Comments on: New SEC Executive Compensation Proposal

New SEC Executive Compensation Proposal

monju_bosatsu — Thu, 16 Feb 2006 11:29:13 -0800

The SEC has proposed new rules [pdf] to drastically increase requirements on executive compensation disclosure. You can read a summary of the proposal in the SEC's press release, as well as statements from Chairman Cox and Commissioner Atkin. [more inside]

By: monju_bosatsu

monju_bosatsu — Thu, 16 Feb 2006 11:29:26 -0800

Securities regulation is the United States is primarily centered on required disclosures, and this latest proposal by the SEC has renewed debate on disclosure regulation. Larry Ribstein has a number of posts criticizing the proposal, Geoffrey Manne has two very interesting posts discussing the costs of disclosure regulation, Stephen Bainbridge weighs in on disclosure regulation here and here. While most of the corporate law academics are concerned that disclosure regulation has gone too far in imposing costs on corporations, others believe that regulation has not gone far enough. Pending in the House of Representations is the Protection Against Executive Compensation Abuse Act, which would require that issuers of a certain size not only disclose but also obtain shareholder approval for compensation of "principal executive officers," including severance compensation. Christine Hurt comments on shareholder approval requirements here. The new proposal isn't the only controversy surrounding executive compensation. Last year FASB adopted a rule, SFAS 123R, requiring that the grant of stock options be treated as an expense for accounting purposes. Richard Booth and Geoffrey Manne weigh in on that issue.

By: JekPorkins

JekPorkins — Thu, 16 Feb 2006 11:41:39 -0800

While I think it's generally a good idea to rein in corporate America in terms of ethics and transparency, the '33 and '34 acts are so vague (IMHO unconstitutionally so) that I think they have granted far too much legislative authority to administrative agencies.

By: orthogonality

orthogonality — Thu, 16 Feb 2006 11:41:39 -0800

Good post. Bad news.

By: dios

dios — Thu, 16 Feb 2006 11:50:53 -0800

Good post. I think Bainbridge hits the nail on the head though: the SEC has no power - none, nada, zilch - to regulate the substance of corporate governance, including but not limited to the merits of executive compensation. These issues are left to state corporate law That should be dispositive on this issue.

By: mullacc

mullacc — Thu, 16 Feb 2006 11:52:14 -0800

One of the more recent themes I've been hearing in the private equity world is that, once a company is taken private, the executives can be paid appropriately (which is presumably more than as a public company) without fear of public/regulatory scrutiny. Avoidance of SOX and the quarterly earnings game were already powerful reasons used to convince management to go along with a buyout; this move will only make going-private transactions more alluring.

By: monju_bosatsu

monju_bosatsu — Thu, 16 Feb 2006 12:04:20 -0800

That should be dispositive on this issue. Uh, no. As Bainbridge correctly points out, the SEC has no power to regulate the substance of corporate governance, including the merits of executive compensation. The SEC is clearly empowered to regulate disclosure of financials.

By: bove

bove — Thu, 16 Feb 2006 12:15:14 -0800

I am someone who disagrees with the naysayers monju links to above. Although the increased disclosure may be costly, I think it is necessary. I actually study CEO and director pay for a living (I am an academic) and I still find it incredibly complex and difficult to figure out. Even reading the current proxy statements, it is still often impossible to completely know what an executive is being paid. The goal for public companies should be complete transparency. As an investor, I should be able to examine your disclosures, and fully understand how people are being paid. This is a step closer to that ideal.

By: mullacc

mullacc — Thu, 16 Feb 2006 12:26:01 -0800

bove: Transpency is great and it can be worth the expense. But my fear is that the issues that regulator focus on (and perhaps this is a function of what they can legally focus on) may not be the most worthwhile information to most investors. I'd much rather have more disclosure related to business fundamentals than more granularity related to executive comp.

By: bove

bove — Thu, 16 Feb 2006 13:08:11 -0800

mullacc: I probably agree with you as an investor on that point. As a researcher, I am happy to see more transparency in an area that helps me in my data collection efforts. I will also say, that virtually ever academic who studies executive compensation will tell you that there is no real link between executive pay and performance. The best predictor of pay is the size of the firm. Companies and executives spend a lot of time justifying their pay packages, but the truth is, they are not tied very closely to performance.

By: Dreamghost

Dreamghost — Thu, 16 Feb 2006 13:52:11 -0800

According to the study, the average CEO-to-worker pay in the US also increased greatly, from 301-to-1 in 2003 to 431-to-1 in 2004. By contrast, in 1990 the average CEO pay was "only" 107 times more than the pay for the average production worker. The report notes that if the average pay of workers had risen as fast as CEO pay since 1990, the lowest paid workers in the US would be earning $23.03 an hour, not $5.15 an hour, and the average production worker would make $110,126 annually, rather than the $27,460 average earned in 2004.

By: mullacc

mullacc — Thu, 16 Feb 2006 14:01:36 -0800

Is this news, Dreamghost? Do you have any thoughts related to the subject at hand? Perhaps how the new disclosure rules will affect executive pay? Or did your critical thinking skills come to a screeching halt as soon as you read the phrase "executive compensation?"

By: bove

bove — Thu, 16 Feb 2006 14:12:38 -0800

Also to follow up, mullacc what do you think regulators should be focusing on? What are other areas where companies need to be more transparent?

