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Executive Compensation Comes Into The Clear
By Terence O'Hara, Staff Writer
Washington Post
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 shareholders.

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 and salespeople.

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.

http://www.washingtonpost.com/wp-dyn/content/article/2006/12/14/AR2006121401816.html?referrer=email