Hide the true price" is an old and disreputable game in business that requires eternal consumer vigilance and frequent intervention by regulators.
Food companies wrapped elaborate packages around tiny products, so we got unit-cost requirements showing what you pay for how much cereal or sugar. Banks tried to gouge you by disguising fees and interest rates, so we got truth-in-lending laws allowing borrowers to easily compare products.
The Securities and Exchange Commission is considering truth-in-executive-pay rules for fat-cat CEOs, and it's about time.
Every year a few hundred CEOs siphon billions of dollars from publicly traded corporations in the guise of compensation.
But it's almost impossible for the ordinary shareholder to figure out what these people are costing investors. Present disclosure rules split executive boodle into a dozen different pieces, assign hard-to-understand values to many of them, no value to others and then scatter the components all over the proxy statement, annual report and elsewhere.
Instead of ingredients for a scavenger hunt, what investors need is a bright and flashing CEO sticker price, or at least a comprehensive (and comprehensible) table of what bosses got in the most recent year and what they would get under different scenarios in the future.
The SEC is promising to move in that direction. Yesterday the commission voted to propose new, better standards.
"Our disclosure rules haven't kept pace with changes in the marketplace, and in some cases disclosure obfuscates rather than illuminates the true picture of compensation," SEC Chairman Christopher Cox said in his opening statement.
The fine print won't appear for a few days, but a summary provided by the agency looks promising. Maybe the best new standard is a total compensation column that would add each of the small fortunes in a CEO's pay package into one stupendous amount that even a board's compensation committee could understand.
(You think I'm joking? One reason for the $100-million-plus payday for former New York Stock Exchange CEO Richard Grasso was that the board didn't understand what the components added up to, according to a 2004 complaint filed by New York Attorney General Eliot Spitzer.)
The second-best proposed rule would deliver more clarity on executive pensions, which have become as enormous an enrichment source in many cases as stock options and performance bonuses.
These "supplemental executive retirement plans," which have become standard even as corporations back away from pensions for underlings, may be the most insidious development in executive pay in recent years.
They sound innocuous. (A pension is just a fringe benefit, right?) They're extremely hard to value. And they frequently turn into lump sums of dozens of millions of dollars that bosses pocket years before retirement age.
I'm convinced that the complication in CEO pension pay and elsewhere is intentional. With pay growth stagnating for average workers, ever-higher executive pay packages look uglier and uglier to the public. Bosses and their consultants have huge incentive to try to disguise them.
So we get millions socked away in "potential" pension plans that often convert to hard cash if a CEO can sell his company. (For a current Maryland example, see what Constellation Energy boss Mayo Shattuck stands to get for merging with FPL Group.)
We get "phantom stock," "stock appreciation rights" and "deferred compensation" that are difficult to value. We get variables including actuarial tables, stock prices, interest rates, strike prices and bonus targets that add to the smokescreen.
It's time for regulators to disperse some smoke with a new truth-in-pay-troughs rule. If the law requires Giant to reveal whether peanut butter costs 12 cents or 14 cents per ounce, it darn well ought to compel corporations owned by you, the shareholder, to clearly disclose the millions they pay management.
Regulators already took a big step in executive pay disclosure requiring the aggregate cost in employee stock options to be booked as a cost against profits this year. Now they should catch up with the times even further by naming names and seeing how the options and other munificence match up more exactly with the suits.
Among other requirements, the proposal would show exercised executive stock options more clearly.
Will better disclosure knock boards to their senses and lead to a moderation in pay escalation? Probably not, but maybe it'll make people think twice.
The SEC will take public comments two months after the proposal comes out. Let the agency know what you think on www.sec.gov.
jay.hancock@baltsun.com
