Executive Compensation Disclosure Rules: Son of Sarbanes
Krell, Eric, Business Finance
The SEC's proposed rule changes will profoundly affect the processes through which executive pay is set, monitored and divulged to the public.
As the demand for greater executive compensation disclosure intensifies, CFOs are heading for a "Holy Cow" moment. The shock will have nothing to do with tally sheets, whose revelations of true executive compensation have been raising investors' and directors' eyebrows recently. No, it will have everything to do with the amount of additional work and responsibility finance executives will bear under new executive compensation disclosure rules. * "Generally speaking, more disclosure and more information in the hands of the investing public is a good thing," says Doug Bettinger, CFO of Los Gatos, Calif.-based 24/7 Customer, a company that provides business process outsourcing (BPO) and offshore call-center services. "You want investors to know you're managing the company thoughtfully. But there is a flip side: Running an organization while complying with rules and regulations is becoming more and more taxing." * Regulators may have a difficult time striking the right balance now that executive compensation has become a political hot potato. In the past, the controversial topic tended to surface each spring during proxy season. "By fall, everybody would forget about it," says Myrna Hellerman, a senior vice president with Sibson Consulting, the human-capital consulting division of The Segal Company in Chicago. "It isn't that way any more. The discussion just doesn't go away now." More questions about the timing of stock-option grants are being raised, and perceptions of executive-pay problems seem to have reached a critical mass among boards, shareholders and employees. In late April, an IBM employee stood up at the company's annual meeting and asked CEO Samuel Palmisano if he could manage to live on the $10,000 per day that his executive pension might provide.
Where It Stands
Activity on this issue is taking place on three fronts. In the U.S. Congress, lawmakers have introduced one legislative proposal that would prevent executive retirement plans from being funded if employee pensions are not adequately funded and another proposal that would allow shareholders to vote on executive compensation arrangements when a merger or a financial restatement occurs.
On the regulatory side, Financial Accounting Standard (FAS) 123R, the accounting rules change that required companies to begin treating stock options as an expense last June, sparked a contentious debate among business leaders, regulators, investors and members of Congress (a group of whom flirted with blocking the new rule through legislation). The treatment of stock options as an expense has curtailed the use of stock options as a long-term incentive vehicle; restricted stock awards have grown more common as a result. The rule has also created more work for finance departments charged with calculating the bottom-line impact of the new rules and forced many companies to hire external service providers to assist with the additional valuation and accounting.
The most sweeping executive compensation change, which has been dubbed the "Son of Sarbanes," is currently being finalized by the SEC. In January, the SEC outlined numerous proposed changes to the disclosure requirements in proxy statements and other reports for executive and director compensation. The comment period for the proposal, which was developed by the commission's division of corporation finance, concluded in April, and staffers are poring over thousands of responses that will affect if and how the commission changes its proposal. "If the proposed rules are finalized in their current state," says Edward Hauder, a Buck Consultants principal based in Chicago, "it will mean a lot more work for finance departments."
The SEC may adjust its proposal over the next month or so, but even if changes are made, the thrust will likely remain intact: Public companies must significantly increase the amount of disclosure pertaining to executive compensation. …