SEC Clears New Rules on Stock Pay

Companies trading on the biggest U.S. stock markets must get shareholder approval before granting stock options and other equity-based compensation under rules cleared Monday by the Securities and Exchange Commission.

The SEC in Washington approved changes to listing standards for the more than 6,200 companies listed on the New York Stock Exchange and Nasdaq Stock Market. The SEC asked the exchanges to toughen standards after complaints that option grants contributed to accounting scandals at Enron Corp. and WorldCom Inc. by creating incentives for executives to exaggerate profits.

The new rules also require companies to get shareholders’ OK before changing the exercise price of existing option grants, which set a price for buying shares in the future. Companies often lower the strike price on options when a stock’s decline has made the options worthless.

Option grants became a popular form of executive compensation during the bull market of the 1990s. They came under attack during the market’s three years of declines.

“Shareholder approval of equity plans is common sense and should be required, because ultimately shareholders are the ones paying for it,” said Ann Yerger, deputy director of the Council of Institutional Investors, which represents funds managing a total of more than $2 trillion.

The new listing standards replace a pilot program administered by the NYSE that allowed companies to avoid a shareholder vote when equity compensation programs were made “broad-based” by including lower-level employees in the stock and option grants.

That exemption had created a “loophole companies used to escape shareholder scrutiny,” said Richard Ferlauto, director of pension investment policy for the American Federation of State, County and Municipal Employees, an association of labor unions with pension assets of more than $1 trillion.

Under the NYSE’s new listing standards, brokers that hold securities on behalf of customers wouldn’t be allowed to vote on equity-compensation plans without instructions from the owners of those shares. Some companies fought that provision, saying it would be difficult to administer.

Nasdaq general counsel Edward Knight said the listing standards would go into effect immediately.

“We believe in stock options,” he said, “but we believe they should be subject to shareholder approval.”

An NYSE spokeswoman declined to comment.

Shareholder activists say excessive option grants and stock awards to executives have diluted the value of shares.