Wednesday, August 28, 2013

The cost of reporting CEO pay to median worker pay

The irony is that it all came out of such a simple-sounding idea: requiring that the pay of a company’s chief executive be compared to the median salary of its employees. Carrying out the law may well result in costs that are just as obscene as the pay it is disclosing.

When the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act was being completed, a new section was inserted in the final hours of negotiation. It was two-thirds of the way in, at Section 953(b). The section was also short, at only 140 words, in a bill that would eventually run about 2,300 pages.

What the section required was that all public companies disclose this median number on worker pay, placed side-by-side to the chief executive’s pay.

What could be so hard about making such disclosure, right? It turns out plenty.

The first problem came in how compensation is calculated. We are decades past the time when manager compensation was simply what you received in a paycheck. Now, compensation includes options, pensions, 401(k) matches, health benefits, parking allowances and other various prerequisites. Calculating this all as one figure — and in particular valuing average stock options for employees as well as top executives — can be difficult.

The problem is compounded because the rule says that the median is calculated with respect to “all” employees.

Take a multinational conglomerate with 50,000 employees across the globe. That company has the task of not only figuring out the total compensation provided to every employee, but it also has to collect and analyze this information, much of which is in different currencies. And some of this information collection is arguably prohibited by privacy rules in the European Union and other countries like Japan and Canada. ...

The end result is that what was thought a simple calculation is turning into an exercise that could cost some companies millions. ...

Even the A.F.L.-C.I.O., which strongly advocated for this disclosure, recognizes that there are problems. In a release, the union argued that companies should not count all employees as the statute says, but rather use statistical sampling methods.

The statute, however, is strongly worded, saying the median should be calculated for “all employees.” If the S.E.C. tries to water down the provision as the A.F.L.-C.I.O. suggests, it may lead to a lawsuit in court to strike the rule down by companies themselves.
--Steven Davidoff, NYT, on the costliness of data analysis