At an open meeting of the Securities and Exchange Commission today, the SEC will reportedly propose the first major changes since 1992 in how corporations disclose executive compensation in their proxies. Looming large among the proposed revisions is a requirement to reveal the total annual compensation for each of the five highest-paid executives.
Last week, The Wall Street Journal reported that, among other things, the commission will also propose that public companies be required to:
• display the monetary value of the top executives’ stock options next to salary and bonus figures;
• produce a new director-compensation table;
• create a table that discloses the details of executive retirement plans, including their potential future benefits;
• reduce the level at which a perk must be disclosed from 10 percent of total salary to a flat $10,000.
If the commission votes to continue with the proposals, a public comment period and a final vote by the commission will follow. If the final vote is thumbs up, the resulting rules would revamp the reporting of executive pay substantially.
Up until now, for instance, annual compensation disclosure has included salary, bonus, options granted, the initial value of restricted stock, and other compensation. Mark Borges, a former special counsel in the SEC’s division of corporate finance, expects the commission to propose replacing the number of options granted with the monetary value of the options. Currently, the monetary value of options appears in a separate table, not next to the salary and bonus figures.
Asking companies to report top executives’ total annual compensation prominently seems sure to generate controversy. Some might argue that the number could overstate an executive’s annual pay because options, for instance, aren’t immediately exercisable. “Once Financial Accounting Standard 123R came into being, it [was] only a matter of time for the SEC to say they want that in the pay disclosure,” says Borges. FAS 123R is the rule for calculating the fair value of options for financial reporting.
Similarly, one proposal companies might rail against would reportedly require them to disclose the current market value of the possible future compensation provided by supplemental executive retirement plans (SERPs) and other such benefits, notes Borges, now a principal at Mercer Human Resource Consulting.
Overall, the proposals’ impact on corporate-compensation practices has yet to be determined. “It is too early to know what companies think,” says Michael Kelly, president of New York-based executive search firm Michael Kelly Associates, “but I don’t see reform changing the way people get paid because it is a competitive marketplace and in order to get people to change jobs, people must pay them.”
Even before the SEC proposals, companies had been considering ways to improve disclosure on executive compensation, according to Borges. The SEC had expressed its dissatisfaction with corporate compliance with disclosure rules in 2004 through enforcement actions and public speeches, he noted. “In the 2005 proxy season, a number of companies made a real, concerted effort to provide disclosure that went well beyond basic disclosure requirements,” noted Borges. “For the first time in a number of years, companies looked at their disclosures and offered more details, including a total compensation number and numbers about how much executives would be paid if they left voluntarily or not, or if there were a change in control.”
Disclosure rules were last overhauled in 1992, during a time when SERPs and deferred-compensation plans accounted for a smaller portion of executive pay than they do today. The SEC had recognized the need for compensation disclosure rule updates since the late 1990s, but the commission was “sidelined by Sarbanes-Oxley” and “didn’t have the bandwidth at the time” to also work on disclosure rules, according to Borges, who worked at the commission from 1999 through 2003.
Still up in the air is the eventual impact of the SEC proposals on shareholder efforts to push boards to change companies’ executive-compensation policies. “To the extent people feel their ideas have been incorporated in the proposals, they will probably be satisfied for the time being,” Borges predicted. Those whose main concerns aren’t addressed will see the proposal as a boost to their attempts to get their demands met, he said.
They could also increasingly resort to the courts. “The bottom line is that in the land of litigation, [the proposals will] provide a simpler way of identifying overpaid executives for activists so they can go after them,” Kelly forecasts.