Weekend Question 3: Why Shouldn’t Companies Have to Reveal What Their Highest-Paid Employees Get Paid?
Maybe you thought that publicly-traded companies are already required to do this.
They are not. They ARE required to disclose the salaries and perks of their highest-paid executives, but not of any non-executive employees.
The Securities and Exchange Commission considered requiring disclosure of how much at least some of the highly-compensated non-execs make, but backed off:
SEC Drops Celebrity Pay Proposal
July 27, 2006Tom Cruise can rest easy. Unless he suddenly assumes a policy-making role at Viacom, the movie star won’t find his salary listed in a proxy statement — even though his work for the company’s Paramount Pictures subsidiary has netted him a pretty penny.
That’s because the Securities and Exchange Commission voted unanimously on Wednesday to jettison a proposal — known widely as the “Katie Couric rule” after the handsomely paid CBS news anchor — that would have required a company to list up to three non-executive employees if their pay packages were heftier than those of the executive officers named in financial statements.
Instead, the SEC will go back to the drawing board and to public opinion with a new proposal to add to the revised executive-pay disclosure rules it unanimously voted to install at an open meeting on Wednesday. The new rules, most of which will have to be spelled out in plain English, will affect compensation disclosure in proxy statements, 10-Ks, and registration statements.
I think some degree of disclosure is necessary for two reasons:
- To give some context to executive pay; If shareholders know what othere non-execs are making, they can better think through whether certain prima donnas are overpaid, execs are underpaid, or both.
- To shine an occasional light on the artificial distinction in the tax code relating to companies’ ability to deduct executive salaries and others’ salaries for income tax purposes. A little-remembered (except in executive suites) “legacy” of the Clinton Administration was the 1993 tax package’s $1 million limitation on executive salary deductibility. Companies can and often do pay certain individual execs more, but they can’t deduct the amount over $1 million on their corporate income tax returns. This deductibility limitation was supposed to act as a hindrance to “excessive” executive compensation. It obviously didn’t work. It also led to a greater use of susceptible-to-abuse stock options instead of cash as a form of compensation. Meanwhile the pay of top stockbrokers, movie stars, athletes and others is fully deductible, no questions asked, and no disclosure required.
If shareholders really want to know where large chunks of their companies’ money are going, it only seems right that they know what the bigwigs earn, whether they happen to hold executive positions or not.
By the way, they also capped the deductibility of pension benefits, which has been a small piece of the puzzle that has led to weaker pensions. It used to be the execs had all their pension in the same plans as the employees (to capture the deductibility), but now that little exec interest in the pension has had its $ incentive taken away.
Comment by meep — July 30, 2006 @ 3:23 pm
#1, that is very true. No matter how much an exec made, only a certain portion of it could be included in pension benefit calculations (it was about $160,000 I think for quite a while; now it’s in the neighborhood of $250,000). What this caused was a proliferation of so-called nonqualified plans that are often basically unfunded promises to execs who stick around. A NQ plan was, as I understand it, a major factor in why Enron went down so fast. Once execs saw trouble, those who could retired and cashed out. There’s a lot more to it than that, but no time or space for more.
Comment by TBlumer — July 30, 2006 @ 4:14 pm
Because it is none of the general public’s business?
Comment by Steven J. Kelso Sr. — July 31, 2006 @ 5:25 pm
#3, there is a decent argument for that, EXCEPT that a PUBLICLY traded company has responsibilities to its general-public shareholders. The debate over whether those responsibilities include disclosing exec pay and perks is settled, because the Board directly has the ability to influence that, and shareholders have to evaluate the job the Board is doing.
Whether a PUBLICLY traded company’s general-public shareholders need to know the pay of non-execs is an obviously touchy subject. I would argue that many shareholders would be offended if they knew what certain people were being paid, and that on that basis you can back into the idea that they probably have a right to know. After all, they’re (partial) owners.
A company can always decide that the hassles of being publicly traded are too much to handle and go private.
Comment by TBlumer — August 1, 2006 @ 10:11 am
I understand and it does make some sense. I worry when the government gets involved though. Wouldn’t it be wiser for shareholders themselves demand that this information be disclosed?
Comment by Steven J. Kelso Sr. — August 1, 2006 @ 11:09 am
#5, you are exactly correct. The next argument then becomes “if we disclose it and our competition doesn’t, then we’ll be at a competitive advantage because Tom Cruise won’t work with us when he can go down the street and keep his privacy.”
Now if this is something that CONGRESS sees as an issue, it should pass a law that addresses the issue. I have to concede a point to you that the SEC should NOT be doing this on its own without specific Congressional authority; I tend to think of the SEC’s issuance of disclosure rules as interchangeable with the accounting standards bodies, which is an error on my part.
It all gets back to one of Bill Pierce’s core campaign points–that bureaucrats are running the country and setting its rules of day-to-day operation without adequate oversight, and all too often no oversight.
Comment by TBlumer — August 1, 2006 @ 12:16 pm