Pay Dirt

As the SEC shines a light on executive compensation, will companies clean up their acts or find new ways to hide excess?

As Pfizer Inc. shareholders assembled in Lincoln, Nebraska, last April for the company’s annual meeting, there was a buzz in the air — literally. A small plane circled overhead, pulling a banner that read, “Give It Back Hank!”

The sign captured the mood of investors who had raised angry questions after reading in the March proxy statement about CEO Henry McKinnell’s $83 million retirement package. Why was such lavish treatment warranted when the share price had fallen 43 percent over his five-year watch? Besides, hadn’t he already earned $65 million during those years?

A withhold-the-vote campaign failed to unseat two of the Pfizer board’s compensation-committee members, but did garner an embarrassing 20 percent of the shares voted. And when anti-McKinnell pressure continued to mount, the board finally announced in July that the chief executive would step down.

But one question probably did not occur to shareholders: Why was the drug maker disclosing the value of the retirement package in the first place? The Securities and Exchange Commission had made a proposal in January for new compensation disclosure rules, but had called for them to be reflected in proxy statements next year. Pfizer directors, though, decided that their company would be among the first to include the array of details the SEC proposed requiring — one of them being a calculation of the present value of McKinnell’s pension.

The SEC stresses that its new rules, which apply in 2007 to companies that have a fiscal year-end of this December 15 or later (Pfizer’s is December 31), aren’t meant to influence pay practices. “Our job is not to regulate compensation,” says John White, director of the SEC’s Division of Corporate Finance. “We just want to make sure disclosure is out there so that the marketplace can make its own judgment.”

As McKinnell discovered, though, disclosure has a way of forcing changes that companies might not otherwise make. Compensation experts, in fact, expect the new rules to spur big changes both in how companies set executive pay and in the resulting pay packages themselves. Shareholder activists, among others, are betting on it. “This will mean an absolute quantum leap in the quality of disclosure,” says Patrick McGurn of Institutional Shareholder Services. “Compensation committees are now in the hot seat.”

Machete and Pith Helmet

The last overhaul of disclosure rules came in 1992, ushering in the compensation tables that are still in use today. The tables, too, were meant to give shareholders a plain view of the amount of money that management was making. Not long after that rule change, however, companies developed and began installing forms of pay that did not have to be disclosed in the tables. These include deferred compensation, supplemental executive retirement programs (SERPs), golden-parachute payments, and a variety of perquisites.

Many investors dislike these forms of pay, of course. Such methods allow firms to grant executives a great deal of money or other benefits — often unrelated to their performance — without clearly detailing it in financial reports.


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