Editorial: The CEO’s getting paid how much?!?!

Investors in certain U.S. stocks who’ve been angered by excessive, hidden management perks and burned by the shady back-dating of executive stock options will soon be getting some satisfaction courtesy of the U.S. Security and Exchange Commission.

In late July, after many months of public consultation, SEC chairman Christopher Cox and his four commissioners voted unanimously to carry out the biggest overhaul of the country’s compensation-disclosure rules in 14 years.

With more than 20,000 comments submitted, Cox noted that, in the 72-year history of the commission, “no other issue . . . has generated such interest.”

Under the new rules, which take effect on Dec. 15, 2006, companies will have to publish far more detailed accounts of executive and director compensation, related-party transactions, director independence, and security ownership of officers and directors.

One of the biggest changes investors should notice will be a new section in proxy statements called the “compensation discussion and analysis,” where a company will broadly lay out the compensation committee’s objectives, policies and decisions. Actual performance targets can be left out of this new section, however, if they are deemed to be competitive information.

More specifically, companies will be required to publish tables showing the total executive pay packages of their chief executive officer, chief financial officer, the next three highest-paid executives, and the remaining directors.

Importantly, for the first time, companies will have to calculate and publish the total, present value of retirement benefits accruing to their top five executives.

And the new rules will force companies to reveal perquisites (“perks”) exceeding US$10,000, such as club memberships, personal use of a company jet and elaborate ice-sculpture fountains built for a spouse’s 40th birthday party at a tropical resort.

Another new provision compels a company to clearly spell out what “golden parachutes” would be paid out to high-level executives should they be fired or the company taken over.

In another important victory for shareholders, public companies will now have to lay out far more information about the timing of stock options granted to their top officers and directors, and explain why such options were approved.

These particular stock-option disclosure changes come on the heels of the U.S. Justice Department announcing its first criminal case involving the back-dating of stock options, and charging two former executives of Brocade Communications Systems with fraud. The SEC has also filed standalone civil fraud charges against the duo.

While the SEC is currently investigating another 80 or so companies with respect to the timing of their stock-option grants, the commission stresses that it still considers the issuance of stock options a legitimate form of executive compensation.

In another good move, the SEC is demanding that most of this new disclosure be made in plain English. Commented Cox: “Shareholders need intelligible disclosure that can be understood by a lay reader without the benefit of specialized expertise or the need of an advanced degree.”

In a reversal of an earlier proposal, the SEC has exempted from the newer, more-stringent rules those highly paid employees who have no responsibility for a company’s policy decisions. The SEC had originally proposed revealing the salaries and perks of all highly paid employees (dubbed the “Katie Couric rule,” after the high-profile U.S. news anchor), but the commission eventually gave in to strong lobbying by the entertainment, sports and advertising industries.

“It’s not the job of the SEC to place limits on what executives get paid,” said Cox.

But with these new and improved disclosure rules, shareholders will finally have much better information on hand when they’re taking on companies that are grossly overpaying their management and directors.

Send your Letters-to-the-Editor and other op-ed submissions to the Editor at: tnm@northernminer.com, fax: (416) 510-5137, or 12 Concorde Pl., Suite 800, Toronto, ON M3C 4J2.