SEC Rules to Expose Executive Pay

The new rules add to the number of items companies will have to disclose. The total compensation figure, for instance, is a new requirement, as is forcing companies to include the fair value of stock options in the compensation chart.

Companies will also have to give more detailed explanations of the various forms of executive compensation. In particular, they will have to place a value on the potential severance payout executives will receive when they leave the company.

Golden Parachutes

Dubbed "golden parachutes" by critics, such severance payments can often amount to huge liabilities for companies, representing several times the annual pay of particular executives.

With the SEC now investigating roughly 80 companies over the issue of the timing of options grants, the new rules focus particular attention on the disclosure of such grants.

Stock options give corporate insiders the right to buy their company's shares at a predetermined price. Usually, the exercise price of the option is equivalent to the market price of the stock on the day of the grant.

However, companies enmeshed in the scandal have generally been accused of using as an exercise price the market price of the stock days, weeks or even months before the actual grant date. In most cases, that market price turned out to be a short-term low in the company's stock.

By using that price as the exercise price, corporate insiders built an automatic gain into the stock options.

An alternate plan also under investigation by the SEC has been dubbed spring loading. With spring loading, companies are accused of timing the release of market-moving information around the grant of stock options.

So, companies might release negative news immediately prior to a stock grant, or positive news immediately after one. In either case, insiders would likely get options that carry a favorable exercise price.