Before the Securities and Exchange Commission announced an amendment to its new executive compensation rules at 5:15 PM on the Friday before Christmas Eve, it left Barney Frank out of the loop.
That might have been a big mistake. Frank, a Massachusetts Democrat who assumed chairmanship of the powerful House Financial Services Committee on Thursday, was clearly miffed that the commissioners failed to let him know about the change before it was made official. He also felt that he wasn’t the only one who would be irate. In the end, he said, “I think they just may not understand how greatly they have pissed off America over stock options.”
Indeed, the substance of the amendment, as well as the timing of its announcement, raised a few eyebrows. In its December 22 press release, the SEC stated that it wanted align the compensation-disclosure rules it had just passed in July more closely with Financial Accounting Standard No. 123R, Share-Based Payment. The FASB rule requires a company to report the costs of stock and option awards “over the period in which an employee is required to provide service in exchange for the award,” according to the release.
To be fair, there was a hefty amount of praise for the SEC’s amendment, which will become effective when it’s published in the Federal Register. The change will, in fact, enable companies to reveal the costs of awards listed in the Summary Compensation Table of proxy statements over the period during which the awards vest. Previously, companies were required to report those costs all at once.
Under the rules issued in July, for instance, a company granting a CFO $5 million worth of options that vest over five years would have to report the entire $5 million in proxy statements this year. In contrast, the new amendment stipulates that the company will be able to report $1 million a year in each of the next five years.
Like the compensation rules themselves, the amendment applies to proxy, information, and registration statements filed on or after December 15 and to forms 10-K and 10-KSB for fiscal years ending on or after December 15—in other words, immediately.
After the SEC’s announcement, Rep. Frank fired off a press release calling the “loosening” of reporting “regrettable both substantively and for not having been open to more public discussion.” He also promised that Congress would revisit the issue of executive compensation, which he thinks is now constrained only by “the self-restraint of top executives, a commodity that is apparently in insufficient supply.”
Frank told CFO.com that while “there’s no perfect answer” to the question of how to report stock option awards, “given the sensitivity to the excessive pay of executives and the recent shenanigans about stock options,” it’s better to err on the side of more disclosure than less.
But does reporting the cost of option awards all at once provide a clearer picture than reporting it over the time in which the options vest? On that question, opinion seems divided—or sometimes neutral. “I don’t think one answer or the other necessarily provides more complete or fuller disclosure—they’re just two different ways of providing the information,” said Scott Taub, the SEC’s deputy chief accountant.