Aug 05, 2015 - 1:30pm

SEC’s New Pay-Ratio Rule in LeBron Terms: Hoops and Some Harm

Former Managing Editor, Digital Content


Pay ratio is a costly disclosure that fails to provide investors with useful and comparable data. For example, the Miami Heat probably had a much lower pay ratio last season compared with when LeBron James was on the team – and won a championship.

Some rules are just rules -- for the sake of rules. The problem is when those rules are ineffective and harmful. Need proof? See LeBron James and his old team, the Miami Heat. Allow us to explain.

The Securities and Exchange Commission’s pay-ratio rule – inserted into the 2010 Dodd-Frank Act without warning or a hearing – was approved Wednesday. It requires public companies to publish comparisons of a CEO's pay and the median annual pay for all employees in the United States and overseas.

“Congress added this disclosure … as a favor to union lobbyists who misguidedly think it will help their organizing efforts,” said U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC) President and CEO David Hirschmann. “When disclosure is used to advance special interest agendas rather than provide investors with better information, it is a step in the wrong direction.”

So, where does LeBron James come into play? Hirschmann noted at a CCMC event this week at the Chamber how the rule can be so misleading – “a costly disclosure that fails to provide investors with useful comparable data.”

“If you think about it in basketball terms, I bet that the Miami Heat had a better pay ratio last season than the season when they had LeBron on the team that went on to win the championship,” he said. “And yet, certainly as an investor in basketball teams, it wouldn’t help you to know that.”

Hirschmann’s example was noted by The Wall Street Journal, which also reported that “Republican SEC Commissioner Daniel Gallagher, speaking at the same event, described the rule as a ‘textbook example’ of ‘social policy masquerading as disclosure requirements,’ which are helping encourage companies to stay private.”

This is a rule that is more harmful than helpful.

“While the SEC and Congress have acknowledged that disclosures need to be modernized, this only exacerbates the problem and makes the public markets less attractive to investors and companies,” Hirschmann said, adding that the Chamber “will continue to review the rule and explore our options for how best to clean up the mess it has created.”

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About the Author

About the Author

Former Managing Editor, Digital Content

Eric Nelson is the former managing editor of digital content at the U.S. Chamber of Commerce.