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SEC's Proposed Disclosure Rules Get a First Public Airing Today
NEW YORK (The Wall Street Journal)--When the Securities and Exchange Commission meets today to vote on proposing a massive revamp on how companies disclose executive pay, business and investor advocates will be zeroed in on picking out fresh details of the proposal.
The anticipated changes -- including disclosure of a total compensation figure, detailed analysis of how pay is determined and new tables requiring better disclosure of retirement plans and director pay -- already are being hailed as the biggest overhaul to executive-pay disclosure in 14 years.

But pay consultants, lawyers and investor advocates say the extent to which compensation secrets are brought out of the shadows will depend in large measure on how aggressively the SEC, under new Chairman Christopher Cox, pushes for disclosure on a handful of issues that have been little discussed so far.

The full proposal -- and the fine print -- won't come out for some days. Yet today's meeting will be the SEC's first public airing of the changes, and investor and business advocates hope to fill in some blanks when staff members answer questions by the five commissioners.

"Any details we'll get will come out of the discussion and presentation of the proposal itself," said Mark Borges, a principal at Mercer Human Resource Consulting in Washington.

Business groups say they don't oppose more disclosure in principle, and the agency's commissioners are expected to vote to send the rules out for public comment. The potential lobbying battle, though, will be over the final wording of the proposed rule, and experts say a handful of issues stand out as potential flash points.

PAY FOR PERFORMANCE: Investor advocates say the current compensation-committee report in annual proxy filings gives mostly boiler-plate information about how pay for top officers is determined. Companies disclose, for instance, that they are rewarding a chief executive officer for attaining an internal goal, have hired a pay consultant and have compared their CEO with peer groups.

The SEC staff is proposing a beefed-up discussion-and-analysis section. Investor advocates are hoping the SEC will demand that boards disclose exactly what performance measure is being rewarded. Is it growth in earnings per share or growth in some other financial metric? Companies have argued that disclosing that information could hurt them competitively.

Shareholders also want to know details of the hiring arrangement of any pay consultant. The latter is important, they say, because it shows if the consultant's interests are aligned with those of the board or those of the CEO.

"If the compensation committee hires the compensation consultant, they have more of a direct control over the whole process," said Mark Reilly, a partner with 3C-Compensation Consulting Consortium in Chicago. But if management hires the consultant and uses the firm for other work, there is concern the consultant will be beholden to the executives. "If you can set your own pay, it's probably going to be pretty high," he said.

Experts also wonder whether the SEC will require companies to provide an inventory of all outstanding stock options for each top executive, with grant dates and strike prices, plus a list of exactly which options were exercised during the past year. David Yermack, associate professor at New York University's Stern School of Business, said it is difficult now to keep track of past awards because of bare-bones options tables.

FUTURE COMPENSATION: An emerging hot-button issue among investors is how boards allow executives to sock away huge amounts of money but disclose little of it.

Deferred-compensation arrangements function like souped-up 401(k) plans for executives. On the surface, they are little more than savings plans giving tax advantages for deferring pay, but critics say they allow companies to secretly bolster executive pay through features like guaranteed high interest rates, generous matching contributions and the like.

SEC rules only require companies to disclose interest credited to an executive's account above a "market" rate set by the Internal Revenue Service, currently 5.76%. If accounts are credited with hypothetical returns based on market-index or company-share performance, the amount may not need to be disclosed. Since these "accounts" typically have no cash in them -- they are IOUs from employer to executive -- the company is on the hook for the interest or hypothetical returns.

Under the SEC's proposal, companies would have to disclose all the interest they pay, not just the above-market portion. In addition, the proposal would require proxies to include a table detailing top executives' deferred-compensation benefits. The table would show the amount each executive deferred, how much was withdrawn and how much interest was credited to their accounts during the year, SEC officials say.

One important detail that is so far unknown: whether companies would have to disclose deferred-compensation details for the five highest-paid executives or also an aggregate figure for all executives receiving the benefit.

RETIREMENT BENEFITS: Executives also benefit from supersize pension plans, often called supplemental executive retirement plans, or SERPs. Like traditional pension plans, these pay out lump-sum or annual checks in retirement, usually calculated as a multiple of pay and years of service.

While traditional pensions are effectively capped by tax law, SERPs have no limits. Some calculate payouts using an executive's highest years of pay, instead of the last years as traditional pensions use. Executives often are credited with more years of service than they have with a company, further inflating their retirement payday.

While proxy filings currently include tables that let an investor approximate the pension take-home for a company's top executives, the disclosure isn't always clear.

By contrast, the SEC proposal would require companies to calculate the actual pension each named executive would be entitled to and list it in an easy-to-read table, SEC officials say.

HIDDEN REWARDS: Corporate-governance experts are waiting to see whether companies will need to supply a dollar value on dividends paid on restricted stock -- shares given to an executive but which can't be sold until certain restrictions are met, usually the elapsing of a specific time period. Currently, a company is required to say whether it paid dividends but not report the value of the dividends. Dividends on restricted stock can add up to real money, and investor groups argue they should be disclosed as compensation.

Similarly, companies currently disclose perquisites if the aggregate value is above $50,000. The SEC proposal lowers the threshold to $10,000. One question is if the SEC will demand more detail on perks. Some companies voluntarily list perks given to executives in a table, but it isn't required.

"The SEC needs to be careful to give companies as little wiggle room as possible," said Paul Hodgson, a senior researcher at The Corporate Library, a Portland, Maine, governance firm. "Without being overly prescriptive, they still need to be very clear about exactly what needs to be disclosed."