The incoming chairman of the House Financial Services Committee
suggested it was a Christmas present for corporate executives from the
Securities and Exchange Commission.
But SEC Chairman Christopher Cox
yesterday defended the agency's recent action to modify stock option
disclosures, saying it "will provide the maximum clarity and consistency
Rep. Barney Frank said the rule will intensify
scrutiny of executive pay.
Hamberg - Bloomberg News)
On the Friday before Christmas, without advance notice or a public
vote, the SEC announced an amendment that generally would make top
executives' annual pay appear smaller than it otherwise would have.
The amendment, which represented an about-face from a requirement
that the agency adopted in July, would change the way stock option
grants are reflected in the main compensation table of companies' annual
pay reports. This revision lets businesses spread the estimated value of
those options over multiple years instead of reporting their full value
in the year the options are awarded.
The U.S. Chamber of Commerce and accounting firms that work for
public companies had advocated such an approach. But reaction from other
quarters was critical.
"I didn't even know they had a chimney at the SEC, and then all of a
sudden this came slipping down it," Rep. Barney Frank (D-Mass.), who is
set to lead the Financial Services Committee, said in an interview.
"Backtracking by the SEC on this important matter of stock options
reinforces my determination that Congress must act to deal with the
problem of executive compensation," Frank said in a statement yesterday.
The change "will make it harder for investors to get a transparent
picture of the magnitude and value of options being granted to corporate
executives," said Lynn E. Turner, former chief accountant at the SEC and
now head of research at Glass, Lewis & Co., an adviser to institutional
The commissioners adopted the amendment Dec. 15, but the agency
waited to announce it because the Office of Management and Budget did
not approve the rule until Friday afternoon, SEC spokesman John Nester
The SEC action reflects the confusion and criticism that surround
stock options, which have created great wealth for many executives and
have been criticized as contributing to some of the worst corporate
scandals. In recent months, many companies have been examining whether
option grants were improperly backdated to maximize their value to
executives, and some corporate chiefs have lost their jobs.
The SEC and the Justice Department have been conducting probes of
options practices, and criminal charges have been filed against
officials from two companies.
An option gives the holder the right to buy a share of stock at a set
price. If the market price of the stock rises above that level, the
holder can exercise the option at a profit. Option grants typically vest
incrementally over a period of years.
Policymakers have long struggled to include some measure of option
value in executive pay, because the ultimate value of options only
becomes clear when they are exercised. They may end up being worthless,
or worth much more than initially estimated.
In July, the SEC overhauled the rules for pay disclosures, requiring
that companies show annual compensation totals for top executives that
include full estimated values of option grants. The approach the SEC
announced Friday would spread the value of the options over the vesting
period, following the method companies must use to account for the cost
of options on their financial statements.
"Artificially inflating executive pay, or reporting 'phantom' pay
that will never be received, is just as misleading as routinely
underreporting it," the SEC chairman said in a statement yesterday.
Estimates of the total value of option grants will not disappear from
the pay disclosures. Rather, they are to appear in a separate chart from
the summary compensation table.
"I don't see it as an effort [by] the commission to enable companies
to hide the ball on the value of option grants," said John Olson of the
law firm Gibson, Dunn & Crutcher, which represents business groups.
Federal law generally requires that the SEC to publish a rule 30 days
before it takes effect, but there are exceptions. In this case, the SEC
found that inviting 30 days of advance public comment would have been
"impracticable, unnecessary and contrary to the public interest," partly
because the disclosure rules it adopted in July kicked in Dec. 15.