CARY HYDEN : Corporate attorney, Pettis, Tester, Kruse & Krinsky
During the 1980s, no salary, stock-option grant or perk seemed like it was enough for top corporate executives. Compensation seemed to skyrocket, even at companies where profits were falling. After a huge public outcry, the Securities and Exchange Commission changed the rules. As of Jan. 1, many public companies have to disclose top officers’ pay in an easy-to-understand fashion in their proxy statements. Cary Hyden, an Irvine attorney who specializes in executive pay, talked to Times correspondent Ted Johnson.
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What will be the most noticeable difference on the new proxy statements?
What the Securities and Exchange Commission has essentially done is embrace the concept described in the proverb that a picture is worth a thousand words. Before these new amendments, much of the disclosure was already in the proxy statement. But it was described in long, narrative, legalistic discussions. . . . Instead, the SEC has proposed a number of graphs and charts where each element of compensation must be fully disclosed. One chart sets forth all stock options and stock appreciation rights that are granted to a particular executive. The controversial part of this is the SEC has determined that at the time of grant, each company must value that award.
What happens when the options are exercised?
Under the new proxy rules, there is a very prominent chart disclosure of all options exercised. Prior to this year, the exercise by Michael Eisner of Walt Disney Co., for example, would not be disclosed that way. Certainly if it was disclosed it would be hidden in some footnote.
What will happen with small businesses?
The SEC believes that there are approximately 3,000 of these 13,000 public companies that would fall within this category and thus would not have to deal with the significant cost (of the new rules) immediately. In some cases, they will be fully exempt.
What brought the changes on?
Toward the end of 1991 and at the beginning of 1992, executive compensation became front page news. (The late) Steve Ross’ $78-million salary package at Time Warner was much publicized. You may also recall the trip that President Bush made to Japan. He brought together many of the top American corporation executives. The purpose of the trip was to win trade concessions with Japan. But it created a huge storm of frustration regarding the distinctions between the amounts paid to American executives and Japanese executives. Immediately following the trip, there was congressional discussion of limiting the tax deductibility of compensation paid over $1 million. There also were numerous shareholder groups that proposed limiting executive compensation to some multiple of the lowest level employee. Many proposals were floated about, like paying chief executives only a multiple of 20 in relation to the least-paid employee. The SEC got on this populist bandwagon very quickly. The SEC undertook a review in February, 1992, that resulted in what we have today.
Do the new rules tie executive pay to a company’s performance?
One of the most controversial elements of the new proxy rules will be what is called the performance graph. Shareholders will be able to look at this very carefully and see how the return of capital as well as a company’s executive compensation compares to other (similar) companies. Another part of what the SEC has done is require a compensation committee report to be included in the proxy statement. The report must disclose the philosophies behind the compensation in light of the company’s return on capital, its profits and (other) measures. For the first time, shareholders will be able to have a full understanding of the compensation packages available to the officers of a particular company.
Were Michael Eisner’s options, which gave him $197 million when exercised, too excessive?
Eisner exercised his stock now rather than wait over the concern that it would be taxed at a higher rate, just the general concern that taxes would be going up in 1993 with the Clinton Administration. While it has been been much publicized, if you get behind the facts, perhaps it is not so bad. Michael Eisner came on with Disney when it was a very troubled company. In less than 10 years, under Eisner’s stewardship, the company has gone from $2 billion in market value to over $20 billion today. To pay Eisner less than 1% of that tenfold growth is something that most stockholders do not have a complaint with. . . . (The exercise) also arguably aided Disney by saving several million dollars. Where the institutional shareholders are more pro-active are at the companies where the executive compensation has grown despite the company’s profitability declining. IBM, Sears, General Motors, Westinghouse and American Express are on every shareholder groups’ hot button list.
Some companies argue that the new rules will tie them to short-term results. Will that happen?
Many companies will make a commitment to a chief executive officer over an extended time period with the view that over the long haul, the CEO will turn the company around. Still, the process that boards of directors and compensation committees undertake in evaluating these packages will be under a microscope. Every shareholder in America will be watching.
How will the new rules affect institutional investors?
They are singing a very happy tune right now. If you look back in the 1980s, it was the takeover era. We’ve all read “Barbarians at the Gate” and “Den of Thieves,” the excesses brought to life. The institutional investors have wanted to address these for some time. These proxy rules, as well as new rules making it easier to make compensation proposals, give them greater ammunition.
On greater scrutiny of compensation.
“In many cases, compensation decisions were rubber-stamped by a board of directors. That will be eliminated. Boards will be living in a fishbowl.”
On shareholder groups’ opinions of the changes.
“They see this as the pendulum shifting. It is an important element to their goal of becoming more pro-active in corporate governance.”
On compensation levels.
“The top executives will continue to be paid much the same as they are now. In general, boards will take a step back and scrutinize these decisions, and there will be a gradual decrease in compensation.”
On the impact of the changes in company decision-making.
“If that means changing their leadership, those decisions will made. The ‘90s are a post-takeover era. Corporate America is being streamlined.”
