Executive Pay May Get Close Look

Times Staff Writer

A Securities and Exchange Commission plan to require better disclosure of executive pay would force companies to reveal specific details about future benefits, perks and stock deals that are often hidden or omitted from regulatory filings.

The commission is expected to vote today to seek public comment on the measure, a crucial step toward passage of a final rule this year. The initiative could lead to the first overhaul of pay disclosure requirements since 1992.

The push for greater clarity in executive compensation is among the top priorities of SEC Chairman Christopher Cox, a former congressman from Orange County who assumed the regulatory post last year. Shareholders have grown increasingly critical of many executive pay packages, saying the deals appear to be crafted to obscure the large sums many senior managers are making.

"I think we can do better," Cox told reporters last week.

Because so much of executive pay falls outside the limits of a paycheck, such as in deferred stock or retirement benefits, "the result is that an increasing amount of executive compensation is escaping disclosure," he said.

Currently, compensation streams for top executives and board members can be scattered inside the annual proxy statement issued to shareholders and often are described vaguely.

To add clarity, the SEC will formally propose an array of disclosure requirements for publicly traded companies and their top brass -- specifically, the chief executive, chief financial officer, three other highest-paid managers and board members.

Although details are being finalized -- "This isn't quite soup yet," Cox cautioned -- the plan is likely to include the following elements:

* A bottom-line dollar figure for executive pay. Companies would have to provide tables showing a total annual compensation figure for the senior officers, and the total must include such increasingly important benefits as stock grants, stock options and pension benefits.

* Tighter accounting of perquisites. Currently, companies are required to report a lump sum if perks exceed $50,000 or 10% of the executive's salary and bonus. An individual perk has to be reported only if it costs more than 25% of the executive's total perk allotment. Under the proposal, perks must be itemized if the total for perks is $10,000 or more.

* Improved accounting of retirement benefits. The SEC would require new tables outlining the defined benefit and defined contribution retirement plans of top officers, along with detailed descriptions of payments that could be triggered if the manager is removed. Such details are not specified under current rules.

* Insight into a company's pay strategy. Firms would have to discuss performance benchmarks that are built into an executive's pay structure and how such benchmarks fit into the company's broader strategic goals. Such discussion is not currently required in the annual proxy mailing to shareholders.

The plan also would require companies for the first time to disclose all compensation to board members. Under current rules, critics say, companies sometimes avoid reporting perks and stock-option awards to their directors.

Ralph D. Ward, publisher of the Boardroom Insider newsletter and an expert on corporate governance, said the plan would greatly expand disclosure requirements.

"Even if there are a few weasels and dodges that come out over time, it's still a pretty strong program," he said.

Business reaction to the proposal has been mostly favorable.

"In general, I think there's been a lack of transparency in the past, and the new proposed regulations are a big step in the right direction," said Charles A. Haggerty, former board chairman and chief executive of Western Digital Corp. in Irvine.

Perks, such as membership in country clubs, deluxe healthcare plans and use of company cars and jets, all should be reported clearly, said Haggerty, who serves on four corporate boards, including Beckman Coulter Inc., a Fullerton-based biomedical instrument firm.

"CEO's will not like it as much as boards of directors will like it," he said of the government initiative. "What should companies have to hide?"

At the same time, Haggerty, who retired from Western Digital in 2000, questioned the plan to require companies to estimate the value of executive stock options. An option is the right to buy shares of stock in the future at a predetermined price.

Regulators recently ordered companies to include the cost of options in their earnings reports. Technology companies, in particular, have opposed doing so, pointing out that options can lose value if the company's share price declines.

"When I was chairman and CEO of Western Digital, you could make the case that I had $50 million in stock options," Haggerty said. "Six years later, they were probably worth $4 [million to] $5 million.... As my wife would say, where's the money?"

Some observers believe that greater sunshine on obscure pay provisions could unleash pressure on companies to move away from astronomical pay packages.

"I think that discussions of that kind of stuff will embarrass some companies into getting these things back under control," said Robert E. Mittelstaedt Jr., dean of the W.P. Carey School of Business at Arizona State University.

Mittelstaedt, who serves on the boards of avionics company Innovative Solutions & Support Inc. and Laboratory Corp. of America, calls the changes "long overdue."

The SEC proposal comes after years of complaints about pay arrangements.

Sentiment for better disclosures picked up in the late 1990s after revelations that General Electric Co. had granted former Chairman Jack Welch a retirement package that included use of corporate aircraft, a New York apartment worth $50,000 a month and other benefits estimated to total $2.5 million in his first year of retirement alone. The full details only came out during a divorce proceeding.

Walt Disney Co. of Burbank also has figured in pay-related controversies, with the $130-million severance package of former President Michael Ovitz prompting a recent shareholder suit.

The SEC also rebuked the company in late 2004 for failing to promptly reveal that it had employed children of three directors and that others on the board had financial ties to the company.

"Disclosure is one of the top issues for a whole lot of people -- not just shareholders but regulators and the public in general," said Richard Koppes, a board member at Apria Healthcare Group and Valeant Pharmaceuticals International and an attorney at Jones Day.

Given the broad sentiment for meaningful disclosures, even those who are wary of new red tape are approaching the SEC initiative with caution.

"We're very much in favor of more transparency and disclosure," said Tita Thompson Freeman, a spokeswoman for the Business Roundtable, which represents the largest U.S. corporations.

But at the same time, she added, the organization awaited the proposal's release with certain questions in mind. She noted the stock-option issue, saying it could potentially overstate an executive's pay, and questioned whether the SEC plan would force companies to divulge confidential business aims, such as mergers and acquisitions.

"Say part of an executive's compensation was linked to a potential M&A; we wouldn't want the confidentiality of the company to be compromised," Freeman said. "You have to consider the potential adverse effects of that to the shareholder."

On the other end of the spectrum, shareholder activists say the stricter reporting requirements -- such as a mandate that firms disclose particular executive achievements that can affect their pay -- may give insight into the workings of a company that shareholders currently are denied.

"Right now you get a lot of nice summary boilerplate, but it's very generic," said Brandon Rees, assistant director of the AFL-CIO's office of investment. "It doesn't explain what are the performance benchmarks and whether they've been met."

If adopted by the SEC this year, the new rules will probably take effect in 2007.

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