It didn’t require microscopic examination of the Securities and Exchange Commission’s pay ratio rule to find the gaping holes in it.
Proposed in September, the SEC’s rule was yet one more attempt to rein in runaway executive compensation packages. The pay ratio essentially is a comparison of a public company’s median employee compensation to that of its CEO.
There were other caveats that undermined the rule’s potential for restraint besides the “flexible” approach. But the fact that it does not “prescribe a specific methodology for companies to use in calculating a ‘pay ratio’” and dictates that “instead, companies would have the flexibility to determine the median annual total compensation of its employees in a way that best suits its particular circumstances” basically gutted its influence.
Worse, some of those who were supposed to care about the ratio — especially investors in a company — didn’t. A Towers Watson survey in October revealed that corporate executives and comp pros were completely unconcerned about how the public, investors or board members responded to the ratio. They just saw crunching the numbers as a big pain.