Wednesday, January 25, 2006

On Big Costs of Executive Pay Disclosure

by Tom Bozzo

Conglomerate guest-blogger Michael Dorff notes that some seemingly regulation-averse corporate lawprofs contend that the SEC's proposed executive pay disclosure requirements will impose substantial (and, moreover, unjustified) costs on firms. For the most part, the claim defies my credulity, insofar as busienss reporters appear able to compile CEO pay statistics for large numbers of corporations on what I'd presume to be budgets that barely would buy lunch for an entourage of compensation consultants.

However, things are stranger if the Chicken Little lawprofs are right about disclosure costs. The existence of substantial executive pay disclosure costs would imply that corporations and their boards have at best vague ideas as to the amount of compensation being shoveled at the executive ranks, and that boards are broadly derelict in their duties to ensure that pay and performance are aligned (woof, ouch — I know). As the saying goes, you can't manage what you don't measure.
Law professors oppose something that might rein in executive compensation? Gee, there's something new.

Seriously, the argument would only hold water if you believe the claim (noted in the WSJ article from your previous discussion post) that median managers are actually underpaid.

As Dorff notes, there's no way to force a BoD to be fiscally responsible (much to the ire of those of us who are DIS shareholders). The data being more public might weaken the power of, e.g., Korn Ferry and Challenger to cherry-pick data in favour of their client--if the BoD would cooperate.

If they won't, then the top will grow, the median will adjust upward, and they will be correct that overall costs will be higher.

But that's an issue for the *cough* "efficient market" to correct, given that there will be updated public information.
Gordon Smith argues, as I've previously noted (and I'm sympathetic to the argument), that more disclosure within the present system may produce envy as easily as shame.

Bainbridge offers a 'rational ignorance' argument against disclosure which, when I happen across it, makes me wish that some of the law-and-economics types would bone up on their economics. Even if Joe Shareholder should lie back and think about England, the same can't be said of Joe Money Manager...
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