.... disclosable. Crunch time at hand for executive pay?
New proxy disclosure rules from the Securities and Exchange
Commission will curb excessive executive compensation.
Martin R. Rosenbaum
Minneapolis Star Tribune
Tuesday, August 7, 2006
In the climactic scene of the film "Wall Street," takeover
artist Gordon Gekko recites the memorable line, "Greed is
Gekko's point is that the basic capitalist desire for
personal profit -- massive personal profit -- drives our
economy. Maybe so, but in the final reel, it turns out that
Gekko's version of greed is based on cheating -- in that
case, insider trading.
Unfortunately, in the real world, there's nothing fictional
about corporate scandals. Over the past several months,
many companies have been criticized for mind-boggling grants
of stock options and other huge compensation awards to
executives. Lately, a bigger scandal has been brewing -- a
growing number of public companies are being investigated
for backdating stock options, which basically is cheating
the system to increase the value of their compensation.
Enter the U.S. Securities and Exchange Commission (SEC).
Trying to play the hero, the SEC has just approved an
overhaul of its regulations governing the disclosure of
executive pay. The new rules will be effective starting in
To combat backdating, the new rules will require extensive
disclosures about a company's option-granting practices.
This won't have a big effect, because the backdating problem
was largely solved several years ago. The lion's share of
the reported abuses occurred before 2002, when other SEC
reporting rules were stiffened to require that option grants
be reported publicly within two business days. The 2002
change did not eliminate backdating, but it did make it much
However, in regulating other compensation practices, the new
disclosure rules will have a bigger impact than many
observers think, especially in the case of the most extreme
Investors continue to express outrage over reports of huge
executive paychecks. Consider recent reports about
compensation practices at UnitedHealth Group, including the
$1.6 billion worth of stock options granted in recent years
to CEO William McGuire. UnitedHealth spokespersons justify
high executive compensation levels with a "rising tide lifts
all boats" argument. That is, option-related wealth is
performance based, and the huge increase in the value of
company stock has increased wealth for all stockholders, not
just executives. And, yes, management of that company did
create tremendous value for stockholders.
However, the real issue is the propriety of the compensation
decisions over the years by the board's compensation
committee. The UnitedHealth executives already had large
stock options giving them built-in incentives to increase
the company's value, but the committee continued to grant
millions of shares of stock options to them every year.
Only recently, after a public outcry, did the company
announce that it was stopping the practice for its most
Certainly this is not an isolated example; there are many
cases of uncontrolled compensation practices at public
companies. Investors have been especially outraged about
exorbitant perks and payments to executives who retire or
who leave after their companies are sold. For years,
institutional investors have tried to hold directors
accountable. These voices are starting to be heard.
New SEC rules
The SEC's new disclosure rules will require:
• Expanded compensation tables in proxy statements,
including a "total compensation" figure for each top
executive; more information about existing holdings of
stock options and other equity interests, and more
disclosure of retirement and other post-employment benefits,
including payments due after a change in control.
• More detailed disclosure of the nature of executive
"perks," with the disclosure threshold lowered from $50,000
• A new section in the proxy statement, to be written in
plain English, giving a detailed justification of the
reasons for the types and amounts of compensation granted to
The new rules don't limit compensation, so will they stop
the increase in executive compensation? After all, more
disclosure of executive pay levels could heighten the "Lake
Wobegon Effect" -- all executives are considered "above
But for the most serious cases of excessive compensation,
the new disclosure rules will have a greater impact than
many commentators think. Board members will have to justify
troublesome compensation decisions in greater detail than
ever before. This comes at a time when several other
factors have increased directors' sensitivity about how
these decisions are perceived.
First, directors who approve excessive compensation have
been increasingly faced with the prospect of "vote no"
campaigns at shareholders meetings by institutional
investors and advisory groups. Institutional investors have
pressured many public companies (so far including 145 of the
Fortune 500) to implement so-called "majority voting"
standards, which make it easier to vote a director out of
Second, there has been an increasing trend of shareholder
lawsuits against directors about executive pay, such as the
lawsuit over the huge severance package Walt Disney Co. gave
to Michael Ovitz.
Faced with such pressures, corporate directors will be more
careful about granting the most problematic types of
compensation such as rich retirement programs and executive
perks -- especially in cases where the company's performance
is less than stellar.
So pop up some popcorn and keep watching -- it's going to
About the Author:
Martin R. Rosenbaum is a
partner in the Minneapolis law firm of Maslon Edelman Borman
& Brand who specializes in advising companies on executive
compensation, corporate governance issues and securities
law. His e-mail is firstname.lastname@example.org