February 28, 2014
In an op-ed this week in Agenda, Center On Executive Compensation CEO Charlie Tharp challenged the flawed logic of using the pay ratio as a measure of fairness but cautions that if and when the pay ratio disclosure is finalized, it will be crucial for Boards and management to put their ratio in perspective. In his piece, Mr. Tharp makes the point that "the pay ratio is merely the product of differences in market rates of compensation for various levels of skills and responsibility" and that the differences in pay levels across countries undermine its use as a measure of fairness. To address concerns about fairness, Mr. Tharp advises that companies should "anchor discussions about the [pay ratio] rule within the context of the company’s overall pay philosophy, as well as variances in pay rates across the various labor markets" and "address the relative position of pay to the prevailing market rates in which the company competes for talent." As Mr. Tharp concludes, "Unfortunately, the only way for companies to put the meaningless and potentially confusing pay ratio requirement into context is through more disclosure" at a time when the SEC is trying streamline corporate filings. The op-ed is timely, as pay ratio proponents have floated linking a company's pay ratio to tax policy. Last week, Washington Post columnist Harold Meyerson suggested that to address inequality, Congress "could create a lower tax rate for companies that increase their median wage in line with the annual increase in the nation’s productivity.” To prevent companies from gaming the system, he suggested that “Congress could also cut taxes on companies with a low ratio between CEO pay and median pay—something that could persuade CEOs not to cut their workers' wages." While it would be surprising for any such proposal to go very far, it is clear that pay ratio proponents will not be content with merely publishing the ratio; rather, they will seek to incorporate it into legal mandates affecting corporate operations.