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SEC Votes to Propose More Executive Pay Transparency

Posted on: Tuesday, 17 January 2006, 21:00 CST

CHICAGO _ It should soon get a lot easier to gripe about, envy and/or covet the pay packages of corporate chieftains.

With corporate scandals still fresh in the minds of a public that can be fascinated by the rich but also resentful of their lifestyles, federal regulators on Tuesday proposed new rules requiring Big Business to shine a brighter light on how top executives are compensated.

Heralded as the most sweeping reform to executive compensation disclosure in 14 years, the Securities and Exchange Commission's proposed changes include requiring companies to clearly disclose the total annual pay, including perquisites, for the chief executive officer, the chief financial officer and the next three members of top brass.

It also wants companies to provide _ "in plain English" no less _ improved narratives and more details about stock options, perks and severance and retirement packages.

The five-member SEC voted unanimously to propose the plan, which will be open to a 60-day public comment period.

"Over the last decade and half, the compensation packages awarded to directors and top executives have changed substantially," SEC Chairman Christopher Cox, a former Republican congressman, said in opening statements Tuesday. "Our disclosure rules haven't kept pace with changes in the marketplace, and in some cases disclosure obfuscates rather than illuminates the true picture of compensation."

Experts said the changes will help make executive compensation, which some believe is the clearest window into corporate governance at the nation's publicly owned companies, more transparent to the investing public.

Current executive-compensation reporting requirements allow companies to scatter more of the numbers throughout official documents like annual proxy reports, for example listing salary on one page but stock option values in a chart elsewhere.

"To the extent that people invest in mutual funds or individual stocks, it will provide much greater clarity in terms of what executives are paid in publicly traded firms," said Joe Rich, president of compensation consulting firm Pearl Meyer & Partners.

But Rich believes that the new rules will do little to slow the growth or reduce the pay levels of executive compensation, and in fact could lead to the unintended consequence of even higher executive pay.

"Enhanced disclosure is likely to rein in a few bad actors, but it's much more likely that the vast majority of good actors will have better data to compare themselves with their peers, and people want to be competitive," he said.

That the proposed rule changes come under a Republican administration, typically seen as more friendly to business than a Democratic one, doesn't surprise at least one expert. That's because the Bush administration has overseen the prosecution of executives from such companies as WorldCom Inc. and Enron Corp., and executive pay reform taps into more of that outraged populist sentiment over hidden compensation.

"Given what we've seen with (the likes of) Bernie Ebbers and Ken Lay, there is momentum in this direction on both sides of the aisle," said Rosemary Lally, an editor of the Council of Institutional Investors' weekly newsletter.

At first glance, the SEC's proposed changes look "very good, but the devil is in the details, and the details haven't been released yet," she said.

The SEC started cracking down on executive pay under former chairman William Donaldson. The agency took action last year against General Electric Co. and Tyson Foods Inc., for example, for doing a poor job of reporting perks. Under the new rules, the level at which total executive perks must be detailed would be reduced to $10,000 from $50,000.

Donaldson once said investors had to be "Sherlock Holmes" to compute executive pay.

Cox has expressed similar sentiments.

"We want investors to have better information, including one number, a single bottom-line figure, for total annual compensation," Cox said Tuesday. "That single figure will include a more accurate representation of perquisites."

Most compensation watchers lauded the changes.

"It's a major positive development and hopefully a first step to reining in excessive executive compensation," said Broc Romanek, a former SEC lawyer and now editor of CompensationStandards.com. "Things that ordinarily companies didn't consider perks will now have to be considered perks under the SEC's new guidance." He expects the rules to be in place in time for the 2007 spring annual meeting season.

A report released in October by the Corporate Library said CEO compensation at 2,000 of the largest U.S. companies increased 30 percent in fiscal 2004, compared with 15 percent in 2003 and 9.5 percent in 2002.

The proposed rules "should be effective at further shining the light on understanding executive compensation," said Paul Hodgson, a senior research associate at the independent research firm, which tracks directors' pay,

He particularly likes the new rules that would require companies to better spell out and quantify retirement and severance payments and benefits, including perks.

Currently "there is a disclosure of the formula of termination and retirement benefits, both of which are excessively difficult to calculate," Hodgson said.

But he questions the wisdom of including, on the summary compensation table, the dollar value of all stock-based awards, including stock options.

"My concern is they're putting them in the wrong place," he said of the estimated value of stock options. "The summary compensation table should reflect the present value of actual compensation earned rather than" what they could earn in the future through the exercise of stock options, he said.

"That is future compensation," he said. "No one knows whether they will really earn that or not."

Not surprisingly, some pushback is expected from businesses. The U.S. Chamber of Commerce is "skeptical that any system could come up with a single number that is directly comparable for all executives," its president, Thomas Donohue, told Bloomberg News. The group will oppose any provisions "that constitute a back-door attempt to regulate pay."

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Source: Chicago Tribune

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