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What A Friend

Greetings, American shareholders. Your friend, Rep. Barney Frank, has a plan to help you — by giving your competitors a guide to your firm’s very best talent and how to poach it.

Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said in an interview with Bloomberg earlier this month that the Securities and Exchange Commission should require companies to publicize how much they pay their top-earning employees.

While the SEC currently requires companies to disclose compensation for chief executive officers, chief financial officers and their three highest-paid other executive officers, companies need not make public the salaries of non-officer employees, such as traders, top salesmen, money managers and entertainers. This talent often earns more than officers, for the simple reason that the talent can generate more revenue and profit.

The SEC considered a similar proposal in 2006. That proposal would have required companies to disclose the total compensation and job descriptions, but not the names, of up to three non-executive employees earning more than an executive officer. In response to criticism from the business community, the SEC revised the plan to include only employees responsible for “significant policy decisions.” The narrowed proposal still met with substantial opposition and was eventually dropped.

The same concerns that led the SEC to drop that idea four years ago still apply today. If a business wants to advertise which positions or employees are its most valuable, and how much they are worth, it can do so. Most do not because if top salaries are disclosed, competitors can easily try to hire away the very people who make an enterprise successful. Instead of bringing down compensation, as Frank presumably wishes to do, this could potentially drive up pay for top earners.

Even though the proposal did not require companies to name names, in many cases individuals could be easily identifiable. At the time, the 2006 proposal was dubbed the “Katie Couric” rule, because it would have required the news anchor’s salary to be included in disclosures. While the disclosure would not mention her name, it would not be difficult to guess Couric’s identity based on her job description. This sort of information could be useful, not just for headhunters, but also for criminals, scam artists, gold-diggers and in-laws. After decades on the public payroll where his own compensation is a matter of record, Frank apparently has forgotten that private citizens have some good reasons to value their privacy.

Frank says he wants to empower shareholders. During the same Bloomberg interview he expressed his support for a measure approved by the House in December that would give shareholders a non-binding vote on the compensation for executive officers already named in proxy statements. Frank said that legislators are now considering expanding the bill so shareholders could also vote on the percentage of annual revenue allocated to pay. I suppose when you take as many meaningless votes as a member of Congress does, you might think everyone else wants to take meaningless non-binding votes, too.

Of course, shareholders already vote — in a vote that counts — for corporate directors who are supposed to make informed judgments on compensation and other key business issues. As I have written previously, there is good reason for Congress to try to give shareholders a more meaningful voice in this process. But there is no reason to mandate that companies spend their money to permit ill-informed shareholders to cast non-binding votes on management decisions. What matters to shareholders is the bottom line, not how the company spends each dollar in order to generate that profit.

Fortunately, even in the current Congress, Frank’s shareholder-friendly ideas have no future. This is why Frank is trying to push his agenda onto the SEC rather than pursuing a legislative strategy. Frank said “there’s no point in legislating” because the SEC can expand the disclosure requirement on its own. But he is a legislator, not an SEC commissioner. If he thought he could succeed at pushing the measure through in his own branch of government, he would do it.

Also fortunately, the SEC doesn’t seem to be any more easily swayed than Congress. In response to requests for comment, SEC spokesman John Heine said, “The SEC recently revised our executive compensation disclosure rules and routinely reviews our rules to ensure they provide meaningful information to investors.”

In other words, the SEC can do its job perfectly well without any help from meddlesome congressmen. Businesses and their shareholders are also better off without Frank’s help.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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