SEC Website Publishes Executive Compensation Amounts
By Stephen D. Kirkland, CPA, CMC, Compensation Consultant
Atlantic Executive Consulting Group LLC
As executive compensation amounts continue to rise, investors are watching, and crying foul. The media and general public are focusing on executives’ rich pay packages.
The House of Representatives is inquiring about how compensation consultants are used in setting executive pay. Now, the Securities and Exchange Commission (SEC), which closely regulates publicly-traded companies, is demanding explanations.
Although the SEC has not imposed limits on executive pay, the powerful agency has required companies to disclose compensation amounts that they paid to top executives for many years.
To comply with the SEC’s disclosure rules, executive compensation amounts have been published annually by publicly-traded companies in their proxy statements. These proxies show the names and titles of top executives, along with the amounts of wages, bonuses, and benefits such as stock options.
However, due to the increasing controversy over potentially excessive executive pay, the SEC wants companies to disclose more details, especially concerning “how and why” the companies arrived at the compensation amounts they paid.
They would like each publicly-traded company to disclose its compensation
methodology. The agency also says the “manner of presentation matters.” They want the information to be presented in “clear, concise, and understandable” language.
The SEC also wants disclosure of the goals each executive met to earn his or her compensation, or at least an indication of how challenging those goals were. In particular, the SEC has asked companies to explain the role of individual performance
in determining pay amounts.
Although performance goals for key executives may be set for multiple reasons, such as awarding bonuses, the goals are required for income tax purposes. This is because Congress limits a publicly-traded company’s tax deduction to $1 million for compensation paid to an executive officer annually, unless certain requirements are met (see Internal Revenue Code section 162(m).
To make executive compensation tax deductible, companies must establish performance goals, also known as performance targets, for executives early in the fiscal year. Neither the Internal Revenue Service nor the SEC requires companies to publish their performance goals to shareholders, or anyone else.
During the last couple of years, however, the SEC has been strongly encouraging companies to disclose this type of information, and they prefer it to be published during the year, not just afterwards as they have been doing.
The recently exposed scandals involving back-dated stock options demonstrate one of the reasons why earlier disclosure of these details may help protect shareholders.
So far, most corporations have been reluctant to comply with the SEC’s requests. Some companies have explained that they could hurt themselves by making such sensitive information available to competitors or customers.
Some want the flexibility to adjust the goals as the year unfolds. Once published, it could be difficult to explain why the goals are changed. But SEC Chairman Christopher Cox does not plan to give up.
In fact, to help promote corporate transparency and make information more easily obtainable, Cox has created the SEC’s Compensation Reader, which is available free at www.SEC.gov/xbrl.
The Compensation Reader is a user-friendly database that contains compensation information of senior executives at 500 U.S. corporations. Investors and interested parties can find dollar amounts for salary, bonuses, stock options, and other benefits.
One advantage of this tool is that any investor can easily obtain both total and individual component compensation amounts. These compensation amounts can be compared quickly to those of other companies of similar size or in the same industry.
The database is searchable by company name, ticker symbol, public market capitalization, annual revenue, or industry. Information can be exported into a graph, table, or spreadsheet.
The information provided at the SEC’s Compensation Reader is the same information published in the companies’ proxies. However, one no longer has to sift through pages of financial statements, footnotes, or proxy statements for each
company in order to compare amounts paid by corporations.
The Compensation Reader may be helpful to investors, human resource managers, watchdogs and others, but it is not the end of the story. The SEC is a persistent. We may soon see them require detailed disclosure of performance targets and compensation policies. When more disclosure is required, the rules will be strictly enforced.
Once this information is published, will investors accept the explanations of how executive pay is determined? Or will executive pay packages have to be trimmed to
satisfy the investing public? Stay tuned.
Stephen D. Kirkland provides compensation opinion letters for companies, charities, and foundations across the country. He also serves as an expert witness in court cases concerning the reasonableness of executive compensation. Kirkland is based in Columbia, S.C. and can be reached at (803) 477-5973 or through www.ReasonableComp.
