The Conference Board's Blue Ribbon Commission on Public Trust and Private Enterprises unveiled a sweeping reform plan to address the types of unfair executive pay practices that have come under increased public scrutiny in connection with a recent wave of accounting scandals.
Lawmakers and regulators have tried in the past to reform executive pay by expanding disclosure requirements and revising tax policies. But the panel says these efforts have not been entirely successful. For example, tax laws were changed to disallow deductions for executive pay in excess of $1 million, but this only served to open the door to greater use of fixed-price options and inhibit more effective types of pay-for-performance plans.
To avoid more misguided legislation in the future, the panel plans a national initiative to encourage companies to use of a list of "best practices" that includes the following:
- Corporate compensation committees of boards of directors should directly retain any outside consultants who advise them, and they should not be constrained by industry averages or past practices.
- Stock options should be expensed on a uniform and broadly accepted basis.
- Senior management and directors should be required to own a meaningful amount of company stock on a long-term basis.
- Companies should avoid the use of special purpose entities to compensate or enrich senior executives.
- There should be tougher requirements for conspicuous disclosure of all material impacts of stock options and other compensation arrangements, as well as employment agreements for top executives, including severance arrangements.
- Shareholders should approve all changes to existing equity compensation arrangements, including any repricing of options.
- Executive officers should be required to give advanced public notice of their intention to sell their stock.
Members of the panel include John H. Biggs and Charles A. Bowsher, both of whom served on the accounting profession's public oversight board until it was disbanded this year, as well as former SEC Chairman Arthur Levitt and well-known accounting reformist Paul A. Volcker, who led the attempt to reform Andersen into an audit-only model for the profession.
Download the panel's full report.