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Costelloe says CEOs should be paid for performance |
SEC SHINES SPOTLIGHT ON EXECUTIVE PAY AND PERKS |
As his first major initiative as chairman of the US Securities and Exchange Commission, Christopher Cox on January 17, 2006, unveiled proposed new rules that will require companies to clearly report pay and benefits, including stock options and golden parachutes, for their top five executives and all directors. The agency said it is trying to help investors see how much of the money they invest in corporations is being paid to top executives. “Companies will have to make a calculation of what the parachute payment will be,” says Don Delves, president of the Delves Group, a Chicago-based consulting firm. “This has never been disclosed before,” he says.
Compliance with the quantification requirement could be difficult and confusing, according to corporate lawyers. Companies would be required to make assumptions about the dates of an employment termination or proposed transaction in order to calculate change-in-control payments. They also would have to estimate the price of the transaction or stock price at the time of termination and consider potentially complex future tax positions of the executives, according to a memorandum by Wachtell, Lipton, Rosen & Katz. The new rules for company proxy statements, which likely will be adopted this spring following a 60-day comment period, would require companies to explain in plain English how they arrived at a total compensation figure, including equity holdings, pensions and post-employment arrangements. The Compensation Committee Report will be replaced by a new compensation discussion and analysis section in the proxy statement. A summary table will list a total annual compensation figure, salary and bonus, stock-based awards, long-term incentive cash payouts and other compensation. The latter category will include all perks with a value of more than $10,000, instead of $50,000 under current rules. Supporting tables and narrative will describe how specific compensation levels are determined. A second set of tables will elaborate on outstanding equity awards and vesting terms. If adopted, the new rules would be effective with the 2007 proxy season. Analysts say that while increased disclosure is a necessary first step, it won’t put a cap on rising executive compensation. Boards may take a longer and harder look at the whole issue of accounting for the expense of stock options, however, while shareholders will remain worried about the potential dilution of their holdings. In a survey of institutional investors last year, Pearl Meyer & Partners said nearly 80% of respondents regularly consider dilution in making decisions on whether to buy or sell a stock. Executive stock ownership and corporate governance were cited by about 65% of those surveyed as being important investment criteria. The proposed new pay-disclosure rules would not apply to non-US companies that register with the SEC to sell securities in the United States. They would require that a US company disclose whether each director or nominee is independent and describe any relationships that were considered in making such a determination. Companies also would have to disclose audit, nominating and compensation committee members who are not independent. —GP |
Gordon Platt