Question

New laws under Dodd-Frank require companies to disclose the pay gap between the CEO and the median employee salary.

a) Do you think this is useful information to investors?

b) Is this a diversion of valuable resources (time and money) that would better serve investors if applied elsewhere?

Answer 1

a) Millions of Americans invest in the stock market through their retirement funds and pension plans. Investors evaluate numerous metrics to determine where to place their hard-earned savings, but another measure could help determine whether a company is a good buy: the chief-executive-to-worker pay ratio.It has been well documented that large pay gaps between chief executives and their workers severely weaken companies and put investments in those companies at risk. These gaps inhibit teamwork and lead to lower job satisfaction and morale, higher employee turnover, reduced productivity and inferior product quality. Companies with low employee morale are routinely outperformed by competitors with higher morale. According to Moody’s Investors Service, excessive executive compensation indicates a weak board and poor decision-making.
All of this makes the pay ratio an important financial indicator that should have investors thinking twice before they invest their money.

b) Its not a diversion of valuable resources.Calculating the pay ratio can be done efficiently and inexpensively. Intel estimated its costs of calculating the ratio would be just $15,000 a year.Investors need to see this ratio to help them make informed decisions.