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Beller Says Staff Is Reviewing Compensation Disclosure

The SEC's direct regulatory interest in executive compensation focuses on the proxy provisions of the Exchange Act and the SEC's own proxy rules. Mr. Beller said that two trends have converged to make executive compensation an issue that must be addressed. First, shareholders have concluded that executive compensation is not aligned with their interests or that the disclosure is not transparent enough to determine whether there is an alignment. Second, too many issuers provide opaque disclosure that confirms investors' worst suspicions that there's something to hide, he explained.

Mr. Beller referred to a recent report by the National Association of Corporate Directors on executive compensation and the role of the compensation committee which concluded that boards need to find better ways to measure and reward performance. The Council of Institutional Investors also recently updated its policy on executive compensation in which it emphasized the importance of transparency in the compensation disclosure.

Mr. Beller said there is an unfortunate misconception that disclosure of certain aspects of executive compensation is not necessary if " literal compliance" with the SEC's rules would not require it. He emphasized that all compensation must be disclosed, whether it is plan or non-plan compensation for services rendered or paid, current or deferred. If a company believes that a payment is not required under the rules, Mr. Beller said it should consider whether not disclosing the payment is a material omission that makes its disclosure misleading.

Mr. Beller is concerned that companies are routinely omitting information about perks such as the personal use of company planes or cars. Some companies are being overly creative when categorizing other items, he added, such as calling housing, security systems and cars business expenses rather than perks. Mr. Beller suggested that companies consider whether the expense is available to employees generally on a nondiscretionary basis or whether it is a benefit for the chosen few in determining whether an expense is a perk.

The valuation of perks should also be examined, according to Mr. Beller. The staff has seen large tax gross ups for perks that are not disclosed. The appropriate measure of value is the aggregate incremental cost to the company, not the tax value of the benefit, he advised. Mr. Beller noted that adequate disclosure about executive compensation is also of interest to the Division of Enforcement, and referred to the case against General Electric Co. for failing to fully describe the benefits provided to former chairman and CEO Jack Welch.

Mr. Beller said he also has concerns about compensation committee reports, too many of which include boilerplate language that is not informative. Companies and their compensation committees would benefit from taking a fresh look at these reports, in his view. The SEC has not provided guidance in this area since 1993, but Mr. Beller said that guidance is still sound.

Mr. Beller hopes that compensation committees are taking to heart suggestions that they reexamine their relationships with compensation consultants to make sure the consultants work for the committee rather than the executives whose pay is being considered. Committees should look at how bonuses and other compensation is awarded, and how that affects post-retirement packages.

The group within the Division of Corporation Finance is looking at how companies avoid categorizing items as perks, disclosure related to retirement benefits and deferred compensation, as well as total compensation. The staff is also considering whether companies should disclose the compensation of additional officers, such as the chief financial officer and general counsel. Mr. Beller noted that the SEC proposed, but did not adopt rules in 1995 to expand the disclosure of director compensation, and will take another look at that.

The staff is also considering whether compensation committee reports adequately address the committee's policies, operation and determinations. Mr. Beller noted that in order to encourage transparency in these reports, the SEC provided that they would be deemed to be filed under the Exchange Act and are not incorporated by reference in the registration statements. He said this step has not been reciprocated with more transparent disclosure, so the staff will consider whether this special treatment should continue.

Finally, the staff is considering the relationship between Item 402 and the related-party disclosure under Item 404 of Regulation S-K. Mr. Beller said the SEC has received several rulemaking petitions on this issue and the staff is reviewing it as it relates to executive compensation.