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By Rachel Beck, Associated Press
The Securities & Exchange Commission is considering changing a formula that critics say often allows public companies to lowball in regulatory filings just how much top executives are paid. At issue is how companies report in a summary compensation table found in their annual proxy statements the totals for stock options and stock awards, which often make up most of top executives' pay.
When the rules were last revised three years ago, the SEC directed companies to include a figure that is based only on how much of a charge against earnings is taken each year for the portion of those awards that vested during the year. Take the case of a company that decided its CEO deserves $10 million worth of stock options: The company need only include one-fourth of that amount in the summary table if the award were structured to vest in equal installments over four years.
Executive pay experts say a better gauge of what boards of directors consider when setting pay levels is the estimated present value of all stock-based awards on the day they are granted. But the 2006 SEC rules relegated those totals to a separate table lower in the proxy statement, which investors often overlook or find hard to decipher.
The Associated Press and other news organizations don't rely on the total pay figures reported by companies in the summary compensation table for those reasons.
SEC Chairman Mary Schapiro said in an interview on Apr. 28 that an executive pay formula review may be part of a broader rethinking of the agency's compensation disclosure requirements. Among other changes Schapiro—who took over the SEC in January after being picked by President Barack Obama—said the SEC is considering:
Requiring companies to spell out in greater detail how their boards manage risk
—ranging from financial issues to climate change—and how risk affects the setting of compensation. "Shareholders generally deserve greater clarity about how compensation plans have been designed, how they relate to risk taking, and how they relate to longer-term performance," she said.
Bolstering required disclosures relating to benchmarking
—how companies' pay practices compare to those of competitors—and the qualifications of directors.
Expanding disclosure about how companies pay employees outside the top five now listed in proxy statements.
While individuals wouldn't be named, companies may be ordered to reveal more about such things as the structure of their bonus programs for the broader work force. Schapiro said adding details would serve shareholders by enabling them to better comprehend what "kind of conduct is incentivized by paychecks."
"I think it's important in the context of understanding, particularly at financial institutions, the linkage between compensation decisions and risk taking," she said.