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Image Credit: <beginnersinvest.about.com

Image Credit: <beginnersinvest.about.com>

On June 19th, the House Financial Services Committee voted on legislation to repeal the pay ratio provision of the Dodd–Frank Wall Street Reform and Consumer Protection Act. The legislation was approved on a fairly party line 1. There were 5 democrats who supported the legislation. It passed 36-21.vote 1, and will now move to the House of Representatives.

Those in favor of repeal have made some fairly compelling arguments for doing away with the pay ratio provision. I’ve said before that the administrative burdens of calculating a simple ratio aren’t as heavy as implied, but to be fair this is really dependent on how the SEC ultimately defines reporting 2. Which they seem reluctant to ever do.requirements. 2

The provision should probably never have been included in Dodd-Frank to begin with. It’s a worthless number because the market for executives is different than the market for the rest of the population, but I *do* think it’s about time that companies start to have more dialogues about how to align pay with performance in broader employee populations.

While 85% of executive pay is at risk, the performance incentives for individual contributors at the middle management level are relatively small. Most companies do a poor job of differentiating pay between their top performers outside of the executive level.

A lot of people wouldn’t be comfortable with even 30% of their pay being at risk – let alone 85% – but organizations need to find a way to truly differentiate the pay of the best versus median employees. The merit system fails in this respect. Differentiating pay between the best and worst employees by less than 5% simply doesn’t cut it.

So yeah, the Dodd-Frank pay ratio provision is poorly conceived legislation that 3. It also damages a company’s competitive advantage, since by determining the makeup of an organization’s workforce limited pay philosophy information could possibly be gleamed.neither serves a business need nor provides any useful context. 3 Repealing it is likely for the best.

…It did have the makings of a good conversation starter around pay for performance, though.

As always, please share your thoughts in the comments section below.

Best,

Rory

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