New pay disclosures for execs on the way
Published: Wednesday, January 10, 2007 at 6:01 a.m.
Last Modified: Tuesday, January 9, 2007 at 11:32 p.m.
Investors will soon have a new scorecard designed to lay out in plain English just how much pay and perks are being lavished on top executives at public companies. If the goals of federal regulators are met, you won't need an MBA to decipher the numbers.
The new disclosures, in annual reports and proxy statements that will begin arriving later this month, will come closer than ever to a full accounting of total compensation for companies' top two executives and the next three highest-paid executives.
"The SEC, in a very short amount of time for a regulator, has pushed through very sweeping pay disclosures that, for the first time, will give investors a very clear picture of CEO pay," said Amy Borrus, deputy director of the Council of Institutional Investors. "The big picture is a very big win for investors."
Investor anger over executive pay has spread from union activists to buttoned-down mutual fund trustees. The AFL-CIO singled out Home Depot Inc.'s CEO Bob Nardelli for loud criticism of his pay package, but almost all mutual funds in the $308.1 billion T. Rowe Price Group Inc. more quietly withheld their votes for the majority of Home Depot's 11 directors at the company's May annual meeting. On Jan. 3, Nardelli resigned abruptly — with a severance package worth roughly $210 million.
Investors wondering whether executives at their companies are getting similarly stratospheric pay have always been able to look for evidence in companies' annual reports and proxies. But key parts of the information often were buried in footnotes.
What will be new in the reports for public companies whose fiscal year ends after Dec. 15 are total figures that add up executives' annual salary, bonus, stock awards, stock option awards, other "incentive" compensation, changes in the value of the pension and all other compensation.
The tallies were mandated by the Securities and Exchange Commission in July as part of the agency's biggest overhaul of executive pay disclosure since 1992.
Shareholder advocates say the tallies are missing some important components of pay, such as the amount of dividends paid on restricted stock that has not yet vested.
"We're talking about, in some cases, millions," said Brian T. Foley, an independent executive compensation consultant based in White Plains, N.Y.
Besides the tallies, the other telling section could be a new is a compensation discussion and analysis, which will require the company to answer questions such as: What are the objectives of the company's compensation programs? What is the compensation program designed to reward?
"They're good questions," Zion said. But he said companies' answers may be no more than "legalese."
Another addition: Details of the pay an executive stands to get under "change of control agreements" in place if the company is sold. But they won't appear in the total pay tables; investors will have to read deeper in the filing to find them.
The requirements also include disclosure of the dating of stock option grants to executives, including whether the company "backdates" options. Options give the recipient a right to buy stock at a fixed strike price, generally set at the stocks' market price the day the option was granted. In a scandal that has led to federal investigations at more than 100 companies, executives and directors picked option grant dates when their stock prices were at a low, enhancing the holder's potential for greater profit.
Advocates are unhappy with one change the SEC made late last month on options after intensive lobbying from the U.S. Chamber of Commerce and other business interests.
Under the rules as they were initially adopted in July, the full amount of an option award to an executive had to be listed for the year. So, if an executive received options valued at $10 million, the company would have to record that $10 million in its compensation table.
After the December change, companies can list a smaller amount for the first year, spreading the remainder over later years as the executive becomes eligible to exercise the options. So a $10 million options grant could look like $2 million.
The options' full value will still be in company filings, just not in the summary compensation tables, Borrus said.
"We are disappointed by this last-minute change on the disclosure of options," she said. "We think it's a step back for investors."
Anyone hoping increased disclosure of executive pay will lead to shrinking compensation is also likely to be disappointed. Some critics say CEO pay began ratcheting up after the SEC's 1992 rules required more detailed levels of disclosure and executive pay consultants made an industry out of comparing an executive's pay to his industry peers. Boards scrambled to make sure their executives were in the top half, or top quartile, of total pay.
In Congress, though, with the Democrats now in power, more proscriptive proposals on pay could get a serious hearing. Rep. Barney Frank, D-Mass., the new chairman of the House Financial Services Committee, says he will push legislation that would require shareholder approval of executive compensation plans.
Frank has railed against CEO pay, pointing to data from The Corporate Library showing that CEO compensation at the 500 largest U.S. companies rose a median 11.29 percent between fiscal 2004 and 2005, on top of a median increase of 30.15 percent the previous year.
The SEC has said its goal was to provide investors with more and clearer information; agency officials have stressed that they're not looking to dictate what companies pay their executives.
And in that respect, the new regulations are unlikely to change anything, many observers agree.
Said Charles Peck, compensation specialist at The Conference Board, a not-for-profit research organization specializing in business management and economics: "In terms of its impact on executive comp, I don't think we'll see any particular change in the size of executive pay or how it's delivered."
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