Human Capital & Careers

Companies in Denial on Pay-Disclosure Rules?

Though regulations on disclosing performance-based pay may soon be enforced, many companies have no plans to give the SEC what it wants, a new surv...
David McCannJanuary 24, 2008

Many companies have no plans this year to disclose performance goals that determine the compensation of top executives, despite increasing pressure from the Securities and Exchange Commission to do so.

In survey results released Thursday by Watson Wyatt, a corporate compensation and human resources consulting firm, 31 percent of 135 large, publicly traded companies said they do not expect to reveal these goals in their 2008 proxy statements, and 27 percent are unsure whether they will. Only 42 percent have definite plans to do so, according to Watson Wyatt, an interested party because it advises companies on setting executive pay levels, designing pay programs, and making compensation-related disclosure.

So far, the SEC has not enforced revised rules for compensation disclosure that took effect in mid-2006. “We were quite clear that we were not going to have aggressive enforcement for the first year because it was a learning curve for everyone,” said SEC spokesman John Nester. But the commission signaled its intention to heighten its scrutiny last October, when it published a review of the first year of its revised compensation rules and sent letters to 350 companies it deemed to have provided insufficient disclosure.

“The purpose of this review was to assess how companies were doing with the new compensation-disclosure rules and let all companies see our view of things, with the expectation that their 2008 proxies will be more in keeping with what’s expected of them,” Nester told

Under the revised SEC rules, companies first determine whether performance targets are material elements of policies and decisions affecting compensation for their five highest-earning executives. “The way most incentive plans are designed, the metrics are material to the determination of the bonus,” said Ira Kay, global director of executive compensation consulting for Watson Wyatt.

If the targets are material to compensation, a company can be excused from the disclosure requirements only by demonstrating that disclosure could cause it competitive harm. If not, the company must disclose each metric and performance threshold used in determining compensation — for example, 10 percent earnings-per-share growth, $1 billion in revenue, etc. — along with an explanation of how it decided on them.

However, there is still a subjective component. The SEC acknowledged in its October review of the first year of the new rules that disclosure of performance-based pay “will always depend upon each company’s particular facts and circumstances.” Further, the commission wrote, “We do not seek to require companies to defend what may properly be subjective assessments, but rather only to clearly lay out the way qualitative inputs are ultimately translated into objective pay determinations.”

Many companies likely bided their time in 2007, with the SEC on record that it wouldn’t do much to enforce the new rules during their first year. This year, companies will have some decisions to make.

“Of the many companies that did not disclose their goals last year, very few said competitive harm would be done,” Kay told “But I was in discussions with some of these companies, and they did think competitive harm would be done. I think they were trying to be legally cautious about what they put in writing.” In other words, any specific rationale for a claim of competitive harm could be challenged by a shareholder lawsuit, say.

“Companies are extremely worried about this issue. Some are in agony about what to do,” said Kay. “They obviously don’t want to be in violation, but they’re worried about competitive harm and whether they can in fact explain the business case for that in their proxy.”

Meanwhile, despite the SEC’s stated intention to enforce its compensation-disclosure rules more vigorously this year, the commission is under fire for not doing enough. In a year-end letter to John White, director of the SEC’s Division of Corporation Finance, two top officials of the CFA Institute’s Centre for Financial Market Integrity said they were “highly disappointed in the inconsistent and overly complex implementation of the rules exhibited by many companies.”

The CFA Institute, whose 92,500 members are financial analysts and other finance professionals, said companies were using “endless and complex legal boiler-plate” and avoiding full disclosure “by inappropriate claims that compensation metrics are proprietary.”

The new rules, the letter stressed, require companies to use plain language to show investors “the full picture of an issuer’s executive compensation process.” Saying this mandate is being ignored by many companies, the CFA offered 10 proposals for improving the situation.

Even beyond the disclosure debate, executive pay is clearly a topic that is heating up. On Thursday, a diverse network of institutional investors announced the filing of shareholder resolutions at more than 90 U.S. corporations as part of the 2008 proxy season, aiming to give shareholders an advisory vote on executive compensation packages.

The investor network, launched last year, comprises public pension funds, labor funds, asset managers, individual investors, foundations, and religious investors. It is organized by the American Federation of State, County and Municipal Employees (AFSCME) and Walden Asset Management.

“Shareholders want CEOs to be paid for their long-term performance,” said AFSCME president Gerald McEntee. “We are in the middle of a subprime-mortgage crisis where some failing CEOs are walking away with hundreds of millions of dollars. That makes no sense, and we think giving shareholders a vote on CEO pay will help to stop it.”

In other results from the Watson Wyatt survey, most companies (68 percent) do not plan to change their approach to goal setting. However, the 21 percent who said they expect to modify their compensation programs in response to the SEC rules represented a big jump from the 5 percent who said so in a similar 2006 poll.

The poll also found that most companies — 77 percent — believe the disclosure rules will not have much effect on corporate performance.

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