The SEC Speaks: No Pay Secrets

The federal government's top corporate watchdog is going to start requiring corporations to spill all the beans on what they're paying CEOs. But sunshine alone won't disinfect America's executive pay rot.

By Sam Pizzigati

July 31, 2006

Securities and Exchange Commission chairman Christopher Cox knows a hot political issue when he sees one.

This past January, the SEC released draft regulations designed to force public traded corporations to divulge more information about how much they pay their top executives, then sat back and waited for the public comments on the draft regs to come in.

And come in the comments did. In torrents. The SEC received, in all, over 20,000 letters during the public comment period for the CEO pay draft regs, more letters than the SEC had ever received, on any single issue, in the agency’s entire 72-year history.

Last week, amid appropriate media fanfare, Cox released the end-product of this intense comment period, a set of new standards that will indeed — starting next year — force corporations to disclose substantially more information about their executive pay.

These new standards won almost immediate praise from key observers on the corporate governance scene.

“This is a red-letter day for shareowners,” noted Amy Borrus from the Council of Institutional Investors. “At last investors will get a full, clear and plain English explanation of CEO pay.”

“So much of what has gone on in the past has been an elaborate attempt to hide compensation and options and perks paid to executives,” added AFL-CIO associate general counsel Damon Silvers. “The comprehensive nature of this change is really welcome.”

Even corporate types exulted. The new SEC rule, proclaimed compensation consultant Ira Kay of Watson Wyatt Worldwide, a frequent apologist for contemporary CEO pay excess, “will enhance transparency and be good for shareholders."

The SEC rule, agreed Office Depot CEO Steve Odland, the chair of the Business Roundtable corporate-governance task force, “strikes a good balance.” The new standards, Business Roundtable president John Castellani summed up, leaves CEOs “pleased.”

How could top CEOs be “pleased” with the same new standards that have CEO pay critics celebrating?

Corporate leaders are smiling because they know they’ve dodged a bullet. Opinion polls are now regularly revealing a sky-high level of public anger over CEO pay excess. But the new pay disclosure regulations from the SEC do nothing to actually limit CEO compensation.

The new regs, for instance, do not require that shareholders get a chance to vote, even on an advisory basis, on executive pay packages. By not taking this step, says Rich Ferlauto from AFSCME, the public employee union, the SEC has let a chance to make a real difference slip by.

“What we didn't get is any additional ability for shareholders to do anything about it when they learn how overpaid the chief executive may be,” says Ferlauto. “We’re disappointed.”

Even so, most CEO pay critics are giving the new SEC disclosure rule, if not a standing ovation, at least a hearty round of applause. The rule, these critics agree, will definitely increase the body of information out there on what CEOs are actually taking home.

Under the rule, the most important change in corporate pay reporting requirements since 1992, public traded companies will have to show almost everything their top five executives are making, perks and lifetime retirement benefits included.

One example of the direct changes the new rule makes: The old rule let companies keep secret any perks worth under $50,000. The new SEC standards demand disclosure of all perks over $10,000.

Corporations will also have to disclose what their top execs stand to make from any “golden parachute” severance packages set to kick in should their company be merged or acquired.

The new standards impact reporting on stock option as well. They require corporations to give a value to any new stock options they award executives and include this value in a new “total pay” figure they must report for each top exec.

Corporations, besides this reporting, will have to pinpoint exactly when options are granted, a move that should discourage the backdating and other maneuvers that essentially guarantee executives massive stock manipulation profits.

Executives, under the new SEC rule, won’t have to include the profits they actually clear from exercising stock options in the “total pay” figure they report to the SEC. But they will continue to have to disclose these profits in their company’s annual proxy statement.

Some companies, to be sure, already disclose what the SEC is now requiring. But most companies don’t, and that means that the first pay reports filed under the new SEC standard — to be available next spring — will likely show a significant boost in CEO pay above and beyond the healthy annual boosts that have been the norm for the past quarter-century.

What impact will these new — and higher — CEO pay numbers have on executive compensation overall?

Historically, some analysts note, new disclosure rules have increased pressure — within CEO ranks — for higher pay, as CEOs have learned more details about what their counterparts are making.

But the new CEO pay figures could also help heat up public pressure on Congress to get involved with executive pay in a more meaningful way.

SEC chairman Christopher Cox, for his part, has clearly concluded that taking on CEO pay as an issue can pay political dividends. Cox, as a high-ranking GOP congressional leader before his SEC appointment last year, consistently carried the legislative water for Corporate America. Corporate reform activists opposed his SEC appointment, figuring Cox would roll over for corporate interests once he became SEC chair.

But Cox has been, in fact, as aggressive an SEC chair as any of his recent predecessors. Why? He may be angling to position himself as a people’s champion against executive excess, in an attempt to separate himself from the Republican field in a future contest for a GOP presidential nomination,

Cox, as SEC chair, has certainly mastered the corporate reform discourse.

“Shareholders need intelligible disclosure that can be understood by a lay reader without benefit of specialized expertise or the need for an advanced degree,” he noted last week. “It’s our job to see that they get it.”

But Cox will only go so far down the road toward more reasonable levels of executive pay. He reiterated once again last week that he has no plans whatsoever to seek limit on how much CEOs can take home.

“It’s not the job of the SEC,” he told reporters, “to place limits on what executives get paid.”

Limits, in other words, remain off the table for polite political discussion. So long as that remains the case, so will any real change in CEO compensation.

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Labor journalist Sam Pizzigati, the author of Greed and Good: Understanding and Overcoming the Inequality That Limits Our Lives, edits Too Much, an online weekly published by the Council on Economic and Political Affairs.

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