Sunlight: Disinfectant, or Growth Enhancer? - Is Disclosure a good thing?

Sunlight: Disinfectant, or Growth Enhancer?

Justice
Louis D. Brandeis once wrote the following:

"Publicity
is justly commended as a remedy for social and industrial diseases. Sunlight is
said to be the best of disinfectants; electric light the most efficient
policeman."

I
often hear people restate the comment about sunlight. They use it as a defense
for all sorts of things, including pay transparency and disclosure. It may be
that all of these perspectives were factually accurate at one time, but in
today’s world perhaps we need to reconsider.

"Publicity
is justly commended as a remedy for social and industrial diseases.” I think we can all agree that reality TV,
political ads and even terrorism are about publicity. None are curing the
diseases of our society. Publicity is often at the heart of our current social
issues. While it does give a voice to many who need one, it also gives false power
to those with loud voices, deep pockets, ridiculous lives and axes to grind.
Most of us know that we need to take these voices with a grain of salt, but it
is nearly impossible to keep them from shifting our thought processes. When we
see compensation data in the headlines we all wonder where the numbers came
from and who put them together.

“Electric light the most efficient policeman." I don't really need to provide examples here.
Just imagine replacing even one of your policemen with a streetlight. Of
course, streetlights are useful in reducing crime, but in the end you don't
want to call 911 and have a bright light come knocking on your door.
Compensation professionals need to serve as the local police force. When we
don’t, federal officers come calling.

This
leads us to…

“Sunlight
is said to be the best of disinfectants.” This brings us to the heart of Say on Pay,
Proxy Disclosures, and Summary Compensation Tables. The belief is that like sunlight
on a moldy windowsill, pay disclosure will clear up the many real and
perceived issues about executive compensation. Even Justice Brandeis hedged his
bets on this one. He didn't take credit for this concept, perhaps because he
knew it was genuinely flawed.

Sunlight
is a key ingredient for life. It makes things grow. Put a plant in dark closet
and put the same plant out in the sun. The one in the sun will grow faster,
especially if you water it. Pay disclosure is our sun. Media coverage and
shareholder advisory firms are our water. Of course, there is always more than
enough fertilizer. The explosive growth in executive pay has coincided with our
attempts to control it.

For
the skeptics out there, I point you to a paper written by Kevin J. Murphy of
the University of Southern California - Marshall School of Business. In doing
some research, I came across his work and found it very interesting. He, like a
good compensation professional, discusses the complexity of executive
compensation, but finds direct causality between attempts to control pay and
the growth and evolution of the same.  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041679.

Dan Walter is the President and CEO of Performensation an independent compensation consultant
focused on the needs of small and mid-sized public and private companies. Dan’s
unique perspective and expertise includes equity compensation, executive
compensation, performance-based pay and talent management issues. Dan is a
co-author of “The
Decision Makers Guide to Equity Compensation”, “If
I’d Only Know That”, “GEOnomics
2011” and “Equity
Alternatives.” Dan is on
the board of the National Center for Employee
Ownership, a partner
in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently
requested as a dynamic and humorous speaker covering compensation and
motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.