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Pension Funds Criticize Amendments to Executive Compensation Rules

The Teachers Insurance and Annuity Association and College Retirement Equities Fund ("TIAA-CREF") has asked the SEC to rescind its December 22, 2006 interim final rules that changed the required disclosure for stock and option awards to named executive officers (Rel. No. 33-8765). TIAA-CREF wrote that it does not support the amendments to permit companies to report the compensation cost of stock and option awards over service periods rather than the full present value at grant date. The SEC's amendment became effective December 29 in order to be in place for the 2007 proxy season, but comments were accepted through January 29, 2007.

TIAA-CREF noted that the SEC appeared to justify the amendments as a means to conform the reporting of stock and option awards to financial accounting practices. TIAA-CREF, which has $370 billion in assets under management and holds shares in over 6,300 public companies, believes that executive compensation disclosure and financial reporting are separate and distinct. TIAA-CREF said that in order to give an accurate representation of the compensation committee's actions in a given reporting period, the aggregate fair value of awards should be disclosed in the summary compensation table.

The SEC would require the disclosure of the aggregate fair value of awards in a supplemental table, but TIAA-CREF said this approach will reduce comparability. TIAA-CREF urged the SEC to give priority to the goals of making directors aware of the total present value of the compensation packages they authorize, disclosing this cost to investors as a single number and enabling clear comparisons of compensation among companies from year-to-year. TIAA-CREF said the SEC's last minute amendments will undermine the goals of the executive compensation rules, which were widely endorsed by investors.

The California State Teachers' Retirement System ("CalSTRS") asked the SEC to review its action in adopting the interim final rules, and to instead make the amendment a proposal with a comment period longer than the 30 days that were provided. The SEC's action did not give investors a voice, CalSTRS said, and does not reflect well on an agency whose mission is the protection of investors.

The Council of Institutional Investors also expressed disappointment with the SEC's adoption of the interim final rules. The comments of investors cannot have any practical impact, CII wrote, since the amended rules became effective on December 29. The SEC has concluded that the amendments will benefit investors, CII noted, but investors supported the original rule, not the one that was subsequently adopted.

CII said the companies that will benefit the most from the "surprise move" are those in the high technology industry that accelerated the vesting of employee stock options prior to the adoption of FASB Statement 123R. These companies avoided having to report $4.7 billion in after-tax compensation costs in their earnings statements, according to CII, and will again avoid the reporting of a portion of those costs in the summary compensation table. 

The AFL-CIO urged the SEC to reinstate the originally adopted executive compensation disclosure and to reject the interim final rules. The revised approach does not reflect the total impact of the compensation decisions that were made in a particular reporting period, according to the AFL-CIO. The AFL-CIO also criticized the manner in which the interim final rules were adopted. 

One of the supporters of the SEC's action is the Chamber of Commerce. The Chamber believes the amendment is a significant improvement and will provide more useful and accurate information to investors. Ernst & Young also wrote that the revised approach will provide a more clear and complete picture to investors.

Jacquelyn Lumb