Public companies will have to be a bit more revealing about what and how they are paying executives, say the new rules passed by the Securities and Exchange Commission on Wednesday. Under provisions that will go into effect later this year, companies will have to provide a figure for the total compensation they pay to executives each year, as well as a detailed breakdown of the different components of the compensation, including the value of retirement benefits. The rules were in response to complaints that current compensation disclosures don't provide enough information to shareholders about what CEOs and other executives are actually paid and that they omit some crucial components of their compensation. But the new provisions go beyond simply giving more details on CEO salaries. They also target the growing scandal over companies manipulating stock-options grants for the benefit of insiders. Under the provisions, companies will have to disclose more information about when grants were made, why they were made then and whether they either backdated the grants or timed the release of potentially market-moving information around the grants. The SEC originally proposed the new rules back in January, and they drew enormous interest from the public, commission Chairman Christopher Cox said in a statement. "The better information that both shareholders and boards of directors will get as a result of these new rules will help them make better decisions about the appropriate amount to pay the men and women entrusted with running their companies," Cox said. "Shareholders need intelligible disclosure that can be understood by a lay reader without benefit of specialized expertise or the need for an advanced degree," Cox said. "It's our job to see that they get it." Public companies currently have to disclose compensation to the CEO and their four other top-paid executives in the form of several charts in their proxy statements and annual reports. The charts list executives' salaries, cash bonuses, stock awards and the value of various perquisites.
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.
Neither practice is necessarily illegal. In the case of backdating, for instance, the SEC and other federal regulators are investigating whether companies properly disclosed that the options had been backdated and if the companies had properly accounted for them. The new rules better articulate companies' disclosure duties when it comes to the timing and terms of options grants. Under the new provisions, companies would have to disclose if they have any "program, plan or practice" to time the release of material information around stock grants and the role of company executives and directors in establishing the program. Companies would have to make similar disclosures about whether they have a program to use a date other than the grant date for determining the exercise price of options. Companies will also have to discuss in their proxy disclosures why they choose particular dates to grant options and, if they backdate them or use a price other than that of the grant date for the exercise price, why they did so. In disclosing the terms of compensation agreements with new executives or new contracts with existing executives, companies will begin having to comply with the new rules within 60 days of the date of publication in the Federal Register. Most other companies will have to comply with the rules beginning with any annual reports or proxy statements they file after December 15.