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Proposal would open up executive pay


WASHINGTON -- Outlining the details of his first major initiative, Christopher Cox, the new head of the Securities and Exchange Commission, said that next week the agency would propose the most extensive overhaul since 1992 of the way companies disclose compensation to senior executives and directors.

"The marketplace for executive compensation has proceeded apace in the intervening decade and a half and the results have been an increasing amount of executive compensation that is escaping disclosure," Cox told a group of reporters over lunch at the agency's headquarters.

Once adopted, the new rules would provide considerable assistance to investors, who are often unable to glean from corporate filings the total compensation of top executives.

But the rules would still fall far short of the ambitious corporate democracy proposals made for many years by stockholders and some lawmakers, including one proposal that would give the investors some say in setting pay scales.

Those proposals have gained little political traction in Washington, even as a growing body of evidence has emerged to suggest that at many companies there is no correlation between executive pay and company performance.

Still, in a sign of how much the landscape has changed over the last decade, business groups that previously had resisted changes on executive compensation disclosure rules now appear generally supportive of the effort.

Cox and other officials emphasized that the proposed changes were not intended to reduce skyrocketing compensation packages but to make them more transparent. They are also supposed to force boards to provide more explanation for them, he said.

Cox dismissed the notion that more information about large packages could result in ever-escalating salaries and bidding wars for top executive talent.

"There is a counterargument that says making more information available will cause upward pressure," he said. "But that's just not how markets work. Markets function best when there is more disclosure."

At the luncheon, Cox and Alan L. Beller, director of the commission's corporate finance division, said that the rules would require greater disclosure of deferred compensation and executive compensation when a company's ownership changed hands.

By lowering the disclosure limit for executive perks from $50,000 to $10,000, as the current draft of the proposal contemplates, companies would be required to provide more information about a wide range of benefits that often go undetected or are imprecisely described. These include club memberships, the use of executive jets and cars, and payments companies make to cover the taxes on compensation and benefits.

Companies would also have to put a precise value on stock options in the table listing executive compensation.

The new rules would apply to the chief executive, the chief financial officer, and the top three other executives, as well as all board members.

Officials hope that the rules can be in place by the 2007 proxy season, although investors at some companies may begin to see changes this year.

Recent studies have shown that compensation of top executives has increased at a far greater rate than for other workers, and that there is often little correlation between pay and performance.

One study, by Mark Van Clieaf, managing director of MVC Associates International, a management consulting firm, and Janet Langford Kelly, a Northwestern University law professor, found that 60 companies in the bottom 10th of the Russell 3000 index lost $769 billion in market value and $475 billion in economic value in the five years through 2004. They paid their top five executives more than $12 billion over the same period.

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