Sucheta Dalal :SEC Rules Tightened On Pay Disclosure
Sucheta Dalal

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SEC Rules Tightened On Pay Disclosure  

August 1, 2006

Firms Must Detail Total Compensation Of 5 Top Executives


By Terence O'Hara

Washington Post Staff Writer

Thursday, July 27, 2006; D01


The Securities and Exchange Commission yesterday ordered public companies to give investors something they have long lacked: a clearer statement of total compensation for top executives.


Under the biggest overhaul of executive pay reporting in 14 years, the companies will be required to tell shareholders clearly how much the five most-senior executives earn from salary, stock options and other benefits.


The new regulations, approved unanimously by the five-member commission, come after years of criticism over rising executive pay and numerous instances of compensation practices playing key roles in corporate accounting scandals, including at Enron Corp. and Fannie Mae.


The rules include a requirement that companies publish details about the timing of stock option grants, a response to recent revelations that, without disclosing the practice, many companies backdated stock options to give executives guaranteed profit.


SEC investigations into backdating led last week to the first criminal charges related to the practice. Federal prosecutors accused Gregory L. Reyes, the former chief executive of Brocade Communications Systems Inc., of securities fraud for allegedly not disclosing backdated options to investors.


The new rules, which are widely supported in by business and investors, reflect SEC Chairman Christopher Cox's belief that clear compensation information will help shareholders and boards of directors make better judgments about the level and type of executive pay.


"Shareholders and their representatives need intelligible disclosure . . . without the need for an advanced degree," Cox said.


John J. Castellani, president of Business Roundtable, a trade group representing the largest U.S. companies, said his members would be pleased with the rules after expressing alarm over a few aspects when they were proposed in January.


The SEC left out a requirement that companies disclose the compensation of up to three non-executive employees whose pay is higher than the top five executives'. Dubbed the "Katie Couric rule" because some television celebrities, sports stars and top salesmen often earn far more than their bosses, the regulation drew negative comment from businesses concerned that disclosing such data would compromise competitive pay information and violate the privacy of those employees.


A modified proposal, which has been reissued for public comment and will be voted on by the commission later this year, would require that companies disclose the three highest-paid employees who have some "policy responsibility" over major divisions or subsidiaries of the company. It would also not identify the employees by name, only by job description.


"Athletes, entertainment persons, salespeople are not covered by the proposed rule," said John W. White, director of the SEC's corporate finance division, which governs disclosure. "It would even exclude trading professionals."


Castellani said companies were worried about revealing competitive information in a newly required discussion and analysis section on executive pay. He also expressed concern about revealing the pay of top-performing employees, fearing that such information would encourage competitors to poach top salespeople.


"They've gone a long way to fixing that," Castellani said.


Among the most significant revisions to the annual proxy statement will be the inclusion of stock options grants, earnings on deferred compensation and changes in the value of pension benefits in one table that will add all the items up for a total pay figure. The table will also include more disclosure of executive perks: perks of at least $10,000 a year must be disclosed; the old rule left out perks less than $50,000.


Profits made on stock-option exercises will continue to be disclosed in annual proxy statements but not in the total-pay summary table.


Ira Kay, head of executive compensation consulting at Watson Wyatt Worldwide Inc., said the new rules "will enhance transparency and be good for shareholders." However, he said, they will not eliminate all confusion. The inclusion in total pay of stock-option values on the date they are granted can be misleading, he said, because the actual money made on the options is almost never the same and usually isn't realized until years in the future.


"We think it's best to look at realized pay," Kay said.

-- Sucheta Dalal