"After a long delay and plenty of resistance from corporations, the Securities and Exchange Commission approved in a 3-to-2 vote on Wednesday a rule that would require most public companies to regularly reveal the ratio of the chief executive’s pay to that of the average employee."That from the NY Times.
John Thain, CEO of CIT Group, said on Bloomberg yesterday that the ruling's motivation was to appease a populist Progressive position and that shareholder's don't care about pay differentials. I don't believe that's really a useful way to think about the rule.
Of course, if we think about promotions as a tournament where the winner receives a wage higher than his marginal product in order to motivate all employees to put forth their best effort, then high pay differentials are "efficient." In such cases, the returns each subsequent promotion must be increasingly large in nominal dollars to maintain the same relative work incentive.
This might have some truth to it, but we don't have to decide whether high wage differentials are efficient or inefficient, just or immoral. A better way to look at it is whether the information on pay differentials is beneficial to the decision-making of job-seekers.
If workers value companies with certain wage differentials, then the rule allows for better matching. If society values a more egalitarian pay, then firms with high wage differentials will have to pay a premium for their labor. In general, more information is better for market efficiencies of all kinds.
I see this as a labor market equivalent of some consumer protection laws, like a nutrition label on food (except the gov't here is protecting the supply side of the labor market).
This kind of information may be relatively unimportant, but at least it avoids more onerous laws which Progressives may easily champion, such as those which expressly restrict compensation.
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