Compensation Goodies

Investors benefit from new rules requiring firms to reveal all kinds of executive perks.
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There's been a flood of reports about executive compensation in recent weeks. That's because new SEC regulations force companies to disclose far more about executive pay -- not only salary and bonus, but options grants, restricted stock, deferred compensation, retirement benefits and all kinds of "perks" including use of corporate aircraft and corporate promises to cover the executives' taxes on those benefits!

For years these numbers have been buried in corporate proxy statements, or not disclosed at all. But the SEC under Chairman Christopher Cox has demanded more information for shareholders. This year, it must all be formatted in a prescribed table in corporate proxy statements, those dense little printed booklets that arrive along with the photo-laden annual reports.

In future years, all corporate financial information will be available a more useful format, submitted in a new interactive computer format (XBRL) in coming years. But at a panel I moderated in Washington, D.C. last week, Chairman Cox made a surprising announcement.

All of the data in the new executive compensation tables for the 500 largest reporting companies will be translated into the new user-friendly format of XBRL by this June. That means you'll be able to go to the SEC Web site and compare all of the reported data by company and category with a click of your mouse.

Shareholders Benefit

Richard Bennett, CEO of The Corporate Library, an independent firm that researches corporate governance and compensation issues, hails the move for more disclosure of the true nature of executive pay: "Shareholders will be able for the first time to see in real time the tremendously important numbers -- warts and all -- exposed for viewing."

Says Bennett: "Compensation practices are the best window that investors have into the boardroom of the companies they own. The numbers reveal the quality of decision-making and the power relationship between the directors and the CEO."

The Corporate Library employs 25 people who sift through proxies to compare the newly mandated disclosures. Bennett says the translation to online interactive data at the SEC Web site will make their job easier. But his group has already issued two reports detailing some egregious compensation practices.

Big Dollars in Deferred Comp

One of the largest is the category of "non-qualified deferred compensation plans." These plans have not been reported in the past. Just as athletes defer salary to future years, so do corporate executives. They're not qualified retirement plans, but are meant to be paid out in the future, when the executive retires -- and will presumably pay taxes on them at a lower rate. In the meantime, they may be "invested" in company stock or other alternatives, and continue to grow.

The Corporate Library found that of the 280 largest companies that have reported so far, two-thirds of CEOs have investments in NQCD plans. The average balance in such plans is more than $5 million.

Among the largest deferred comp plans reported so far:

US Bankcorp

(USB) - Get Report

CEO Jerry Grundhofer has amassed more than $86 million, while Alexander Cutler, CEO of

Eaton Corp.

(ETN) - Get Report

and William Weldon, CEO of

Johnson & Johnson

(JNJ) - Get Report

each have more than $40 million in these plans.

Wonders Bennett: "If they're aggregating such large sums in these accounts, do they really need additional retirement benefits?"

Reporting Executive "Perks"

Another big issue that is coming to light as a result of new reporting requirements: the value of executive perks. In a sample of 100 companies that had filed as of March 12, 2007, the total disclosed cost of perks was more than 130% higher than the reported amounts the previous year, according to The Corporate Library.

Some CEOs received significantly more in perks in 2006 than in 2005, according to the study. The largest increase was at

Merck (MRK) - Get Report

, where last year's filings (for 2005) showed the CEO receiving only $9,450 in perks. By 2006, he received aircraft benefits, commuting benefits, security alarm monitoring benefits, dividend equivalents, and a company match to the savings plan of $210,536 -- a 2100% increase.

Thomas May, CEO of

NSTAR

(NST)

, an energy delivery company in Massachusetts, received 40l(k) contributions, financial planning, company leased vehicles, home security, tickets to sporting events, a life insurance benefit,

plus

a tax gross-up of that income in 2006, according to the new compensation disclosures. The previous year only the savings plan and life insurance were reported.

Asks Bennett: "Are these new benefits, or just newly reported? He answers his own question: "The better disclosure standards demanded by the SEC are scaring companies into being much more meticulous about reporting compensation practices."

You can learn more at

www.TheCorporateLibrary.com

. Or, starting in June, you can go to

www.SEC.gov

to not only see, but compare the data that companies are now reporting on executive compensation. Given the enthusiasm for this kind of disclosure, it's likely that next year they'll post even more data, including director compensation and benefits. More disclosure is truly a "perk" for shareholders. And that's The Savage Truth.

Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,

The Savage Number: How Much Money Do You Need?

in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.