Eye View Unintended Consequences Alert, Dodd-Frank Act Will Cause Workers To Lose An Arm

A little-noticed provision in the mammoth Dodd-Frank financial reform act will force companies to disclose regularly the ratio of the median annual pay of all their employees to that of their chief executive.

The measure raises potential public relations problems for some of the US’s biggest companies, as well as significant administrative burdens. The published ratios will vary significantly but some may look alarmingly unfair to the eyes of the average small shareholder.

The $1,025,000 median salary of an S&P500 chief executive last year, according to the Equilar analysis, is 25 times the $40,174 that official statistics show was paid to the average US private sector employee. The chief executive’s $7.5m median total pay package, including bonuses and stock options, is 187 times that average private sector pay and some 19 times President Barack Obama’s basic $400,000 salary.

The provision was inserted into the Dodd-Frank bill “at the last minute, with no discussion and not based on any particular problem”, says Charles Elson, a corporate governance professor at the University of Delaware. He categorised the pay ratio as a “thrill disclosure” that would generate headlines without offering meaningful comparisons.

“This is a political disclosure, as opposed to an economic disclosure, and that’s the problem,” Prof Elson adds.

Lawyers caution that the formula mandated by the act has some seemingly perverse consequences, in terms of factors that will produce a low ratio – an apparent but potentially misleading sign of a company without excessive executive remuneration.

“It will favour companies that outsource and use independent contractors, and those that use franchised rather than company-owned stores, since these relatively low paid jobs will not count towards the median tally,” says Richard Susko, a partner at law firm Cleary Gottlieb.

Once again political disclosure at the expense of American workers.. Washington sticks their nose in business, forcing workers to lose an arm.

 

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