Foreseeing the Impact of Proposed Sec Disclosure Rules
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Upper Saddle River, NJ - January 26, 2006 - If you have not already read about the proposed regulations developed by the Securities and Exchange Commission (SEC) for reporting executive compensation in public filings, you undoubtedly will in the near future. As we have seen so many times in the past, media attention and public outcry about excesses in executive compensation usually brings governmental reaction in the form of new and more stringent legislation and reporting requirements.
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Upper Saddle River, NJ - January 26, 2006 - If you have not already read about the proposed regulations developed by the Securities and Exchange Commission (SEC) for reporting executive compensation in public filings, you undoubtedly will in the near future. As we have seen so many times in the past, media attention and public outcry about excesses in executive compensation usually brings governmental reaction in the form of new and more stringent legislation and reporting requirements. Much of the recent media interest has centered on the payment of seemingly undeserved bonuses and stock based awards, excessive perks and supplemental benefits, as well as award gross-ups for payment of resulting taxes. In reaction, the SEC announced last week that it has developed and is planning to enact new disclosure regulations that will bring more transparency to executive compensation transactions, including the justification used by Boards and their Compensation Committees in making their decisions.
The specific regulations include disclosure of the following:
· Value of the Total Compensation Package within the Summary Compensation Table
· Three year information on the pay packages for top executives, including the Chief Financial Officer, as well as the Board of Directors
· Value of equity-related interests (stock)
· Value of retirement plans and post-retirement benefits
· All perks and benefits over $10,000 in value (formerly $50,000)
The final regulations may be more encompassing than those that have been proposed. Providing the required information may certainly be of a benefit to shareholders and prospective purchasers of a company’s stock. We believe, however, that there is a strong likelihood that there will be some very dramatic and unforeseen consequences as a result:
1. Rather than reducing the levels of executive compensation, the new reporting requirements may actually have the effect of setting new and higher baseline levels of compensation.
Historically, nearly every time the government has required new disclosure or set what it considers to be a ceiling on compensation, it has had an opposite effect and actually acted as a new floor for setting pay.
2. The value of compensation will reach to other areas of the business community, specifically privately owned, for-profit firms, and to a lesser extent, to Not-For-Profits (NFPs)
These organizations have to compete within the same marketplace for qualified executives, and therefore they must provide a variety of programs that offer comparable levels of total compensation in order to successfully recruit those individuals, which include new creative variations of long-term incentives, Supplemental Executive Retirement Programs (SERPs), and Phantom Stock Plans. Similarly, we have seen a huge increase in the use of highly leveraged incentives for privately owned companies and NFPs, which to a great extent have been tailored after those in use by the large publicly traded companies.
While many applaud the move by the SEC to provide grater transparency to executive compensation reporting, it is highly questionable whether it will have the desired and wide spread effect of reducing overall compensation levels that the government and critics assume will occur. We foresee that the proposed changes will have the opposite effect, namely to justify and raise total compensation levels, with only reductions in some egregious cases. Only time will tell.
Author: Paul R. Dorf, Ph.D., APD
About Author:
Paul R. Dorf is the Managing Director of Compensation Resources, Inc. He is responsible for directing consulting services in all areas of executive compensation, short and long-term incentives, sales compensation, performance management systems, and pay-for-performance salary administration. He has over 40 years of Human Resource and Compensation experience and has held various executive positions with a number of large corporate organizations. He also has over 20 years of direct consulting experience as head of the Executive Compensation Consulting Practices for major accounting and actuarial/benefit consulting firms, including KPMG, Deloitte Touche Tohmatsu (formerly Touche Ross), and Kwasha Lipton.
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