In an address to the New York Financial Writers Association (which you can access here), SEC Chairman Christopher Cox discusses upcoming rules for disclosure of executive compensation as well as what he sees on the horizon as far as addressing the current issue of back-dated options.
Regarding executive compensation disclosure:
The Commission’s proposal to significantly improve the way executive compensation is reported to shareholders has received more than 20,000 comments. No issue in the 72 years of the Commission’s history has generated such interest. Our basic approach is straightforward: We propose to tell Compensation Committees to release all material information regarding their decisions, and we mean all. . .The principle here is simple: no shareholder should need a machete and a pith helmet to go hunting for what the CEO makes.
And we want shareholders to know how much the executives will get once they retire or leave for any other reason. One of the problems with the current regime for disclosing executive pay is that the shareholder doesn’t get to know what the golden parachute looks like until the CEO floats cheerfully away from the mother ship.
The new executive compensation disclosure will deliver more than just clear and understandable numbers. We’ll also be getting a plain English narrative that will give investors an insight into the Compensation Committee’s thinking when it decides how to pay the CEO.
Today’s Compensation Committee Report and Performance Graph – which have become little more than pro-forma and boilerplate – will be replaced with an explanation by management called Compensation Discussion and Analysis. We expect the new CD&A to be clearly written, so every investor can understand it.
Regarding back-dated options:
Our final rule will very likely address the issue of back-dated options, which is currently so much in the news. . .While I can’t comment on the SEC’s ongoing investigations of specific companies, I can tell you what the Commission’s position is. Back-dating must be fully disclosed. And the granting of back-dated options must be properly accounted for.
As one means of dealing with this problem, our proposed executive compensation rule will provide better and more useful disclosure of the backdating of options. It would require that a company clearly identify the portion of compensation that results from “in-the-money” option awards resulting from backdating.
The proposed rule will require the disclosure of the full value of an option based on the date the award was actually made. That means the added value from an option’s being in-the-money at the time of grant would be clearly disclosed. It would specifically require a comparison of the exercise price of the option to the grant date market price of the option, whenever the exercise price is lower than market price. That way, investors could see the additional compensation that was immediately conferred on executives when the option was granted.
Just as important as these dates and numbers will be the plain English disclosure of just how the company determined when to make its option awards. . .
The Commission is even now considering further adjustments to our executive compensation proposal to deal with the issue of backdating options. Our staff in the Division of Corporation Finance are collating all of those thousands of comments and will make a recommendation to the Commission at an open meeting soon.
As part of that review process, we will consider the need not only for any changes to the rule, but also for additional guidance to address further the backdating of stock options. So stay tuned. We want this matter settled in time for next year’s proxy season, and I have every reason to expect that it will be. . .
(Hat Tip: TheCorporateCounsel.net Blog)