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SEC Proposes New Executive Compensation Disclosure Rules 

The commissioners yesterday unanimously approved a proposal to amend the executive compensation disclosure rules which were last revised 14 years ago. Chairman Christopher Cox pointed to significant changes in the market place since the rules were last amended and said that in some cases, the disclosure rules now obfuscate rather than reveal the extent of executive compensation. The open meeting was the last for Alan Beller, director of the Division of Corporation Finance. Cox said Beller is a giant in the history of the SEC who is responsible for 70 rule proposals, adoptions or interpretations during his four years at the helm.

A key objective of the rule proposal is to present a single bottom line figure on the top executives' annual compensation, including perquisites. Cox said the proposal is about wage clarity, not wage control. The proposed rules would also enhance the disclosure about related-party transactions and director independence. The disclosure would have to be presented in plain English, including a new section called compensation disclosure and analysis, which would replace the current executive compensation committee report and performance graph.

The summary compensation table would remain the primary vehicle for disclosing the compensation of the principal executive and financial officers, the other three highest paid executive officers and the directors. No items could be excluded from the table, but would be disclosed in a column for all other compensation, where appropriate. All perquisites valued at $10,000 or more would have to be disclosed. The staff will issue interpretive guidance on perquisites and personal benefits to ensure an understanding of what constitutes a perquisite. Directors' compensation would be disclosed for the last year in a director compensation table.

Cox asked Beller if he thought the plain English requirement would work in practice. Beller said he thought the plain English initiative from the 1990s was successful and he hopes for equal or better disclosure in the proxy statements and annual reports. Improvements come not only from rules, but also from the comment process, he said.

Commissioner Cynthia Glassman asked if there was a simpler way to accomplish the proposal's objectives. Beller said he wished that the rule could simply say to disclose all elements of compensation, but experience suggests that something more prescriptive is required. While he is not thrilled with the complexity of the proposal, Beller said the tabular format provides comparability. The proposal will eliminate some of the most complex tables and will simplify the related-party transactions and Form 8-K disclosures.

Commissioner Paul Atkins noted that he was at the Commission 14 years ago when the current executive compensation rules were adopted. Critical holes have developed since that time, he said. He asked Beller how the staff arrived at the $10,000 level for disclosing perquisites since it is not a material amount. Beller said the staff attempted to identify a number that would be of interest to investors. Investors are interested not only in the amount, but in the nature of the perquisites, he said. The staff is seeking comment on that threshold of disclosure, he added.

Atkins also asked why the new compensation disclosure and analysis will be filed, rather than furnished, like the current compensation committee reports. Beller said the view in 1992 was that in furnishing the reports, they would be more open, but that has not been borne out. The disclosure is boilerplate to a substantial degree, he said. Beller said he is open to persuasion, but the proposal reflects the current view that furnishing the information is not the best route today.

Commissioner Roel Campos referred to today's executive compensation as "payment for a pulse" rather than payment for performance. There appears to be no shame associated with receiving overpayments, he said. Since the proposed compensation disclosure and analysis could have liability consequences, Campos asked whether it will take enforcement to keep it clean and useful. Beller said there may well be a role for enforcement, and he hopes to see a significant improvement. He referred to enforcement cases in the past that reenforced what is important in MD&A disclosure.

Commissioner Annette Nazareth questioned whether the retirement plan and post-employment disclosure was prominent enough under the proposal. Beller said it is a significant part of the overall package since those issues reflect perhaps the most significant changes in executive compensation over the past 14 years. He believes the proposed presentation will be clear to analysts and investors.

Nazareth also asked whether the proposal will have any impact on the pending electronic proxy delivery proposal. Beller said it would have no direct impact, but there will be an interaction between the two. The executive compensation rules could be very powerful if presented in an electronic format, he explained, especially if there are hyperlinks and layers of disclosure. The highly formatted nature of the tables lend themselves to interactive data formats, in his view.

The comment period on the rule proposals will be open for 60 days.