Federal securities regulators moved Tuesday to require companies to provide far greater detail about their executives’ pay packages and perks in an effort to bring more transparency to an area that has provoked investor and public anger.
The five members of the Securities and Exchange Commission voted unanimously at a public meeting to propose the plan, which would make the biggest changes in rules governing disclosure of executives’ compensation since 1992. The proposal will be opened to a 60-day public comment period and could be formally adopted by the SEC sometime afterward, possibly in time to take effect for the spring annual-meeting season next year.
Companies for the first time would be required to furnish tables in annual filings showing the total yearly compensation for their chairman, chief financial officer and the next three highest-paid executives. The true costs to the bottom line of their pay packages, including stock options, would have to be spelled out.
“This information is information that shareholders have a right to know,” Commissioner Cynthia Glassman said before the vote.
Also under the SEC proposal:
- The level at which total executive perks must be detailed would be reduced from $50,000 to $10,000.
- New disclosure tables for executives’ retirement benefits and the compensation of company directors would be required.
- Companies would be required to explain the objectives behind their executives’ compensation. Companies’ annual filings would have to include sections written in plain English on executive pay.
Recent academic studies have shown dizzying leaps in top executives’ salaries, bonuses and stock benefits in recent years, as well as big increases in executive compensation as a percentage of company earnings — money that otherwise would go to shareholders. At the same time, critics of corporate conduct underline what they see as a disconnect between company officials’ pay and performance.
With the pay gap between employees and bosses widening enormously, Commissioner Roel Campos said, investors may ask whether “payment for performance has been replaced by payment for pulse.”
SEC Chairman Christopher Cox, who has made fuller disclosure a high priority since taking the agency helm last August said, “Simply put, our rules are out of date.”
Still, some critics of corporate conduct don’t believe fuller disclosure of compensation goes far enough because it won’t rein in runaway pay and may even create competitive pressure among companies that will push it up.
Even after the corporate scandals of 2002, as some companies continued to lavish on their executives extravagant pay packages with scant justification — and often tied to short-term leaps in stock prices — the SEC began in 2004 to consider tightened disclosure requirements for compensation.
In one high-profile case, the SEC said in September 2004 that General Electric Co. violated the law by failing to fully disclose to investors the millions of dollars in perks enjoyed by its retired chief executive Jack Welch, one of Wall Street’s most admired CEOs. They included unlimited personal use of GE’s planes, exclusive use of an $11 million apartment in New York City, a chauffeured limousine, a leased Mercedes, office space, financial services, bodyguard security and security systems for Welch’s homes.
The SEC did not fine GE in the settlement but won a promise from the company to fully disclose such benefits in the future. The agency also has brought cases involving disclosure of compensation against Tyson Foods Inc. and The Walt Disney Co.