By: Dreamghost

Dreamghost — Thu, 16 Feb 2006 14:12:51 -0800

I was stating the obvious reason why this proposal should be adopted. And I believe the word that caught my eye was Abuse.

By: Dreamghost

Dreamghost — Thu, 16 Feb 2006 14:38:08 -0800

I just realized the website i linked to was a socialism site. I am not a socialist actually far from it. I was googling the phrase "average ceo pay 1990" to find information on the rampant rise of ceo to worker wages since the 1990s. I belive a company can pay anyone any amount they want. But that said public companies should offer complete transparency. Sorry.

By: mullacc

mullacc — Thu, 16 Feb 2006 14:41:39 -0800

bove: I'm not exactly sure what the regulators should focus on. I don't think compensation abuse is an obvious case of something that can be solved with more disclosure - in fact, onerous disclosure requirements may make the problem worse. Requiring more disclosure won't make CEOs less greedy. It may give them more incentive to take their companies private or to find more creative ways to avoid disclosure or to give up being CEOs altogether, which may result in less competent CEOs getting the job. The kind of disclosure I think is useful is the kind of stuff that regulators probably could not require. Things like increased and standardized segment reporting across industries (i.e. revenue/cost by product or geography). Pro forma reporting is terrible inconsistent and sometimes unavailable (separating recurring from non-recurring items and providing clear descriptions, definitions and pro forma reconciliation of things like EBITDA and other ambigiously defined financial measures, financial information relating to acquired companies). Details behind financial instruments such as non-public debt and structured products. Lots of things, but I don't have a ton of specifics. But my experience has taught me that the quality of information available to the general public and what's available to, say, a possible private equity investor with a signed confidentiality agreement are worlds apart. So much so that I think the average individual investor is hopelessly disadvantaged.

By: ambrosia

ambrosia — Thu, 16 Feb 2006 14:48:55 -0800

Requiring more disclosure won't make CEOs less greedy. This is true. What I've been hearing about the new disclosure requirements is that it will just make comparing pay packages easier, and more CEOs will wind up demanding that they get bumped up to keep up with the competition. As bove noted above, it's not always that easy to figure out executive compensation from proxy statements.

By: mullacc

mullacc — Thu, 16 Feb 2006 15:00:47 -0800

Dreamghost: I don't really care that it was a socialist site, or that you wanted to share that information. You just didn't give any context about why the compensation trend was bad, or what was causing it, or how this regulation will address, etc. Saying the average CEO makes 400x the average worker is just a form of sensationalism if there isn't any analysis behind it. It's just like saying company X makes a billion dollars - well, oh shit, a billion?! It's always sounds so ominious, but it doesn't mean anything without context. You might as well just write, "OMG rich people sux!"

By: machaus

machaus — Thu, 16 Feb 2006 15:09:54 -0800

Between this and Sarbanes-Oxley, will we see a rush of smaller publicly traded companies going private?

By: mullacc

mullacc — Thu, 16 Feb 2006 15:25:20 -0800

machaus: It's already happening. To be fair, SOX/disclosure hasn't been given as a reason to go private in many deals, at least not publicly, but it is certainly one of a several factors leading to the surge in private equity activity. But, in reality, the incredible high yield market conditions and need to deploy capital have been the biggest drivers.

By: mullacc

mullacc — Thu, 16 Feb 2006 15:28:59 -0800

high yield market conditions And by that I mean, high yield debt. Referring to the debt used in leveraged buyouts (LBOs). Private equity firms provide the "equity" portion of LBOs. Sorry to use jargon, I forget that these may not be everyday terms.

By: Ritchie

Ritchie — Thu, 16 Feb 2006 16:39:09 -0800

From a man-in-the-street perspective, I'm not really interested in what CEOs make. What I would like to know is how much tax they pay.

By: patricio

patricio — Fri, 17 Feb 2006 07:19:49 -0800

It's interesting that this type of disclosure is seen as being contraversial - it's been required in the UK for a while now and is now being proposed across the EU. As it stands UK listed companies have an obligation to disclose, in their annual report to shareholders: "(2) information presented in tabular form, unless inappropriate, together with explanatory notes as necessary on: (a) the amount of each element in the remuneration package for the period under review of each director, by name, including but not restricted to, basic salary and fees, the estimated money value of benefits in kind, annual bonuses, deferred bonuses, compensation for loss of office and payments for breach of contractor other termination payments; (b) the total remuneration for each director for the period under review and for the corresponding prior period; (c) any significant payments made to former directors during the period under review; and (d) any share options, including "Save-as-you-earn" options, for each director, by name, in accordance with the requirements of the Directors' Remuneration Report Regulations" It's great for some casual voyeurism (they got how much?!) and, of course, feeds the sensational "fat cat" stories so beloved of the media. The paradox is that the board's pay is set by a committee of non-executive directors who will, almost without exception, be executive directors of some other company. The mutual back-scratching that goes on means there's little or no restraint exercised. I think the disclosure rules, by generating more attention to executive pay will empower institutional investors to take a tougher stance (particularly on the issue of severance pay), which in turn may feed through into a better link between pay and performance. Compensation disclosure rules at least make things a bit more obvious and can perhaps prevent the most egregious excesses.

By: I Love Tacos

I Love Tacos — Fri, 17 Feb 2006 11:46:19 -0800

Taking the investor standpoint, I think that this sort of disclosure is a very good thing. The accounting isn't too odious, and shareholders aren't going to care deeply unless executive compensation is absorbing an irrationally large share of corporate profits.