Will CEO Compensation Publicity Bring Reform?

Early in the Gulf of Mexico oil-rig explosion and leak disaster, BP agreed to activate a camera fixed on the source of the leak. Some people believe that simple act produced such a vivid, constant reminder of the enormity of the leak that it hastened actions that would otherwise have taken longer and been much less effective in stopping the leak and dealing with the cleanup.

Now comes a little-publicized provision of the Dodd-Frank legislation designed primarily to encourage Wall Street reform. In addition to the disclosure of the annual compensation of the CEO, the bill requires organizations with publicly held stock to disclose the median total annual compensation of all employees and the ratio comparing these two amounts. The intent is clear. It is to provide a periodic reminder to shareholders and others of the reasonableness of CEO compensation. We can expect a deluge of stories comparing the compensation ratios for various CEOs. Reporters won't even have to do the math behind the stories.

As a former director of companies operating in various parts of the world, I can report from experience that differences in philosophy concerning compensation, say between Europe and the U.S., pose real issues. Not only do European CEOs and board members regard U.S. levels of CEO compensation as bordering on insanely generous, they are wary of such things as stock options and other elements of U.S. pay packages. This can pose a real problem when senior executives are moved back and forth between continents.

There are legitimate questions concerning the Dodd-Frank provision. The first is measurement. As we have learned from the detailed explanations of top five executive pay packages required recently for public companies, the amounts shown in those reports can be highly misleading. For example, what are we to make of "out-of-range" compensation resulting from the excellent performance of the company? Or option awards that are intended to cover several years? Or options related to multi-year performance that happen to be cashed in a given year? Second, does this kind of transparency matter? There is little indication that investors pay much attention to the detailed compensation information that is readily available now.

Then there is the implicit assumption that a lower ratio of CEO to average compensation has a beneficial effect on an organization's performance. Presumably, the thinking is that greater equity in pay leads to a healthier culture (for example, in organizations like Whole Foods Markets and the Ben and Jerry's division of Unilever that actually set low limits on the ratio) that in turn accounts for some amount of added performance.

So the resulting questions are: Will moral suasion through such measures as the Dodd-Frank bill affect CEO compensation? Does it matter? What do you think?