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Executive Pay May Get Close Look

The SEC is to vote today to seek public comment on a proposal that would overhaul disclosure rules and require greater detail.

January 17, 2006|Jonathan Peterson | Times Staff Writer

WASHINGTON — A Securities and Exchange Commission plan to require better disclosure of executive pay would force companies to reveal specific details about future benefits, perks and stock deals that are often hidden or omitted from regulatory filings.

The commission is expected to vote today to seek public comment on the measure, a crucial step toward passage of a final rule this year. The initiative could lead to the first overhaul of pay disclosure requirements since 1992.

The push for greater clarity in executive compensation is among the top priorities of SEC Chairman Christopher Cox, a former congressman from Orange County who assumed the regulatory post last year. Shareholders have grown increasingly critical of many executive pay packages, saying the deals appear to be crafted to obscure the large sums many senior managers are making.

"I think we can do better," Cox told reporters last week.

Because so much of executive pay falls outside the limits of a paycheck, such as in deferred stock or retirement benefits, "the result is that an increasing amount of executive compensation is escaping disclosure," he said.

Currently, compensation streams for top executives and board members can be scattered inside the annual proxy statement issued to shareholders and often are described vaguely.

To add clarity, the SEC will formally propose an array of disclosure requirements for publicly traded companies and their top brass -- specifically, the chief executive, chief financial officer, three other highest-paid managers and board members.

Although details are being finalized -- "This isn't quite soup yet," Cox cautioned -- the plan is likely to include the following elements:

* A bottom-line dollar figure for executive pay. Companies would have to provide tables showing a total annual compensation figure for the senior officers, and the total must include such increasingly important benefits as stock grants, stock options and pension benefits.

* Tighter accounting of perquisites. Currently, companies are required to report a lump sum if perks exceed $50,000 or 10% of the executive's salary and bonus. An individual perk has to be reported only if it costs more than 25% of the executive's total perk allotment. Under the proposal, perks must be itemized if the total for perks is $10,000 or more.

* Improved accounting of retirement benefits. The SEC would require new tables outlining the defined benefit and defined contribution retirement plans of top officers, along with detailed descriptions of payments that could be triggered if the manager is removed. Such details are not specified under current rules.

* Insight into a company's pay strategy. Firms would have to discuss performance benchmarks that are built into an executive's pay structure and how such benchmarks fit into the company's broader strategic goals. Such discussion is not currently required in the annual proxy mailing to shareholders.

The plan also would require companies for the first time to disclose all compensation to board members. Under current rules, critics say, companies sometimes avoid reporting perks and stock-option awards to their directors.

Ralph D. Ward, publisher of the Boardroom Insider newsletter and an expert on corporate governance, said the plan would greatly expand disclosure requirements.

"Even if there are a few weasels and dodges that come out over time, it's still a pretty strong program," he said.

Business reaction to the proposal has been mostly favorable.

"In general, I think there's been a lack of transparency in the past, and the new proposed regulations are a big step in the right direction," said Charles A. Haggerty, former board chairman and chief executive of Western Digital Corp. in Irvine.

Perks, such as membership in country clubs, deluxe healthcare plans and use of company cars and jets, all should be reported clearly, said Haggerty, who serves on four corporate boards, including Beckman Coulter Inc., a Fullerton-based biomedical instrument firm.

"CEO's will not like it as much as boards of directors will like it," he said of the government initiative. "What should companies have to hide?"

At the same time, Haggerty, who retired from Western Digital in 2000, questioned the plan to require companies to estimate the value of executive stock options. An option is the right to buy shares of stock in the future at a predetermined price.

Regulators recently ordered companies to include the cost of options in their earnings reports. Technology companies, in particular, have opposed doing so, pointing out that options can lose value if the company's share price declines.

"When I was chairman and CEO of Western Digital, you could make the case that I had $50 million in stock options," Haggerty said. "Six years later, they were probably worth $4 [million to] $5 million.... As my wife would say, where's the money?"

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