SEC Seeks Clarity in Executive Pay
Federal regulators took a first step Tuesday toward forcing companies to shed more light on executive pay -- but an unintended result could be even richer rewards for corporate chieftains, some experts say.
The proposal by the Securities and Exchange Commission would require companies to more clearly disclose salary, stock grants and perks that can now be obscured. It follows a rising tide of criticism of high and hidden compensation in the executive suite.
But stricter reporting rules also would give companies a clearer window into the pay practices of rivals -- information that executives could use to negotiate hefty raises for themselves, compensation experts noted.
“We have a good probability that pay will actually increase based on increased disclosure,” said Dan Wetzel, a vice president with compensation consulting firm Pearl Meyer & Partners in Los Angeles. “To keep up with the Joneses, there will be some increases that are required.”
Such views may find backing in recent history. The SEC’s last effort to strengthen pay disclosures in 1992 was followed by a wave of astronomical executive wage hikes, corporate observers say.
“We have to be extremely careful that the changes don’t promote increasing executive compensation through disclosure,” said Cynthia Krus, an attorney and corporate governance specialist.
SEC Chairman Christopher Cox noted that the initiative was not intended to influence how much companies pay executives. Instead, the idea was to update the rules to reflect compensation trends not envisioned in 1992.
“Our purpose here today is to help investors keep an eye on how much of their money is being paid to the top executives who work for them,” Cox said. “It is about wage clarity, not wage controls.”
In an era of heightened corporate scrutiny, some believe that clarity alone could make a difference.
“There’s no guarantee it will put the brakes on executive pay,” acknowledged Carol Bowie, director of governance research at the Investor Responsibility Research Center in Washington. But, she added, “it will give investors better tools by which to gauge whether the managers of their companies are actually earning the pay they receive.”
On a 5-0 vote, the SEC agreed to put the measure out for a 60-day public comment period, which will begin this month. If the rules are approved, officials expect them to be in place when annual proxy statements are sent to shareholders in 2007.
The proposal would require companies to reveal individual, bottom-line figures for the overall pay of their top executives. Companies also would be required to disclose details of stock awards, deferred pay and projected pension benefits for those managers, as well as all payments to board members.
If perks total $10,000 or more, companies would have to list them in detail. The current threshold for perks is $50,000, and even then they may not have to be itemized.
“If it looks like compensation, if it feels like compensation, it is compensation and it should be disclosed,” SEC Commissioner Cynthia A. Glassman said.
The proposal applies to a company’s chief executive, chief financial officer and three other top-paid managers (as well as up to three other executives if they are paid more than the top corporate officers). Proposed requirements are somewhat less stringent for small companies.
Corporate governance activists note that skepticism about executive compensation is higher today than in the past, after the Enron Corp. collapse, other scandals and controversy over the retirement package awarded former General Electric Co. Chairman Jack Welch and severance deals for former Walt Disney Co. President Michael Ovitz and former New York Stock Exchange Chairman Richard Grasso.
Two advocacy groups last year reported that chief executives on average were taking home 431 times as much pay as workers, up sharply from earlier years. The Corporate Library, a pro-investor group, found last year that CEOs enjoyed a 91% pay raise as opposed to 4% for the rank-and-file worker.
The SEC approach “will smoke out the more egregious compensation packages,” said Walter Van Dorn Jr., a former SEC attorney and a partner at law firm Thacher Proffitt & Wood in New York.
Yet Van Dorn, who had helped oversee the SEC’s executive compensation rules in the 1990s, acknowledged the difficulty in sorting out how disclosure affects pay trends. He noted that the previous rules did not push pay downward in the last decade.
“I’d have thought that would be the case,” he said. “But I think if the rules weren’t on the books, salaries would be even higher.”
Ultimately, it will be up to shareholders to decide whether executives are worth their salt, SEC Commissioner Roel C. Campos said.
“It seems to me that shareholders will have no one to blame but themselves if executive pay continues to rocket upward in a way that they’re not comfortable with,” he said.
