Dodd-Frank passed over three years ago, but more than half the deadlines have been missed. So we’re just starting to learn what some of its provisions will mean. We’ve written before about the most fundamental structural and constitutional problems with the law. But even seemingly minor provisions have the potential to cause negative repercussions. For instance, the Securities and Exchange Commission (SEC) is now considering adoption of a Dodd-Frank rule (953b) that would require companies to disclose the pay ratios between executives and their employees – creating a potential public relations weapon to be used against companies, which is almost certainly not in the interests of shareholders.
SEC Commissioner Dan Gallagher wonders what benefit it will provide to investors, as the information provided may be misleading. While the usefulness of the compensation disclosure continues to be debated, most agree that – as Timothy Bartl, president of the Center on Executive Compensation, recently said – compliance will be “inordinately complex and time consuming”.
Something that happened in federal bankruptcy court yesterday should serve as a warning for where we’re headed with the new SEC rule. Judge Sean Lane struck down the compensation package approved by American Airlines’ creditors to its CEO Tom Horton.
This despite the fact AA has crushed its numbers, executing its turnaround strategy better than anyone could have expected. Even though less than five percent of US bankruptcies have returned any value at all to their stockholders, American’s bond-holders and unsecured creditors have the real potential of full recovery of their investment. Finally, Horton’s compensation is in line with industry standards.
But the merger was high profile and airlines are notoriously disliked by the public. And it’s easy for judges and politicians to say no to large compensation packages – whether deserved or not.
Which is why mandatory disclosure for all public companies as the SEC proposes has the potential to drive top executive talent into early retirement or abroad by subjecting executives of U.S. companies to political retribution and interference.
Last year a group of almost two dozen stakeholders, including those representing a variety of industries, submitted a letter outlining their issues with the rule. Congress has also taken notice of the widespread opposition to the rule, as Bill Huizenga of Michigan introduced a bill in March 2013 that would repeal the compensation disclosure requirement from Dodd-Frank. The bill was passed out of the House Financial Services Committee by a 36-21 vote, receiving the bipartisan support of all Republican committee members and five Democrats.
The bottom line is that executive compensation is a matter that should be decided through private market negotiation – not government interference.
Government should not make executive compensation decisions
