CEO-pay disclosure rules are a failure

The Baltimore Sun

Last year, SEC Chairman Christopher Cox pleaded with corporations to use "plain English" in reporting executive pay and avoid "the legalese and the jargon" that make proxy statements more like insurance policies than helpful guides for shareholders.

In that spirit, Provident Bankshares wants you to know that the $91,725 it paid Chief Executive Officer Gary N. Geisel in company stock last year "reflects the dollar amount of compensation expense recognized for financial statement reporting purposes under FAS 123(R)."

Ciena Corp. said executives' total potential cash pay, "consisting of base salary and bonus opportunity at the target level," was "between the 50th and the 75th percentile of total cash compensation for equivalent positions in the Peer Group."

Constellation Energy said CEO Mayo A. Shattuck III made $13.9 million last year and $20 million in 2006. In the next paragraph, it said he made $14.8 million last year and $14 million in 2006. Can't I just look at the guy's W-2 form?

The Securities and Exchange Commission's improved rules for disclosing big-shot pay are a failure. Yes, they're a superior failure compared with the old rules, which omitted information about retirement boodle and stock-option riches. But they don't work.

"What we're seeing is the lawyers lawyering these disclosure statements while the owners of companies are just getting more and more confused," says Stephen M. Davis, project director at the Millstein Center for Corporate Governance and Performance at Yale University. "They're getting reams of paper, most of it designed to satisfy regulators rather than to explain what compensation is all about."

Black & Decker's executive-compensation section in this year's proxy statement is almost twice as long as two years ago. At 13,000 words, it would make three or four chapters in a novel. Surely the pay of CEO Nolan D. Archibald - $11.1 million last year - requires Proustian expansiveness. But could we have fewer references to threshold performance goals and target payout ratios?

One problem is complexity. Shattuck holds five classes of options, which give the right to buy Constellation stock at a preset price. Some he can exercise; others he can't.

At McCormick & Co., there aren't just short- and long-term cash bonus programs for top people, as at many companies. It has a "midterm incentive plan," apparently just in case the other ones don't pay off.

The combination, says McCormick, "provides an appropriate balanced focus on long-term shareholder value, as well as on the shorter term building blocks necessary for the achievement of longer-term value."

Archibald's compensation has a dozen moving parts, including three (three!) pension plans.

One improvement, of course, would be shrinking and simplifying the packages. Dissident shareholders want to reduce Black & Decker's pension gravy, for example. The company says pension changes "would significantly reduce Black & Decker's ability to attract highly qualified executives."

The hardware manufacturer has lost some talent recently. But lack of a gilded pension plan hasn't seemed to hurt T. Rowe Price, where bosses receive the same 401(k) plan as everybody else and where the stock has generated three times the shareholder return of Black & Decker's in the past five years.

Some hope the growing "say on pay" movement could simplify and shrink CEO boodle while improving disclosure. Endorsed by presidential hopefuls Hillary Clinton and Barack Obama, say on pay would require a nonbinding shareholder vote on executive emoluments.

Yale's Davis thinks corporate boards should embrace say on pay and seek shareholder input on disclosure. Better dialogue, he says, could let the SEC and the lawyers back off while shareholders get what they need. Even among sophisticated financiers at last week's spring meeting of the Council of Institutional Investors, he says, complaints about pay disclosure were "pretty high."

The SEC says it hasn't finished the job. Last year, it let 350 companies know how they could improve executive-pay reports.

But how about this? Payroll departments print W-2 forms so employees can report what they made to the Internal Revenue Service. What's good enough for the revenuers is good enough for shareholders. Show us the CEO's W-2, which is often hugely different from what's in the proxy statement and might give a truer look at how he's profiting at shareholder expense. Include information from his tax return if that doesn't tell the whole story.

But don't bloviate about bonus targets and options vesting. Say what the guy took home. It'll bring bracing clarity for shareholders and relief for CEOs who hate getting blasted for the current value of stock options they might never cash.

Of course, it might be a little too clear for corporate comfort. All the more reason to do it. A W-2 slip, a box for "wages, tips, other compensation" and a number. That's plain English.

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