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I actually like this rule (one of the few from the otherwise horrible Dodd-Frank Act.)
Good point. It really ought to be an apple to apple comparison. I hated accounting with a passion and purged all said information learned in those classes- so I have no idea what the accounting issues would be. Seems pretty simple- calculate all earned compensation (make it simple and add all benefits) divide by employee count and you have the base pay. Then compare with the CEO's pay. But nothing in life is ever so simple.
They are comparing it with the median not the average, but the same thought applies.
I am trying to think what they would be hard about it but am kind of blank. Anything like vehicles (that have personal use) are already valued for tax purposes. Companies already know how much benefits cost per employee (health insurance, tuition reim., etc). Any stock should be par value....
I don't think it will be hard for them to calculate accurately if they choose to do so. I think they will try to find ways to play with the numbers though. It's going to depend on how stringent the rules are written.
It's a massive exercise to even figure out employee costs per headcount in a big company, where you have co-ops, part-time employees, consultants, etc (half-heads, what a concept). Add-in stock based compensation and sales commissions and it gets dicier, and so on goes the list of trickier compensation items. But no matter what these things should be at the ready, be it for external reporting purposes or internal business planning (employee costs tends to be a huge focus point when putting together a forecast).
If it is a public company it will have to. The SEC reporting requirements for the top corporate officers are actually fairly stringent. That doesn't stop the companies from making the presentation as difficult to interpret as possible, but the data has to be included.
How would you calculate the value of options given today that don't vest for 3 years that have a $0 value today at the current stock price? There are ways to play with the numbers. Then again, I'm sure the auditing firms will have a way to come up with something that will be an apples-to-apples metric even if imperfect.
Standard option valuation is typically via the Black-Scholes model. I know in my incentive comp account, they give me a "value" on my options based on this. It takes into account the strike price, the current stock price, and the time till expiration.
yep. If I had put 1 more minute of thought into my post I would have seen how stupid it was.
I get your point though - I'm in corporate finance. Unless it's spelled out to the letter, there's always leeway in how things are valued, calculated, vested, accrued, etc. It's nearly impossible to cover all situations in specific guidance, so there's always room for interpretation, which means that there will always be gaming by corporations to skew numbers in their favor.
Of course the information will be misused. That is a given. But it isn't a valid excuse not to provide it.
I'm pretty much for anything that increases transparency, but what does it truthfully tell you? It's being passed under the guise of increased CEO pay accountability, but CEO compensation is already public. What does it really provide that you don't already have?
In contrast to what they are paying their employees it could end up being something that pumps the brakes on CEO compensation (which has grown to ridiculous levels) and help momentum on increasing average incomes for everyone else.
But again, the ratio of what a CEO makes vs. what the median employee makes can vary greatly depending on the company and the industry. I just don't see how it accurately tells you anything about anything. It's not like there is some cause-effect or "golden rule" that says CEO's should make X times median employee income. It's not like median employee income is even a valid metric for anything. Every business is it's own beast, both in complexity, and in the type of workforce that makes it up.
I think that just like other data points, you will see an industry average and most companies will fall in line around there. The outliers will be roped in for those who pay the CEO tons and their employees not so much and then on the other side, I am willing to bet that if there is a ratio of meaningful difference in favor of the employees- the public will reward that company for that in doing more business with them.
I agree with pretty much all of this, but still don't think it is bad that the data will be provided.
There were many hours in my life I'll never get back that were spent on crafting airplane-use compensation disclosures. It's already there.
I agree that you'll see an industry average...if by that you mean "by industry." But not a global average. You really have to look at small subsets to get meaningful comparisons. i.e. Only Investment Banks with <$1B in revenue, and <100,000 employees...I just feel like anything smaller can be explained by so many other movements.
No, by public I would mean the buying public. Even companies that don't sell to the public directly are worried about PR.
OK. Gotcha. I guess that's a possible side-effect, but I'd have to see it actually happen. I think the extremes may have an impact (i.e. if you're a HORRIBLE company, your sales may have a reflected impact, and vice versa, if you're known for being awesome to your people, it might benefit), but I feel like the middle ground majority (95%) sees no impact.
Yea, I pretty much agree. Like I said before, I think this will help impact the outliers- good and bad. I don't see it being a significant regulatory burden and I don't see much down side on it. I do see some potential upside though.
It is pretty simple really.
Totally agree. I strongly feel that all CEO compensation should be nearly 100% performance-based. The complex thing becomes what the performance metric is, but that can differ - but ultimately, there's no reason a CEO should be paid millions and millions of dollars for doing a bad job. If a CEO does a bad job, their compensation should reflect that, with a leverage much much higher than the average employee because they typically have that leverage upward when they do a good job.
Yea, the performance based compensation can open up a whole different can of worms. If they are paid by performance, then as you point out, what metric? And is that performance short term or long term? A whole lot of compensation now and the nature of publicaly traded companies is largely stock price driven. Too many CEO's today are driven by increasing the stock price to the detriment of the employees and even the long term health of the company itself.Fat Nick said:
Choosing the metric, whether it's for the CEO, or for the layman employee who gets a bonus, is probably one of the hardest things to do in business. Choosing one that accurately reflects "performance" can be nearly impossible. As the old business school mantra states, "that which gets rewarded gets done," and if you don't reward the right stuff, you often don't achieve what you want to achieve.
Typical. Run a company into the ground, get handsomely rewarded and then off to your next big time gig at some other company.
