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Wednesday, February 8, 2017

Strategic CSR - CEO Pay (II)

Continuing with this week's focus on CEO pay, the article in the url below reports progress in the UK with pay ratio disclosures that were designed to reduce the huge discrepancies between the pay at the top and the pay of the firm's median employee. Unfortunately, as with many laws motivated by good intentions, the results have not matched the design:

"CEO pay and its reflection of firm performance has been a preoccupation of U.K. policy makers for a while, and since 2002 companies have had to produce a directors' compensation report for shareholder vote, albeit a non-binding one. A few shareholder revolts later, executive pay became subject to a binding vote at least every three years from 2013, and the disclosure details were enhanced to provide more transparency for investors."
Given the complexity of the problem, there are plenty of loopholes in which to jump through:
"But the law stops short of requiring the publication of a ratio between the pay of top executives and average employee. 'Unfortunately, instead of disclosing this simple ratio, the final disclosure policy only mandates the disclosure of relative changes in pay, and the definition of pay doesn't include equity-based incentive compensation,' said Jenny Chu, university lecturer in the Finance and Accounting group at the Cambridge Judge Business School. Firms also can determine which group will be used in the calculation of change in employee pay, and companies tend to 'engage in more opportunistic reporting for the sake of reputation management rather than fundamental change in disclosure transparency.'"
The result has been little, if any, change:
"The study found that CEO-employee pay ratio at FTSE 100 companies 'barely budged' to 122.37 in 2014 from about 123 in the previous two years."
The key, as always in shaping firm behavior, is stakeholder pressure. Corporations are social constructions that are designed to advance social progress. As such, they reflect our collective set of values. To the extent that stakeholders are willing to hold firms to account, behavior is much more likely to be shaped in the way intended:
"Increased disclosure in and of itself won't result in changes to remuneration or design, but pressure from investors and shareholders or from other interested parties such as customers or potential recruits could do so, said Melissa Reid, an associate at law firm Cleary Gottlieb Steen & Hamilton LLP. 'I don't think that having an additional ratio would significantly, if at all, change pay structures, it would just be [an] additional compliance burden,' she said. But if shareholders' advisory bodies, for instance, advocate for ratios of a particular level to affect how votes on pay are exercised that could have a bigger impact, she said."
Stakeholders (in this case the shareholders) have the potential to deliver the results they say they want. If this pressure does not arise, then other stakeholders will either have to work out how to pressure the firm more directly (e.g., more effectively designed legislation) or they can pressure shareholders to demand the change from firms (e.g., increased demand for socially responsible investing products). If no stakeholders apply any pressure, of course, then the firm will continue to carry on as always (and would be correct to do so).
Note: Reported on the same day as the article below:

"Bosses of the largest 100 British companies saw their pay increase more than 10 percent to 5.48 million pounds ($7.2 million) last year, 140 times the average wage of their employees." (see
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CEO-Employee Pay Ratio Disclosure no Panacea
By Mara Lemos Stein
August 9, 2016
The Wall Street Journal