Getting Ready for Full CEO Pay Disclosure
from
January/February 2007
by John R. Engen
If you sit on a compensation committee, the coming months could be particularly hairy. The Securities and Exchange Commission’s new disclosure requirements promise more work than in the past—and much more scrutiny. Even the best-prepared committees could face investor backlash when this season’s proxies roll out.
The new rules, sparked by shareholder outrage over the size of some big-company CEO pay packages, require that proxy statements break down the total compensation received by each of a company’s five highest-paid executives. This means putting together a table that not only lists their basic salary, bonus, and incentive-payment amounts but also gives the cash value of such things as change-in-control agreements, retirement benefits, and separation deals (voluntary or not). Let’s face it, much of this has heretofore been hard for investors to grasp, and just maybe for more than a few board members too.
Highlighting the total number—and forcing companies to provide a philosophical justification for each component in a detailed portion of the proxy called compensation discussion and analysis, or CD&A—is meant to shame boards into scaling back the most egregious components. “The goal here is to hold the board’s feet to the fire and make them accountable,” says attorney Chase Cole, a partner with Waller Lansden Dortch & Davis in Nashville.
It already seems to be working. Before the close of 2006, some boards—perhaps surprised by the true size of compensation deals that emerged in initial mockups—had quietly pared certain supplemental retirement benefits and perks to keep them from going into print, says attorney Michael Melbinger, a partner at Winston & Strawn in Chicago. “What I tell my compensation committee clients is, ‘It’s him or you. Do you want to be embarrassed by these numbers? Or do you want to force the CEO to make some modest givebacks?’” It seems that a few publicity-shy CEOs were glad to cooperate.
By now, comp committee members whose companies are on calendar fiscal years should be doing dry runs, looking carefully at what the proxy will disclose and reviewing preliminary drafts of the CD&A. It’s well worth fine-tuning the narrative to make sure it accurately reflects the company’s “broad pay philosophy,” says Los Angeles-based George Paulin, chairman and CEO of Frederic W. Cook & Co., a compensation consulting firm.
Sharpen your pencils for this crucial editing assignment. The narrative must cover a wide variety of topics, including such big-picture issues as how the pay practices you’re using encourage better performance. In a nod to recent backdating scandals, it also must address the timing of option grants.
While HR departments, consultants, and lawyers are responsible for producing the document, the comp committee must sign off on it. If something jumps out—unusually high overall pay for shoddy performance, sketchy timing on option grants, or day-care payments for the CEO’s dog—the CD&A offers an opportunity, if not a mandate, to explain the why and how. Expect to be paying special attention to so-called back-end pay components, such as deferred compensation or big severance deals, where specific figures have never before been revealed—and are sometimes proving to be huge.
“Amalgamating all the different forms of compensation will in many cases result in numbers that directors and investors won’t be happy with,” Chase Cole warns. “The legal requirement is that the reasons [for specific pay components] be described. If you can’t do that, then you’ve got a real issue.”
For some, the best advice may be to weather this year’s certain storm and begin preparing for 2008. “There’s going to be a lot of ‘I wish we hadn’t paid this’ kind of talk,” Michael Melbinger says. “But if the year is over, there’s nothing you can do except swallow hard and renegotiate for next year.”
