When the Securities and Exchange Commission sent 350 comment letters to companies last year regarding the requirements for compensation disclosure and analysis, it made it fairly clear that it expects to see better disclosure — including specific performance targets — in this year’s reports. Will companies comply?
“I think there is a certain amount of pushback against the SEC,” says George Paulin, chairman of compensation consultancy Frederic W. Cook. He says about half of his clients have omitted specific targets due to concerns about revealing too much information to competitors. He also says that companies are struggling to describe how difficult their performance goals are to meet, an option the SEC has offered but which Paulin says lacks sufficient detail.
Perhaps it’s not surprising, then, that a majority of respondents to a recent Watson Wyatt Worldwide poll said they won’t disclose additional information this year. However, 21 percent said they will change their compensation structure in response to the new disclosure rules, up from 6 percent in a similar 2006 poll. Steven van Putten, east division practice leader for executive compensation at Watson Wyatt, cautions that this is likely due to a number of factors, with shareholder activism as responsible as the new rules.
Nonetheless, the rules may have a major, if unintended, effect. Van Putten fears that they “will lead to a more bifurcated model, with compensation being either totally formula-based or totally discretionary — neither of which is very good for shareholders.”