U.S. securities regulators are considering a variety of changes to expand and revise its executive pay disclosure rules. At the SEC meeting today, the commissioners will propose giving investors a greater voice in setting executive pay at companies that were given taxpayer funds under the U.S. government’s Troubled Asset Relief Program.
The proposal is still being crafted and may change; however, among the possible changes is a revision to how companies value equity awards in the summary compensation table for top executives that they file with the commission each year.
Stock Options:
The SEC is considering requiring companies to include the estimated value for stock options granted during the year. The table now includes the value of option grants that vested, or became eligible to be exercised, during the year. Many compensation experts consider this an imperfect way to value options, and believe options should be valued as of the date they are granted. Also, a change in how companies report the value of stock options could profoundly affect the reporting of executive pay.
For example, Citigroup reported $10.8 million of compensation for Chief Executive Vikram Pandit in 2008, according to a proxy filing. Had the bank valued Pandit’s stock and option grants as of the date they were granted, his reported compensation would have been $38.2 million. Pandit was awarded much of his 2008 compensation on January 22 of that year, when Citigroup shares closed at $24.42. The stock closed Tuesday at $2.97, and Pandit’s awards are now either under water or show paper losses.
Shareholders Vote:
The Obama administration has sought to rein in excessive executive pay amid outrage from lawmakers and the public that some executives, including some at insurer AIG were collecting big pay packages even as the government propped up their companies. The administration has urged Congress to give the SEC authority to require publicly traded companies to give shareholders a nonbinding vote on pay for top executives.
Corporate Pay Committees:
It also wants the SEC to have power to insure that corporate pay committees are sufficiently independent from management. The SEC may propose requiring companies to disclose more information about compensation consultants who also perform other work for the company. For example, if a consultant provided compensation advice and other services, the company would be required to disclose their fees and the other work being performed. Governance activists charge that consulting firms face conflicts of interest because of their dual role in advising companies on human resources as well as executive pay.
Other Changes:
The SEC may also expand the so-called compensation, discussion and analysis (CD&A) section of the proxy statement, to require companies to address how they set compensation for regular employees, as well as top executives.
The regulator also is mulling further disclosures about the experience and qualification of director candidates, as well as why a company adopts a particular leadership structure, such as separating the chairman and CEO roles. In addition, it may also consider requiring companies to expand discussion of material risks to its business.
Some of the changes under consideration are similar to proposals outlined this year by Chairman Mary Schapiro. The current rules only require a very brief description of a candidate’s business experience over the past five years. That may not be sufficient in today’s complex business environment.
