The Securities and Exchange Commission, responding to rising criticism of soaring -- and partially hidden -- executive pay, is poised to propose the most sweeping overhaul of pay disclosure rules in 14 years, seeking to push companies to divulge much more about their top executives' perquisites, retirement benefits and total compensation.
The proposed changes, according to SEC officials, would for the first time require corporate proxy statements to provide a column with a total annual compensation figure for each of a company's five highest-paid executives and be far more specific about the value of their various benefits. Total compensation is an elusive number under the current system, and one for which investor advocates have long sought greater disclosure.
In addition, the SEC would force companies to take the monetary value of the stock-option grants given to top executives and place those figures side-by-side with salary and bonus information. Under a new accounting rule, companies must start expensing the value of their stock options.
These and other proposed changes will be presented at a public SEC meeting on Jan. 17, where commissioners will question staff members and vote whether to proceed with the plan. If approved, the proposed overhaul will be subject to a period of public comment, followed by a final SEC vote.
While it's too early to tell how the SEC will vote on the proposals -- and details of the plan could be altered in the coming week -- Christopher Cox, the agency's new chairman, appears to have the commissioners' support. With the term of his predecessor, William Donaldson, ending in fractious debate, Mr. Cox has worked hard to make the commission -- composed of three Republican and two Democratic commissioners -- more harmonious by trying to get consensus on major issues. Just last week, he won unanimous backing for new guidelines on how much to fine a company that has engaged in financial fraud.
Mr. Cox, a free marketer and former congressman who worked in the Reagan White House, has signaled in recent months that executive compensation is going to be a major issue for him, and indeed the proposal will be the biggest change he has championed since taking over five months ago.
In an interview with The Wall Street Journal last September, Mr. Cox said that a lot had changed since the SEC last addressed the issue in 1992. "The prevalent forms of compensation have migrated away from what is transparent to what is opaque," he said. "The market is capable of disciplining excessive compensation, provided that the market has adequate information. Too often in recent days, however, shareholders have been surprised to learn after the fact what their executives are being paid."
[Getting Down to Specifics]
The SEC's proposed overhaul reflects the notion popular in some circles that the right answer to soaring executive pay isn't to limit it, but to disclose it more fully. Past attempts to limit executive compensation -- such as Congress's move in 1993 to cap, in most instances, the tax deductibility of salaries at $1 million -- have been failures.
Even professional investors gripe that with deferred compensation, stock options and executive perks such as personal use of corporate aircraft, they have a hard time figuring out what executives are being paid. The information is disclosed in shareholder proxy forms but often isn't collected in one section, and the value of the benefits isn't clearly spelled out.
Among other changes the proposal seeks, the SEC wants to require companies to explain in a summary and analysis section of their proxy statements the goals and objectives behind executives' pay and the various factors directors weigh when coming up with a specific number, the SEC officials said. The agency is also trying to address the longstanding complaint that top executives are motivated by their own pocketbooks to engineer takeovers and mergers. Under the proposal, "change of control" provisions that trigger financial awards under certain transactions would be presented in greater detail in securities filings. There would also be a table that better illustrates how much executives hold in the form of restricted stock and other outstanding equity rewards.
Currently, companies disclose the annual compensation for the top five executives in a table that includes their salary, bonus, options granted, the initial value of restricted stock and other compensation. However, the monetary value of options, for instance, isn't included alongside the salary and bonus information.
One lingering concern for business groups is whether a total compensation number is a fair number since the inclusion of the value of options, which can't immediately be cashed in, may make the annual payment seem artificially high.
Thomas Lehner, director of public policy for the Business Roundtable, which represents chief executives of large corporations, said the group's principles are "consistent" with the SEC's overall effort. "We want to make sure it's done fairly so it satisfies the shareholders and others who want more useful information and at the same time doesn't unnecessarily compromise strategic plans or product developments that may be tied to compensation incentives," Mr. Lehner said. "You have to find the right balance."
Big businesses known as governance pacesetters are likely to incorporate portions of the SEC proposal in their 2006 proxy statements -- even though the new rules won't take effect until next year at the earliest. "A good number of companies will do that," especially ones that already "are spending a lot of time on [revamping] executive compensation," said Ronald O. Mueller, a compensation specialist and partner at law firm Gibson, Dunn & Crutcher in Washington. In particular, he expects those companies mainly to add new tables because SEC rules won't allow them to tamper broadly with existing ones such as the summary compensation table.
While not specifically committing his employer to adopting the expected changes in advance, Schering-Plough Corp. Chief Executive Fred Hassan endorsed greater transparency in proxies. "We believe that transparency is good for shareholders and good for business, particularly if additional disclosures allow shareholders to look at the compensation in the context of management's performance in creating value for shareholders," Mr. Hassan said through a spokesman.
The proxy-statement overhaul could have an unintended consequence, however, by further inflating executive pay. "Often, companies benchmark against each other" in determining how much to pay the top brass, Mr. Mueller, the compensation specialist, said. "The more they know what others are getting, they add that in" to such calculations.
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