Exec Comp: The SEC’s Side of the Story

Surprised by reaction to a change in compensation disclosure rules, the SEC contends that it's requiring more disclosure about corporate stock and option outlays, not less.

When the Securities and Exchange Commission issued an amendment to its new executive-compensation disclosure rules late on the Friday before Christmas, a number of politicians and journalists smelled a rat.

Indeed, it looked to some as if the SEC was reporting the amendment in the dead of night — well, 5:15 PM — to get the least possible exposure for its news. With the business lobby recording several recent wins in tempering post-Enron reforms, the commission might well have been seen as knuckling under to corporate interests. And, some critics theorized, the SEC and its Republican chairman would hardly want the news to come out after the holiday week, just as a new Democratic majority took over Congress.

As it happened, the SEC did ruffle some Congressional feathers. Irritated by the SEC’s failure to contact him in advance of its announcement, the new Democratic chairman of the House Financial Services Committee, Barney Frank, told CFO.com that the commission failed to grasp “how greatly they have pissed off America over stock options.”

Besides the timing of the SEC’s move, institutional investors and other opponents objected to the meat of its amendment. They were, in particular, irked by the SEC’s decision to change its requirement for reporting the dollar value of stock and stock-option awards in the Summary Compensation Tables of corporate proxy reports.

Under the disclosure rules the commission adopted in July 2006, corporations had to report their option costs all at once, based on the aggregate grant date fair value of the awards. The result, in many cases, would be a very large number recorded in the year the options were granted. The amended rule, on the other hand, was designed to be consistent with the Financial Accounting Standards Board’s FAS123R accounting for stock options, which requires companies to report option values, in FASB’s language, “over the period in which an employee is required to provide service in exchange for the award” — that is, over the vesting period.

The critics jumped all over that one. Spreading the cost of options granted today over the next five years, they said, would lower the compensation number recorded in the grant year considerably — and enable companies to game the system.

In a December 29, 2006 column in The New York Times, Floyd Norris took the SEC to task for that. He also argued that the commission “severely damaged” investors’ ability to compare the compensation costs among companies because, thanks to the way the accounting rules handle compensation reporting for retiring executives, “identical pay packages given to two executives will be reported very differently, depending on the details of a company’s retirement plan.”

Under the SEC’s revision, which matches FASB’s rule, companies will recognize the full cost of an executive’s options in the year they’re eligible to retire because accountants figure “there is no requirement they work any more, and treat the full value as instant compensation,” the reporter reasoned. But for non-retiring executives, companies will now report the cost over the vesting period. Thus, the commission will fall short of SEC Chairman Christopher’s promise last summer to provide “one bottom line number, including all options, for an executive’s total compensation . . . comparable from company to company,” Norris asserted.

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