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New SEC Rule Will Not Fix CEO Pay Gap

Bank Statement FBN

The regulators are at it again. Last week, the Securities and Exchange Commission adopted a rule that will force thousands of public companies to disclose the ratio of CEO-to-average employee pay. The regulation was mandated by Dodd-Frank – Congress’s gift to corporate America that just keeps on giving.

Of all the nonsense to come out of Washington since the financial crisis, this particular rule may very well achieve the distinction of having absolutely no practical use whatsoever. No wonder it’s been so many years in the making. There’s no telling how many bureaucrats it took to accomplish that rare result.

Yes indeed, I predict big things for the SEC’s latest and greatest disclosure requirement. Ostensibly a tool for institutional investors, it will more likely be used as raw meat for sensationalist media headlines and to give politicians more ammo to rile the masses over income inequality. More divisive rhetoric; just what we needed.

Make no mistake, the most distinguishing characteristic of the ratio is how incredibly useless it will be. Let me explain why.

Obviously, it’s a ratio of two numbers, chief executive compensation and median employee pay. The problem is that both numbers are remarkably subjective, rendering comparisons between companies essentially meaningless. And dividing the two numbers just compounds the problem by making the ratio pathetically worthless.

While CEO pay has long been reported on annual proxy statements – the much beloved SEC form DEF 14A – there’s so much variance in how companies compensate their executives, not to...