SEC Calls for Greater Disclosure of Executive Pay, Probes Options Dating

With companies now required under FAS 123 to disclose the value of stock option grants on their income statements for fiscal years beginning after December 15, 2005, the Securities and Exchange Commission (SEC) and members of Congress are pressing for more detailed disclosure of total executive compensation.


Formulas set by FAS 123 for valuing stock options are very flexible and allow company accountants to minimize the expense, the Providence Journal reports. Accountants can assume that employees will exercise their options quickly and that stock prices will not fluctuate, thus reducing the value of the option and the expense to the company.

In recent months, however, the SEC has begun investigating nearly 24 companies to determine if they picked dates that would bring the greatest gain to their executives, the Wall Street Journal reports.

In January, the SEC proposed changes to the current reporting requirements for executive compensation in Form 8-K Proxy statements. The new rules would require tabular disclosure including:

  • A column for total compensation
  • A dollar value for all stock-based awards pursuant to FAS 123
  • “All Other Compensation” would include the aggregate increase in actuarial value of pension plans accrued
  • A threshold of $10,000 for reporting perquisites (current threshold is $50,000).

Tabular disclosure of outstanding equity interests and the value of retirement plans and post-employment benefits would also be required.

SEC Chairman Christopher Cox said recently, “I have a feeling that when people are forced to undress in public, they’ll pay more attention to their figures.”

While compensation numbers for last year reflected stock options exercised, FAS 123 has already changed the way executives are compensated, says Steven Hall of Steven Hall & Partners, an executive pay consulting firm in New York, according to the Journal. “It’s caused companies to shift compensation to other vehicles. The other movement that has taken place is that the number of people who get stock options has gone down.”

Use of restricted stock grants has begun to rise, according to David Cross, a consultant at Mercer Human Resource Consulting, the Philadelphia Enquirer reports. Executives prefer the restricted stock grant because the stock holds its value even if the share price goes down, Cross says. Restricted stock grants can also help to set performance standards, as the dates for vesting can be as long as five to seven years, the Providence reports.

Public interest in executive compensation has been sparked recently by revelations that Dr. William McGuire, CEO of UnitedHealth Group Inc., has accumulated stock options valued at $1.6 billion. Hank McKinnell of Pfizer, Inc., earned $79 million over the past five years, while his company’s stock has declined by 40 percent, the Journal says. Lee Raymond, recently retired chairman of Exxon Mobil Corp., received a package of $400 million, the Associated Press reports.

In the meantime, companies including UnitedHealth Group, Inc., are under investigation to determine whether they backdated the grants of the stock options to a date when the stock price was low, allowing executives to benefit by exercising the options later, when the price was higher, according to the AP. Micrel Inc. has sued Deloitte & Touche, the company's former auditor, in California for approving an options dating arrangement. Deloitte subsequently reversed its position, forcing the company to restate earnings for three years, Reuters says.

Congress debated their own bill on Thursday at a House Financial Services Committee meeting where Democrats said that the SEC proposals do not go far enough. Representative David Scott (D-Ga) noted that Raymond’s package amounted to $144,000 a day, while outraged consumers are paying $3 a gallon for gas.

The House bill, called The Protection against Executive Compensation Abuse Act, requires compensation benchmarks, shareholder approval for corporate compensation and repayment of incentive compensation if an executive is involved in fraud or misleading accounting, says.

Thomas Lehner of the Business Roundtable testified against the bill saying, according to the AP, “If we adopted a system where small groups of activist shareholders used the process to politicize corporate decision making, the consequences could very well be destabilizing for companies.”

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