The SEC's New Executive Pay Disclosure Requirements

by: Eddy Elfenbein

Eddy Elfenbein submits:The SEC voted today to require companies to provide more detail about executive pay, including perks. As you may know, I yield to no one in bashing the SEC and tedious regulations, but I honestly can’t get too worked up about this one.

If anything, it will show shareholders that executive pay at most large corporations is a very tiny amount of overall expenses. It sure gets people upset, but it's not what's hurting most businesses. Actually, I wouldn’t mind seeing companies go a step further and provide their executive pay in per-share terms. For example, Stanley O’Neal, the CEO of Merrill Lynch, received a very generous stock options grant of $14 million just a few days after 9/11. To be sure, that’s a huge amount of money. But in per-share terms, it works about to roughly 1.5 cents. Since the time of the options grant, Merill’s stock is up $34 a share, which could also be called 3,400 pennies. Are Merrill's shareholders demanding that 1.5 cent back?

The SEC did not adopt a rule which would require disclosing the income and perks of a company's highest-paid employees. This became known as the "Katie Couric" rule. Companies complained that revealing the income of celebrities could damage competitiveness. Also, just think of the catfights that would ensue if one actress knew she was being paid less than another. We just can’t have that happening. As the above WSJ article states (sub. req.),

Although the final rule dropped the "Katie Couric" requirement, the SEC will seek comment on a less-sweeping approach that would target pay to policymakers at larger companies and their subsidiaries, excluding most professional athletes, television and film personalities, salesmen, traders and investment bankers. As in the original plan, the revised approach calls for identifying highly-paid non-executives by job title, rather than name.

Two things. First, I’m sure that many investment bankers are the highest-paid employees at many conglomerates and financial services firm (talk about catfights). Also, no matter what job title they use, don’t you think we’ll be able to identify which one is Katie?

To combat "backdating" and other abuses in awarding stock options, the SEC will require option grants to be disclosed clearly in tables showing the fair value of the option grant. The closing market price of the stock on the grant date must be shown if it is higher than the option's exercise price, along with the date the company's directors awarded the options if it is different than the grant date of the options. If the exercise price of options is different from the closing market price on the grant date, the company must describe its method for determining the exercise price.

In addition, companies must provide more details about option grants to executives in a new compensation discussion and analysis report, explaining methods used in granting stock options, including why a particular grant date was chosen. Other timing questions, such as whether options are granted to executives before the firm issues important information or whether the company times the release of market-moving information to affect the value of executive stock options, also must be addressed in the report.

Again, I really don’t have a problem with this; the more info the better. But I hardly see how this “combats backdating.” Unless the board has specified it, back-dating is already illegal.

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