Similarly, compensation consultants predict that such staples of past contracts as country-club dues, free sports tickets, and financial advisory services may disappear at some companies. "Instead of giving you a car or money for a lease, it's a lot easier to just say, 'Here's $10,000,'" says Mark Rosen, managing director of compensation consulting firm Pearl Meyer & Partners.
Skeptics believe that better disclosure could spark some pay envy among executives who come up shorter, perhaps causing average compensation to rise, not fall. This happened after the SEC's first overhaul of proxy rules in 1992 and 1993.
But to a greater extent this time, pay increases will be linked to performance. Liability associated with filing the CD&A, in particular, should force boards to explain just how pay practices help the company. And, of course, the increased transparency raises the prospect of Pfizer-style shareholder outrage against boards that grant executives large pay packages with only a slight link to performance.
Rosen already has observed some companies examining their practices. "We're seeing compensation committees asking themselves, 'Are our programs appropriate? Do they incentivize the right thing? Are we, in fact, independent of management?'" he says.
Furthermore, the CD&A will turn the spotlight on consultant relationships, often criticized when the firms work both for management and the compensation committee, creating a conflict of interest. CEOs themselves sometimes work with consultants to determine a package, then present it to their own board, which more often than not approves it. Now, says Aon's Savage, boards will have to explain the process and will take control.
Certain companies may actually benefit from transparency. "We have a high percentage of employee stock ownership and have never had poison pills, severance, or change of control payments," says Rene Jones, CFO of Buffalo-based M&T Bank, an early adopter of many of the SEC's proposals. "In the past, we didn't talk much about it. But as corporate watchdogs start comparing companies next year, I think we'll get some credit for our practices."
It's unlikely that compensation disclosure rules will permanently fix problems plaguing executive remuneration. If future proxies reveal most of what companies now pay, new approaches will emerge, presenting new charges of concealment.
"Never — and I mean never — underestimate the creativity of corporate lawyers, accountants, and compensation consultants to find loopholes," says McGurn.
Still, the SEC's action inspires some rare optimism about the future of compensation. "We're very enthusiastic about the new rules," says Wilcox. "Will it lead to higher or lower pay? I can't say. But I do think pay will be better designed."
Don Durfee is research editor of CFO.
Show and Tell
Highlights of the SEC compensation disclosure rules taking effect in 2007 for companies whose fiscal year ends this December 15 or later.
- The summary compensation table must provide dollar values for all parts of an executive's pay. Companies, for example, will have to provide current values of restricted stock or option grants and show the growth in actuarial present values of pension benefits and deferred-compensation plans.
- A total pay figure for each named executive must be provided, making it easier to compare pay from company to company.
- Perks with a total value exceeding $10,000 must be disclosed. (The previous limit was $50,000.) And proxies will have to detail any perks executives will receive after leaving the company.
- A compensation discussion and analysis, or CD&A, must provide a narrative, principles-based disclosure of how executive pay is set. Thus, companies will have to describe how compensation is structured to drive the company's performance, and to explain any role executives play in setting their own pay. As a part of the 10-K and proxy, the CD&A will be subject to CEO and CFO certification.
- In response to the stock-option backdating scandal, companies must disclose new details on option-granting practices, including option grant dates and grant-date fair values. Any option timing must be discussed in narrative form. — D.D.
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