Two fun pieces of news:

1. ALPHABET – as of last night, Google has decided to be restructured into a subsidiary of Alphabet, which already has a new website called abc.xyz. Also, importantly, part of the reason for the name is: “We also like that it means alpha-bet (Alpha is investment return above benchmark), which we strive for!” – which proves that Sergey and Larry must be reading Rolling Alpha, and decided to plagiarise a bit. For shame.
2. SEC formally adopts CEO-pay ratio rule – the lawyerly politicians are still playing footsie with executive compensation by requiring more disclosure of income inequality.

Let me start with that second one.

EXECUTIVE COMPENSATION DISCLOSURE WILL MAKE IT WORSE

This CEO-median-worker pay compensation ratio disclosure requirement sounds like the type of rule that could only have been invented by lawyers. It is also very stupid.

But let me explain why I think that it was drafted by lawyers:

1. Lawyers work in law firms.
2. Law firms are filled with other lawyers.
3. All lawyers in law firms acknowledge that equity partners will earn more than associates and first years.
4. But the discrepancy is mostly a rumour until the associates and first years become equity partners – at which point, they see just how much coin is being minted on the back of all the slaving associates and first years. Apparently.
5. There is therefore much hallowed secrecy maintained around the full take-home compensation of equity partners. Perhaps to prevent a walk-out of skilled underlings who might decide to set up their own practices. Or to prevent go-slows. Or to ensure that the firm attracts the cream of law school talent each year. Whatever.
6. The point is: many lawyers that come out of this type of environment might well believe that greater transparency of executive compensation will make for better equality of income.
7. And almost all politicians are lawyers.

The trouble is: big businesses do not work like law firms.

Why? Well because law firms are made up of highly educated professionals who are offering intellectual-type services.

Real businesses are made up of highly-skilled, semi-skilled and quite unskilled employees. They produce all kinds of things that aren’t necessarily intellectual-type services. And most importantly, the lower-level employees rarely have as much bargaining power as a highly-educated first year in a law firm, meaning that top-level employees have vastly more bargaining power than equity partners in a law firm.

And by giving the top-level employees more information (like how high their compensation ratio is relative to their fellow CEOs in similar companies), you are giving them even more bargaining power. Which is why the early rules of executive compensation disclosure in the early 90s backfired so badly.

That is: greater disclosure caused the pay gap to expand the way that it has, so why are we not learning this lesson?

For the fuller argument on this, alongside the correlation-causation disclaimers, I first wrote about this in the post: The Awkwardness of Disclosure.

In other news…

Welcome, the Alphabet

In a blogspot post last night, Larry Page announced that the Google investment portfolio will become Alphabet, Google will become a subsidiary of Alphabet with a much smaller portfolio, Google will get a new CEO, Larry and Sergey will become CEO and President of Alphabet, and Alphabet will basically be a holding company for other underlying companies (Google, Nest, X Lab, Calico, and other companies that I didn’t know were part of Google until I read Larry’s blog post).

At this point, everyone is a bit skeptical of the “this is to streamline businesses” story. I mean – it sort of makes sense. As in: perhaps Google should focus on search-engine and other Google-related business rather than trying to incorporate life-prolonging biotech into its game plan. And thus, for cosmetic reasons, let Google be Google and let the rest be Alphabet soup. 

But it also seems a bit weak. So I’m inclined to think that:

1. There is a tax angle (although there’s always a tax angle);
2. Google is worried that too much more life-altering tech from them, and their consumer base will start using phrases like “New G-World Order” and “G-Whore of G-Babylon”. I mean – with Google Now knowing your every move, and Nest potentially controlling your home – it’s not far off… So rather split the brands and pretend that they’re all separate. 
3. Sergey and Larry were bored of Google, and want to talk about other things at shareholder AGMs.

Fun.

But Happy Tuesday.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.