Pay ratio spat: The high cost of embarrassment…

News flash: Major corporations capable of ringing up billions in sales and hundreds of millions in profits are about to be brought to their knees by a government mandate that they — wait for it — figure out how much they’re paying their employees.

OK, so we exaggerate a smidgen. But the very public spat between some U.S. senators and the blandly named Center on Executive Compensation, would lead one to believe that a single little number — the ratio of each public company’s CEO pay to that of its median worker — is either going to shame plutocrats into model behavior, or prevent corporate America from doing its part to create jobs and foster a stronger recovery.

On one side are some Democratic senators that backed a provision in the Dodd-Frank bill requiring companies to disclose this controversial ratio. On the other is the Center, founded and advised by the human-resources executives of the country’s biggest firms, and a feisty defender of the executive-pay status-quo. The Center has mounted a campaign against the Dodd-Frank provision requiring companies to start disclosing the measure, and a few days ago, Senators Robert Menendez, Tom Harkin, Sherrod Brown and Carl Levin sent a sharply worded letter to the Center’s CEO, condemning its effort.

The bickering makes a decent spectator sport, but we’re more interested in the substance of the arguments. Generally, we like disclosure, and we’re inherently skeptical of the so-called value that sky-high executive pay has bought for big corporations.

So when the Center trots out that old stand-by, the undue burden, along with some classic hyperbole, we find our eyes rolling. In a single three-page policy brief, the group calls the measure “unduly burdensome,” warns of “extreme administrative and cost hurdles” and thunders that “The burden of this calculation cannot be understated” and that the measure will

“impose substantial and costly burdens on employers at a time when stimulating the economy and promoting job growth are top priorities for all Americans.”

That sounds pretty serious, but we don’t quite buy it. The center cites an unnamed company with “over 137,000 employees in 68 countries with over 1,000 payroll systems.” (Yikes — no wonder the company didn’t want to be named. Someone, get a management consultant on the line!)

Yet big companies manage to cut paychecks every couple of weeks, despite their thousands of employees and hundreds of payroll systems. Moreover, huge multinational companies manage to aggregate revenues and expenses from hundreds or thousands (or hundreds of thousands) of transactions and publish consolidated balance-sheets and statements of income and cash-flow each and every quarter. We’re pretty sure they’re supposed to add up actual numbers, rather than make educated guesses. Presumably pulling together pay information isn’t dramatically different.

Will calculating the ratio take some work? No doubt. Could the congressional mandate be tweaked to make it simpler? Probably, especially since using the same calculations as the proxy uses for the CEO is probably overkill for the vast majority of employees whose pay is limited to hourly wages or salary and maybe a commission of some sort.

But is the “best alternative” really scrapping the entire thing? For the CEOs that are the Center’s natural constituency, no doubt; the ratios are bound to be a little embarrassing. Citing BLS and other figures and other published reports, the senators say CEO pay at large companies generally is 319 times median worker pay, and that Lowe’s (LOW) CEO makes 380 times the $31,637 of the company’s department managers.

But perhaps the real question is whether the ratio is useful. The Center, of course, says no, and in the process ties itself up in knots, apparently unable to decide whether it considers investors to be smart, discerning people, or easily fooled rubes.In arguing that the provision is unnecessary, it says in bold letters that “Investors Are Not Interested in This Information” and that prior proposals at individual companies had been opposed by nearly all the shares voted.*

Yet, just a few sentences before, it lamented that the ratio

“could mislead investors who seek to compare ratios between companies, because they are unaware that it is a meaningless statistic.” (as opposed to the accounting acrobatics that we routinely see in many earnings releases)

So which is it — are shareholders wise in rejecting the publication of such a ratio when it comes up, or ignorant and in danger of being misled by it? It’s hard to reconcile the two positions.

In fact, the Center’s argument that the ratio won’t mean much to investors has a ring of truth to it: It may be a decent marker of good corporate governance — companies with the biggest disparities may well have misplaced priorities and inattentive boards — but we doubt many hedge-fund managers are going to spend a lot of time making fine comparisons of CEO-to-worker pay ratios when deciding where to put their cash.

Of course, investors aren’t the only consideration in public-policy decisions, either.

* We think that’s what the Center meant. What they said was that the proposals had been “opposed by almost 94 percent of shareholders…” But no annual-meeting results that we’ve seen counts shareholders; they count shares, giving big shareholders more of a voice than small ones and telling us nothing about how many of a company’s shareholders support or oppose a measure.

Image source: Architect of the Capitol