SEC approves executive-pay plan

Overhaul marks biggest change in rules in 14 years


WASHINGTON -- Responding to investor demands for more sunlight on executive-pay practices, the Securities and Exchange Commission ordered yesterday that companies begin providing new details on corporate compensation - including stock option awards that are at the center of a widening scandal.

The disclosure requirements, which will mostly take effect next year, are meant to give shareholders a "plain English" explanation of pay and benefits for top company officers. Corporate critics long have contended that too much of the information was hidden in fine print or obscured by vague language.

"With more than 20,000 comments and counting, it is now official that no issue in the 72 years of the commission's history has generated so much interest," SEC Chairman Christopher Cox said before commissioners voted, 5-0, to approve the overhaul.

Under the new rules, companies for the first time will have to provide a bottom-line number for the total annual pay and benefits of each of their top five officers. The changes also will require more companies to disclose executive perks such as the value of corporate jet use and payment of country club dues.

In addition, the SEC ordered companies to clarify the sorts of commitments made to pay chief executives when they depart because of a merger or other reasons. And companies will have to specify the cost of executives' retirement packages, an increasingly big-ticket item.

Companies also will have to provide lengthy new details on stock option awards, including how awards are granted to executives and why particular award dates were selected.

Options have come under intense scrutiny in recent months, amid revelations that many companies might have manipulated option grants to make them more lucrative for executives and other employees in the late 1990s and early 2000s, while hiding the details from investors.

In at least a temporary victory for Hollywood, the SEC tabled a plan to require financial details on nonofficers who make more money than a company's top executives. That idea was opposed by the entertainment industry, which said the proposal would harm them competitively and invade the privacy of Hollywood stars who aren't involved in management.

The new disclosure rules, initially proposed by the SEC in January, are the first major alterations to compensation-reporting requirements since 1992. They come amid rising shareholder anger over executive-pay levels in general, and allegations by corporate critics that trends in pay practices - such as the growth of post-employment benefits - have made it more difficult for the public to keep track of exactly what a company pays out to current managers and former ones.

"So much of what has gone on in the past has been an elaborate attempt to hide compensation and options and perks paid to executives," said Damon Silvers, general counsel of the AFL-CIO, which has become an activist investor through the group's pension fund. "The comprehensive nature of this change is really welcome."

"More information helps make the markets work," said Steve Odland, chairman and chief executive officer of Office Depot Inc. and an official of the Business Roundtable, a group representing CEOs of major companies. The new SEC rules "will give important information to shareholders who are making investment decisions and ... also will help [company] boards evaluate and determine executive compensation."

The SEC made clear that it was only interested in boosting compensation disclosures, not in regulating executives' pay.

"It's not the job of the SEC" to set pay, said Cox. Rather, the goal was to "give investors a much clearer picture of exactly how much they are paying the executives who work for them."

One of the new requirements will be a simple tally sheet, to be published in annual proxy statements, that includes all of the elements of pay for the top five officers, added up to a bottom-line total for each officer that investors can compare with data from other companies.

The total will include the executive's salary, bonuses and options, as well as the amount the company contributed to the officer's retirement plan that year.

Perks will have to be listed if their total value to an executive exceeds $10,000. The SEC lowered the threshold from the current $50,000, which will force more companies to reveal those details to shareholders.

Although some shareholder advocates believe the new disclosures could help rein in compensation that has soared over the past decade, they said the changes the SEC has ordered could, at first, make pay appear to be rising faster.

"Paradoxically, it will seem as if pay levels are going up and there is an increase in performance-de-coupled pay," said Lucian Bebchuck, a professor at Harvard Law School. "That's not because things are getting worse. We are just going to learn about things that have been bad for some time. They will come to the surface."

Some analysts have worried that better disclosure could set off a new escalation of pay because executives would have more detailed knowledge than ever on what their counterparts were getting.

But others believe increased transparency will keep pay in check by holding up compensation deals - and the directors who approve them - to greater scrutiny.

Jonathan Peterson and Kathy M. Kristof write for the Los Angeles Times.

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