Exposing CEO pay
The SEC calls for more transparency in corporate proxy statements, but others say that won't curb runaway CEO pay.
By Matthew Boyle, FORTUNE writer

NEW YORK (FORTUNE) - Deriding the current disclosure practices for CEO pay as "a waste of trees and ink," SEC chair Christopher Cox called for more transparency in corporate proxy statements at a gathering of compensation experts in Washington, DC, earlier this week.

The conference, sponsored by the newly created Rock Center for Corporate Governance at Stanford University, was held in Union Station's Columbus Club, with trains rumbling below. But the rumblings were not limited to the tracks, as Cox's proposed rules -- which, if passed, will go into effect next year -- generated some lively debate among academics, compensation consultants, and shareholder activists.

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Much of the discussion focused on whether the proposed rules would actually do anything to curtail CEO pay, which has reached stratospheric levels for many corporate chieftains, regardless of their returns to shareholders.

Median CEO pay rose 1.1 percent to $8.4 million in 2005, according to a preliminary analysis of the 251 FORTUNE 500 companies that had filed proxies as of March 27. (Equilar, a compensation data and research provider, conducted the analysis.)

Rules of compensation reporting in "plain English."

Cox, in his opening remarks, made clear that the SEC was not calling for a reduction in CEO pay, just some "plain English" explanations of how those packages were earned (or not).

"The new rules aren't a panacea for runaway CEO pay," said Kevin Murphy, a professor at USC's Marshall School of Business. "Clever CEOs who want to hide their pay will figure out how."

Indeed, several panelists noted that prior attempts by the SEC to reform pay disclosure and practices have only served to inspire creativity on the part of compensation consultants, which has jacked up pay even further.

"Rules influence behavior, but rarely in the manner you expect them to," said Adam Chinn, a partner at Wachtell, Lipton, Rosen & Katz.

The rules Cox proposed -- which are open to public comment at www.sec.gov until April 10 -- would make companies disclose once-hidden info about pay and perks for both executives and directors. Among the proposals: Including a total dollar value for pay packages, increased disclosure of perks, the inclusion of a "compensation discussion and analysis" section, and a clearer picture of post-employment pay and benefits.

As the rules are widely expected to pass, some companies have chosen to get ahead of the game. Goldman Sachs (Research), for example, included a detailed breakdown of CEO Hank Paulson's $38.8 million payday, which included $154,000 for a car and driver. Goldman's Wall Street rival Morgan Stanley (Research), meanwhile, laid out payments that would be made to CEO John Mack under various termination and change of control scenarios. Software maker Adobe Systems (Research) even disclosed that it spent $1,900 for CEO Bruce Chizen's annual physical exam.

Such early birds are few and far between, however: In an analysis by Equilar of 134 proxy statements filed up to March 17, only 8 percent disclosed total compensation for top executives, and just 10 percent revealed payouts for departing CEOs.

CEO severance a sticky issue

The conference also dove into the thorny issue of CEO severance. Earlier this month, four pension funds sued Hewlett-Packard's (Research) board over former CEO Carly Fiorina's severance (worth up to $42 million). The funds claim that Fiorina's package exceeded the maximum allowed under a board policy adopted in 2003. Morgan Stanley's $113 million payout last year to ousted CEO Phil Purcell has also raised the hackles of shareholder activists and pension funds.

Again, some changes are in the works: HP reduced the multiple used to calculate future packages last summer, and firms like Chevron (Research) have followed suit. Wells Fargo (Research) recently canceled CEO Dick Kovacevich's severance payout.

Despite Cox's appeal for more plain English, few at the conference thought that companies would cut out the legalese and boilerplate language entirely.

"It will be easy for management and directors to find words to explain whatever they wind up doing," said Joe Bachelder, a lawyer who constructs compensation contracts for CEOs.

Nor will the new SEC rules make outrageous perks a thing of the past. Shocking examples abound on financial blog footnoted.org. Take Morgan Stanley, for example, which will pay $1.9 million to provide Purcell with a secretary -- for the rest of his life.

Plugged In is a daily column by writers of FORTUNE magazine. Today's columnist, Matthew Boyle, can be reached at mboyle@fortunemail.com. Top of page

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