.” Of course there is always some inequality and therefore always an excuse to meddle and “make things right.” The preferred “remedy” is to use government force to extract wealth from those they despise and redistribute it to those they favor. Notice I did not say that money is taken from the rich and given to the poor. While there is certainly some of that posturing in the progressive playbook, rich crony businesses are often exempt from takings (via tax loopholes and special privileges) if they have the right political connections, and poor people who are not designated as “officially oppressed” need not receive any funds.

Pushback to the leftist complaint from conservatives and free market advocates has generally been weak and ineffective. The problem is that the leftist premise – income inequality is inherently bad – is rarely challenged. Instead critics typically say that inequality is not so extreme as the leftists describe it (conceding that if it were extreme there would be a problem). Or they point out that people with modest incomes have a chance to better their lives and rise (confessing that they are disturbed that “society allows” modest incomes to exist in the first place). Or even worse, say that jurisdictions that are governed by Democratic party leftists have more extreme inequality than places where Republicans hold office (foolishly affirming that they also are bothered by income inequality per se).

Of course, the appropriate retort to the income inequality alarmists is that how much or how little a person makes compared to others is not ethically relevant. Instead, how a person obtains his money is the crucial issue. Any person who obtains wealth honestly, by trading value for value, dealing by mutual consent, deserves all of it. Conversely, if a person gets money by using force or fraud he deserves none of it (even if, especially if, government coercion was used).

Consider what the new SEC rule is doing. It is giving a legal imprimatur to the phony problem of income inequality. To use an obnoxious phrase favored by leftists – “the debate is over.” Now uninformed and unsophisticated citizens will be told that the federal government has explicitly identified the ratio of CEO pay to average worker pay as a vitally important factor in judging a business. The “progressive” flawed concept of fairness – ideally everyone should have the same pay – is the basis for a legal requirement.

Bear in mind that the pay ratio disclosure regulation can be used as an early step in the classic foot-in-the-door technique – obtain compliance to a small request and future larger requests become easier. Once companies get used to reporting pay ratios between the CEO and the median employee they will not object (as much) to disclosing other statistics that leftists demand. The SEC rule is animated by progressive sensibilities where individual merit is replaced by “social justice” for groups – principally class, gender, ethnicity, and sexual orientation. If companies are required to report top pay compared to median pay why not have them reveal (by law) how much they pay men compared to women? Is it unreasonable to publish the pay differentials of each ethnic group and for employees of various sexual preferences? Leftists will spare no effort in exposing what they regard as injustice in their mission to eliminate individual autonomy.

Still, all is not lost. There is a possible upside to the new SEC rule. The law may be seen as an overreach – a regulation that goes too far and exposes other regulations as unjustified. The best scenario is that the odious pay ratio disclosure rule will backfire and encourage Americans to think things through, reject the leftist world view, and appreciate the virtue of liberty.

*** See other entries at AlertMindPublishing.com in “Monthly Columns.” ***

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