Another way in which a federal plan to ‘do something’ misses the mark

You’ll be shocked to learn that the Dodd-Frank financial regulation reform measure is generating another unintended consequence, as explained by investment manager Jack T. Ciesielski in the latest Barron’s.

The Dodd-Frank financial-reform law will require firms to reveal the ratio of CEO pay to median worker pay, but that single figure won’t give investors something they can use to evaluate the ability of managers to use capital to produce returns for them.

It would only make it easier to produce florid headlines about the unfairness of pay packages, without giving investors something they could really use to evaluate managers’ skill in producing shareholder returns.

Investors want to know a firm’s cost of running with 10 levels of management, and they want to compare that firm’s cost with its nearest competitor running with only five. They want to see how labor is utilized in the different operating segments of a firm. They want to know if they’re getting value in return for the labor incurred.

But investors only get annual messages about the compensation levels for five officers, with a media spotlight trained on the CEO. From a firm’s managers, they get sound bites about the “alignment of pay with shareholders.” From the press, investors learn about the public excoriation of managers for their greed. The situation only encourages more “grab it while you can” thinking by managers, and none of it is remotely beneficial to shareholders. There is just not enough usable information for us to use to make an assessment of how well a company is utilizing its labor, something that would help investors discern the best use of their capital.

Given this need for information by investors, one should ask where the standard-setters weigh in on this issue. The answer is that they haven’t weighed in; improving human-capital investor information isn’t one of their priorities. Instead, the nation’s top accounting authorities — the Securities and Exchange Commission and the Financial Accounting Standards Board — have busied themselves over the past six years with trying to meld U.S. accounting standards with those of the International Accounting Standards Board. Though this has been an all-consuming project for them, they have little to show investors in the way of concrete improvements to financial reporting.