Executive Compensation: The New Executive Compensation Disclosure Rules Do Not Result in Complete Disclosure*
Donahue, Sean M., Fordham Journal of Corporate & Financial Law
Can a compensation consultant provide objective advice to the board regarding executives' pay packages when the same consultant provides other services to the company? Can investors understand how executives are compensated if companies do not disclose the level of performance that the company must achieve for executives to obtain certain amounts of compensation? Is the disclosure about executive compensation complete, absent full information regarding earnings on deferred compensation and perquisites?1 This Article concludes that the answer to these three questions is a resounding no.2 Although the Securities and Exchange Commission ("SEC") promulgated new executive compensation disclosure rules that governed the 2007 proxy season,3 the foregoing issues were not adequately addressed by the new rules.
For example, when the board of the North Fork Bancorporation ("North Fork") hired Mercer Human Resources Consulting for compensation advice, Mercer suggested a golden parachute that would pay the top three executives $288 million if the company underwent a change in control.4 This package included a tax gross-up on restricted stock to the chief executive officer ("CEO") of $44 million.5 One pay expert concluded that the CEO could potentially receive tax gross-up payments worth nearly $111 million.6 Essentially, the corporation would pay the taxes for a CEO taking home about $185 million.7 This pay package raises a red flag: it is unusual for a company to pay the taxes on restricted stock upon a change in control.8 However, Mercer recommended this uncommon compensation package in a situation where it performed other services for the bank.9 In fact, Mercer earned nearly $1 million in 2002 and 2003 for its services as actuary to North Fork's cash-balance retirement plan.10
North Fork's payment to Mercer for these services certainly raises doubts as to whether Mercer provided objective advice to the board and highlights an area of disclosure that the new rules fail to address. In fact, this compensation package exemplifies the reality of the new rules. While the amendments are an overall improvement to the previous regime, they do not result in complete disclosure.
Part I of this Article describes the history of executive compensation and the disclosure of this compensation. Part II discusses problems with incomplete disclosure. Part III discusses the amendments to the executive compensation disclosure rules. Part IV discusses the four areas in which the rules fall short: a lack of information regarding compensation consultants, a lack of disclosure of target performance levels, a lack of disclosure of earnings on deferred compensation, and a lack of disclosure of perquisites. Part V proposes solutions for more effective executive compensation disclosure. Part VI concludes this Article.
A. History Of Executive Compensation
Executive compensation is a relatively new area of study.11 In fact, such compensation did not exist prior to the development of the modern corporation.12 This form of business organization started with New Jersey legislation in 1896, and by 1901 the first major corporation was organized.13 When corporations first formed and developed, they were led by entrepreneurs, exemplified by men like Henry Ford.14 By the middle of the twentieth century, however, a new class of business actor evolved to run corporate America.15 These individuals did not found companies, but rather made up an elite class of executives who held powerful positions in major corporations.16
Even though a corporation must disclose the pay for its top five executives,17 the study of executive compensation typically focuses on the pay received by the CEO.18 The CEO typically receives the highest pay of any person in the corporation, and this amount of compensation has increased over time.19 By the 1950s, some CEOs were making relatively large salaries, but many salaries were not exorbitant. …