Compensation Comes Into The Clear
Terence O'Hara, Staff Writer
Friday, December 15, 2006
Shareholders can expect a clearer picture of how much top
executives are paid as new rules go into effect today, requiring
companies to clearly explain their compensation practices.
The new regulations mark the biggest change to corporate pay
disclosure in 25 years. They will force companies to release
more information about different kinds of compensation and to
more clearly justify those payments.
The Securities and Exchange Commission ordered the changes this
year in response to a rising backlash against annual
double-digit percentage increases in executive pay. The
Corporate Library said this year that pay for chief executives
at more than 1,700 public companies grew 16 percent in 2005,
down from 30 percent in 2004.
Executive compensation practices have played a key role in
several high-profile corporate accounting scandals, including
those at Fannie Mae and Enron. More recently, the SEC has
launched investigations into allegations that more than 100
companies improperly backdated stock-option grants.
Rising compensation has been fueled by the growing use of
incentive pay, such as cash bonuses, stock options and other
awards. Those incentives have made it hard for investors to get
a total pay number on top executives.
Starting today, companies must add a section to the annual proxy
statement sent to shareholders that analyzes compensation. In
this section, company directors and managers must describe in
detail how they determined compensation for the chief executive
and other top officials.
The rules also mandate the inclusion of a compensation table
laying out the pay for the top five executives. The table
includes items that previously were not considered part of a
current year's compensation, such as stock-option awards and the
change in pension value in the event of an executive's
retirement. The SEC has also tightened rules for valuing and
disclosing perks, including use of the company jet, club
memberships and personal trainers.
"The new disclosure will allow not only shareholders but
directors and management to compare themselves with other
companies," said Andrew Gibson, a partner at accounting firm BDO
Seidman, who has helped about 100 companies prepare for the new
rules. "We'll get the numbers, see what other people are doing
and go from there."
Some of the changes were driven by recent instances of hefty
retirement pay and perks made available to prominent executives
after their retirement, including former General Electric chief
executive Jack Welch, that weren't clearly disclosed to
The new regulations do not include a provision commonly known as
the "Katie Couric rule," which would require companies to
disclose the pay of up to three non-executive employees whose
compensation exceeds that of the top five executives. Business
groups have resisted this proposal because of fear of poaching
of highly valued and highly paid employees, such as celebrities
The SEC is working on a more limited version of that rule.
Companies may be required to disclose the pay of employees who
aren't necessarily among a company's top five officers, but only
if they have significant authority or control over important
parts of the business. Under that scenario, Couric wouldn't
qualify for inclusion in CBS's proxy.
While the new rules promise to reveal more about how executives
are paid, many compensation experts doubt they will curb the
double-digit growth in pay for chief executives.
"It's a data-collection issue for most companies," Gibson said.