SEC Aims to Clarify Executive Pay
Responding to growing frustrations of investors, the Securities and Exchange Commission will soon propose rules for clearer disclosure of executive pay, including a complete accounting of how much corporate chiefs are getting in retirement plans and severance agreements.
“It is absolutely a top priority for early ‘06,” SEC Chairman Christopher Cox said in an interview, adding, “It’s important to get clear information -- both to investors and to the directors that represent them.”
Cox, a Republican with free-enterprise views, does not want government limits on executive pay. Instead, he said, the goal of the proposal would be to permit comparisons “from person to person and company to company” -- ideally of a valid, bottom-line number that captures an executive’s full compensation.
Shareholder activists and big institutional investors alike have complained that it is nearly impossible to determine how much some executives earn in pay and benefits. The SEC’s current rule is 13 years old, and it allows companies to report such information in a vague, fragmented manner.
Institutional investors have said they want to see detailed disclosures of company-paid perquisites, such as the cost of country club memberships and use of corporate jets for personal travel. Cox, who has significant influence over the agency’s agenda, suggested that he placed a greater priority on disclosing an aggregate dollar figure of pay instead of forcing a batch of new detailed disclosures.
“It is much more important for directors, investors and the marketplace to know that someone is being paid $10 million than to know that he or she is being paid in the form of postage stamps or rare coins,” he said.
At the same time, regulators are wrestling with the matter of how to value certain aspects of an executive’s compensation, especially given the reality that the routine paycheck represents a shrinking proportion of overall pay promises.
“One of the difficulties in capturing the total compensation amount is the contingent nature of some of these contractual obligations,” Cox said.
Executive pay contracts, for example, often include large payments for departing executives in the event of a buyout.
Cox has previously said that he is pressing companies to take certain figures, such as the amount the company contributed to supplemental executive pension plans in any given year, out of obscure footnotes and into meaningful pay tables. The SEC proposal also will address complete disclosure of retirement and severance arrangements.
Shareholders have complained about contractual severance deals -- such as the contentious parting package Walt Disney Co. made to former President Michael Ovitz, now valued at $130 million -- that were murky even to the corporate directors approving the package.
Cox would have companies fill out tally sheets that would calculate the total cost of these payments to get rid of “the ‘aha’ effect,” he said.
The Business Roundtable, which represents the nation’s largest corporations, supports the goal of improved disclosure, but “the devil is in the details,” said Thomas Lehner, the group’s director of public policy.
The SEC proposal is still being written, and many details remain undecided. For it to move forward, the proposal would need the votes of a majority of the agency’s five commissioners. The SEC would then consider comments from the public before coming up with a final rule.
Critics of the current disclosure rules say they’d like Cox to fix other problems.
They complain that some pay isn’t revealed at all, and that apples-to-apples comparisons are difficult because companies have wide discretion over how to value some items. Although most firms say they’re paying for performance, few give any details about how they measure it.
For example, companies are not required to disclose the value of perquisites, such as the personal use of a corporate jet, financial planning services and extra life or health coverage, that are worth less than $50,000 each. So a company that provides multiple perks -- each worth less than $50,000 -- might not show hundreds of thousands in expenses simply because they fell below the reporting threshold when pulled apart, said Brandon Rees, assistant director of the office of investment at the AFL-CIO.
In addition, some perks are not disclosed because companies contend that the services are provided for business purposes, rather than to improve the lifestyle of the executive.
Los Angeles-based Occidental Petroleum Corp., for example, excludes the value of security services for its executive officers in tables listing executive pay. The company said in footnotes that those costs amounted to $915,384 for the company’s top five officers, but it didn’t say how much was allotted for each.
“We need to see full, market-value disclosure,” Rees said. “It’s not necessarily because the perks amount to such a huge amount of compensation. It’s a litmus test. It’s an indication of the true philosophy of the corporation.”
Lucian Bebchuk, a Harvard professor who studies executive pay, said retirement plans were also poorly disclosed. He determined this year that the median plan offered to CEOs of Fortune 500 companies was worth $15 million. The cost of these plans was largely not reflected in cash compensation tables, he said.
Companies can do so because the money is a promise toward a future benefit: The executive is not receiving it today, and thus the income does not need to be counted in the current year.
Public opinion may provide a wind at the back of the SEC proposal. This week, a survey of institutional investors by Watson Wyatt Worldwide found that nearly two-thirds felt that compensation was not well disclosed. At the same time, the SEC can expect sharp scrutiny of its proposal by executives who have not had to submit all the terms of their deals to the public.
Peterson reported from Washington and Kristof from Los Angeles.
