Propose Overhaul of Rules On Executive Pay
Changes Would Increase Transparency in Reporting Perks,
By Kara Scannell, Staff Reporter
THE WALL STREET JOURNAL
Tuesday, January 10, 2006
WASHINGTON -- The Securities and Exchange Commission,
responding to rising criticism of soaring -- and partially
hidden -- executive pay, is poised to propose the most
sweeping overhaul of pay disclosure rules in 14 years,
seeking to push companies to divulge much more about their
top executives' perquisites, retirement benefits and total
The proposed changes, according to SEC officials, would for
the first time require corporate proxy statements to provide
a column with a total annual compensation figure for each of
a company's five highest-paid executives and be far more
specific about the value of their various benefits. Total
compensation is an elusive number under the current system,
and one for which investor advocates have long sought
In addition, the SEC would force companies to take the
monetary value of the stock-option grants given to top
executives and place those figures side-by-side with salary
and bonus information. Under a new accounting rule,
companies must start expensing the value of their stock
These and other proposed changes will be presented at a
public SEC meeting on Jan. 17, where commissioners will
question staff members and vote whether to proceed with the
plan. If approved, the proposed overhaul will be subject to
a period of public comment, followed by a final SEC vote.
While it's too early to tell how the SEC will vote on the
proposals -- and details of the plan could be altered in the
coming week -- Christopher Cox, the agency's new chairman,
appears to have the commissioners' support. With the term
of his predecessor, William Donaldson, ending in fractious
debate, Mr. Cox has worked hard to make the commission --
composed of three Republican and two Democratic
commissioners -- more harmonious by trying to get consensus
on major issues. Just last week, he won unanimous backing
for new guidelines on how much to fine a company that has
engaged in financial fraud.
Mr. Cox, a free marketer and former congressman who worked
in the Reagan White House, has signaled in recent months
that executive compensation is going to be a major issue for
him, and indeed the proposal will be the biggest change he
has championed since taking over five months ago.
In an interview with The Wall Street Journal last September,
Mr. Cox said that a lot had changed since the SEC last
addressed the issue in 1992. "The prevalent forms of
compensation have migrated away from what is transparent to
what is opaque," he said. "The market is capable of
disciplining excessive compensation, provided that the
market has adequate information. Too often in recent days,
however, shareholders have been surprised to learn after the
fact what their executives are being paid."
The SEC's proposed overhaul reflects the notion popular in
some circles that the right answer to soaring executive pay
isn't to limit it, but to disclose it more fully. Past
attempts to limit executive compensation -- such as
Congress's move in 1993 to cap, in most instances, the tax
deductibility of salaries at $1 million -- have been
Even professional investors gripe that with deferred
compensation, stock options and executive perks such as
personal use of corporate aircraft, they have a hard time
figuring out what executives are being paid. The
information is disclosed in shareholder proxy forms but
often isn't collected in one section, and the value of the
benefits isn't clearly spelled out.
Among other changes the proposal seeks, the SEC wants to
require companies to explain in a summary and analysis
section of their proxy statements the goals and objectives
behind executives' pay and the various factors directors
weigh when coming up with a specific number, the SEC
officials said. The agency is also trying to address the
longstanding complaint that top executives are motivated by
their own pocketbooks to engineer takeovers and mergers.
Under the proposal, "change of control" provisions that
trigger financial awards under certain transactions would be
presented in greater detail in securities filings. There
would also be a table that better illustrates how much
executives hold in the form of restricted stock and other
outstanding equity rewards.
Currently, companies disclose the annual compensation for
the top five executives in a table that includes their
salary, bonus, options granted, the initial value of
restricted stock and other compensation. However, the
monetary value of options, for instance, isn't included
alongside the salary and bonus information.
One lingering concern for business groups is whether a total
compensation number is a fair number since the inclusion of
the value of options, which can't immediately be cashed in,
may make the annual payment seem artificially high.
Thomas Lehner, director of public policy for the Business
Roundtable, which represents chief executives of large
corporations, said the group's principles are "consistent"
with the SEC's overall effort. "We want to make sure it's
done fairly so it satisfies the shareholders and others who
want more useful information and at the same time doesn't
unnecessarily compromise strategic plans or product
developments that may be tied to compensation incentives,"
Mr. Lehner said. "You have to find the right balance."
Big businesses known as governance pacesetters are likely to
incorporate portions of the SEC proposal in their 2006 proxy
statements -- even though the new rules won't take effect
until next year at the earliest. "A good number of
companies will do that," especially ones that already "are
spending a lot of time on [revamping] executive
compensation," said Ronald O. Mueller, a compensation
specialist and partner at law firm Gibson, Dunn & Crutcher
in Washington. In particular, he expects those companies
mainly to add new tables because SEC rules won't allow them
to tamper broadly with existing ones such as the summary
While not specifically committing his employer to adopting
the expected changes in advance,
Schering-Plough Corp. Chief Executive Fred Hassan
endorsed greater transparency in proxies. "We believe that
transparency is good for shareholders and good for business,
particularly if additional disclosures allow shareholders to
look at the compensation in the context of management's
performance in creating value for shareholders," Mr. Hassan
said through a spokesman.
The proxy-statement overhaul could have an unintended
consequence, however, by further inflating executive pay.
"Often, companies benchmark against each other" in
determining how much to pay the top brass, Mr. Mueller, the
compensation specialist, said. "The more they know what
others are getting, they add that in" to such calculations.
---- Joann S. Lublin
contributed to this article.
Kara Scannell at