Better disclosure of executive pay is likely

THE BALTIMORE SUN

The image of the fat-cat CEO might soon get a little fatter.

Under a regulatory proposal that appears to be headed for approval this year, corporate America would be forced to disclose a raft of previously unreported perks and payouts to its top executives. The disclosures might extend from housekeeping services and yachts to lavish severance packages.

"This will certainly trigger some 'Oh my's' when everything is included," said Steve Van Putten, who leads an executive compensation practice at Washington-based Watson Wyatt World- wide.

His firm released a poll last week that showed four out of five companies would have to divulge more than they do now under the new regulations.

The Securities and Exchange Commission proposed a rewrite of disclosure rules in January in response to investors clamoring for more information about executive pay, which has far outstripped any wage gains by rank-and-file workers in recent years.

Shareholders and the public at large have also been astounded by revelations of outlandish perks, including the much-ballyhooed $6,000 shower curtain for L. Dennis Kozlowski, the former head of Tyco International Inc. who is now serving a prison term for looting the company of millions.

The SEC has been seeking feedback from the public in recent weeks and intends to vote on the proposal later this year so the rules could be applied to proxy statements next spring. Companies use proxies to announce annual meetings and employee matters, such as executive pay.

The proxies often elicit what are known as "holy cow!" reactions among shareholders. Those are the moments when they learn just how much compensation, including salary, bonus, stock and perks, that executives were paid the previous year.

While the SEC proposal has drawn widespread praise, some compensation consultants and corporate officials are worried about unintended consequences buried in the 370-page proposal.

Chief among the concerns is that pay would actually increase when executives get a better idea of how their peers are making out. That's what happened in the 1990s, the last time the SEC revamped disclosure rules to require tabular reports for easy comparison.

One rule bound to lead to surprises would require companies to aggregate all remuneration into one sum. That may sound like simple math, but some board members say they have approved separate elements of a pay package only to find later that they were ignorant of the total amount.

Such a scenario unfolded a few years ago when Richard A. Grasso resigned as head of the New York Stock Exchange with a $190 million payout.

Another rule would compel companies to detail more perks, including country club memberships, security guards and corporate jet rides, by lowering the threshold for disclosure to $10,000 from $50,000.

Many perks weren't revealed under the previous threshold. General Electric Co., for instance, paid for a Manhattan apartment for life and New York Knicks basketball tickets for one-time CEO Jack Welch. Those benefits weren't widely known until his former wife spilled all in their divorce proceedings.

The SEC also proposed that companies use "plain English" to describe their pay policies. That means following all of the tricks taught in elementary-school English class, such as writing short sentences, using the "active voice," employing everyday words, and avoiding multiple negatives. It also means steering clear of legalese and business jargon.

But perhaps the most scintillating of the new disclosures would be revelations of how much employees earn who aren't executives or directors. Their paychecks have never been open to public scrutiny.

The rule would apply only to three employees who make more than the top executives. Companies wouldn't be required to name them, although compensation experts say it wouldn't take much guesswork to deduce who is being described.

Among those believed to be raking in enormous sums are hot-shot money managers in the financial world. They could include luminaries like Bill Miller at Baltimore's Legg Mason Inc. and perhaps T. Rowe Price Group Inc.'s Brian Berghuis, who was named fund manager of the year last year by Morningstar Inc., which tracks mutual funds.

Other employees who might occupy the multimillion-dollar strata of executive pay are studio executives at entertainment giants such as Time Warner Inc. and commissioned salespeople at companies like Boeing Co. that push high-cost products or that sell globally.

Critics of the rule change say the disclosures would spark bidding wars for those highly paid, and presumably highly regarded, employees because headhunters and corporate rivals would know how much it may take to lure them away. Critics also say the information wouldn't serve investor interests but merely satisfy curiosity.

James S. Riepe, former head of the Investment Company Institute, the mutual fund industry's trade group, and now a consultant at T. Rowe Price where he retired last year, said he understands nosiness. After all, he admits he, too, reads the Forbes 400 list of the richest people in America. But he thinks the SEC proposal should be scrapped.

"The pendulum swings too far sometimes," he said. "What's next? Eventually, they'll probably want to find out how much your wife makes or whether you eat at fancy restaurants."

Legg Mason hinted at the high-stakes job market in a recent filing with the SEC: "The market for experienced asset management professionals is extremely competitive and is increasingly characterized by the frequent movement of employees among different firms," said the filing, unrelated to the rule change. "Our costs to attract and retain key employees are significant and will likely increase over time."

"It's going to be a meat market if you put dollar numbers in," said Burton J. Greenwald, a consultant to the mutual fund industry. "Bodies are going to be traded."

James K. Markey, vice president at Kellogg Co., also expressed concerns in a letter to the SEC about competitors wooing top salespeople at the Michigan maker of cereal and food products.

The disclosures could cause morale issues, he said, and gathering the information would be too costly because it would involve tracking the compensation of "tens of thousands of employees across several countries just for purposes of the proxy statement."

SEC Chairman Christopher Cox has said the rules are not intended to dictate a level of pay, which increased on average for CEOs in every sector in 2004, the last year for which data is available.

According to the Conference Board, a private economic research group, a CEO in construction, the most highly paid sector, earned a median $2.8 million in salary and other payouts, a 26 percent year-over-year increase. The lowest-paid CEO, in the transportation industry, still earned more than $800,000, a 27 percent pay raise.

Those figures don't include retirement benefits and so-called "golden parachutes," or severance that would be paid to executives if they lose their jobs, often because of a merger. Most CEOs enjoy those pay-package features, but their exact costs aren't laid out in most proxies.

The new rules would require the companies to report the estimated payments under such agreements and the estimated retirement benefits, even if the executive retires early.

Under current disclosure rules, companies can obscure what each executive gets because they are required only to describe the company's retirement plan and not how it could affect individual executives.

The enhanced disclosures could lead to less excess, though not necessarily smaller salaries, by accelerating what New York executive compensation consultant Steven Hall called the "red-faced test" in which board members ask themselves whether they would be embarrassed if payments they approve become public. Even CEOs are becoming pay-shy, he said.

"We're seeing CEOs coming in and saying, 'You know, I don't need that country club membership, or I'll just pay for it myself. It's not worth the lightning rod it will become,' " Hall said.

The SEC sought to hold CEOs and chief financial officers, whose pay packages would have to be among those disclosed under the new regulations, more responsible by requiring that they "certify" the discussion and analysis of compensation practices at their companies.

The certifications would be similar to those required under the Sarbanes-Oxley Act, which made the top executives liable for their companies' financial reports.

laura.smitherman@baltsun.com

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