Magazine article Workforce Management

The Fuzzy Math on Exec Pay

Magazine article Workforce Management

The Fuzzy Math on Exec Pay

Article excerpt

TheInsider

Companies and experts say the SEC's call for disclosure of total compensation could end up painting a misleading picture

EXECUTIVE COMPENSATION

Distress over disclosure

Companies point to difficulties putting a value on perks and future benefits under proposed SEC rules, and say that competitive information could be compromised By Jessica Marquez

No company would argue, at least not publicly, that the Securities and Exchange Commission proposal to require increased disclosure of executive compensation is a bad idea.

But many executives and compensation experts are concerned that the proposal, which is in a 60-day comment period alter being unveiled by SEC Chairman Christopher Cox on January 17, could create more questions than answers.

One of the most controversial provisions in the proposal, expected to become a rule by year's end, would require companies to disclose a total compensation number for the four highest-paid executive officers. Companies question whether this number would really be meaningful given that it includes projected values for stock options, retirement payouts and other compensation, such as severance pay.

There are other pieces of the proposal, which comes in at 370 pages, that companies are expected to protest. One is a requirement to disclose perquisites in excess of $10,000, down from $50,000 currently. There is a mandate to disclose compensation of as many as three nonexecutive employees who are more highly paid than the lowest-paid named executive officer. Then there is the addition of the new "Compensation Discussion and Analysis" section, where companies would have to explain what kind of metrics they used to determine compensation.

"This proposal is a move in the right direction, but it has just overreached in some areas," says Jerry Carter, senior vice president of human resources at International Paper, a Memphis, Tennessee-based paper manufacturer with 82,000 employees globally. "In some areas it will just add cost, and not necessarily produce better companies."

Compensation experts predict that the proposals could increase the amount of time and money that companies devote to disclosing compensation by 50 percent to 100 percent for at least the first year.

"These proposals are a radical revision of the existing framework," says Mark Borges, a principal at Mercer Human Resource Consulting and former special counsel in the SEC's division of corporate finance. "Next year's proxies on executive pay are going to look pretty different."

THE NUMBERS CHALLENGE

The main concern that companies and experts have about coming up with a total compensation figure is that it will be misleading because it will require companies to put an exact dollar value on projected future benefits, such as retirement benefits.

This seems like a fruitless exercise, particularly with change-of-control benefits, which may never take effect, says Allison McBride, director of executive compensation at International Paper. Generally, International Paper's compensation committee calculates its change-of-control figures once every three years, rather than once a year, because it is costly to bring in actuaries to figure them out.

It might be more useful if the SEC required companies to set their own caps on change-of-control agreements rather than have to report figures every year, says Mims Maynard Zabriskie, an attorney and partner in the Philadelphia office of Morgan Lewis & Bockius.

Also, by projecting values of benefits like pensions and severance, companies will end up reporting final compensation numbers that are much bigger than they are in reality.

"People are worried about mixing many aspects of current compensation with prospective compensation," says David Swinford, senior managing director of New York executive compensation consulting firm Pearl Meyer & Partners. …

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