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See also accompanying New York Times "Executive Pay: A Special Report" articles:


New York Times, April 8, 2007 article


The New York Times

Executive Pay: Proxy Season

The New York Times spotlights the one season a year when shareholders can express their opinions on management.

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April 8, 2007

Transparency, Lost in the Fog

POP quiz: What highly paid chief executive thought nothing of plunking down a thousand bucks for an ivory back scratcher?

If you guessed L. Dennis Kozlowski, the former head of Tyco International, you’re not being creative enough. The back-scratching C.E.O. is the fictitious C. Montgomery Burns of “The Simpsons” — he’s the greedy owner of the nuclear power plant where Homer works. Alas, Mr. Burns is a piker compared with Mr. Kozlowski, who bought such goodies as a $15,000 dog-shaped umbrella stand.

In the world of executive compensation, fact often outstrips fiction, and even farce. That is why, when the topic is executive compensation, the word that naturally springs to mind is likely to be something like “egregious,” along with many others that are unsuitable for printing in a family newspaper.

On the other hand, a word that does not readily leap to the tip of the tongue is “transparent.” There are many reasons for that, including the fact that for most people, the word applies to windows and Saran Wrap, not finance. But transparent is the word of our time, and it pops up in the context of anything from financial statements to government policies.

It’s somehow fitting that officials use a big, foggy word like “transparency” when what they really mean is “not lying” and “not hiding what we’re really doing.” But that doesn’t sound as nice or vague, does it?

So transparency is on the march, especially over at the Securities and Exchange Commission. The outrage over some of the big paychecks for corporate titans and the excesses in which they engage has spurred the S.E.C. to change its rules about how much companies have to disclose. The regulators, under the S.E.C. chairman, Christopher Cox, want companies to tell us more about the nooks and crannies where they have tucked away the true value of their pay packages.

But now that the disclosure forms are rolling in, experts say that if anything, the S.E.C. has achieved opacity. There is so much information that you can’t see the forest for the non-tax-qualified deferred compensation. The disclosure forms run dozens of pages, with so much swirling data and paper that they form a cloud, like the foil chaff that fighter jets drop to confound radar.

“Most of us in the trade don’t know whether to laugh or cry,” said Brian T. Foley, an independent compensation consultant based in White Plains. When plowing through disclosure forms that run dozens of pages, with tables, footnotes and the kind of language that makes your hair hurt, he said: “My own test is, can I read it through, or do I lose focus? I’ve been doing this for 30 years — if I lose focus, or can’t figure something out, God help the average person.”

To illustrate, he walked me through some of the dizzying complexities of the pay for Peter R. Dolan, the former chief executive of Bristol-Myers Squibb, who was fired last September. Just getting the numbers to add up requires connecting the dots across page after page of densely packed figures. The “summary compensation table” on Page 29 of the corporate proxy statement serves only as the beginning, with the mysterious suggestion that Mr. Dolan’s stock awards were worth a negative $815,000.

“You have to go to a footnote to a chart that’s an explanation for a footnote to another chart,” Mr. Foley said with a sigh. Well, he actually said that during his first explanation. Then he tried again. Then he left three phone messages describing the process again. Then he sent an e-mail laying it out once more.

Transparent as mud.

OF course, it would be wrong to say specific companies are actively trying to conceal information, because they are paragons of corporate citizenship, and have libel lawyers. So I am not saying that at all. Really. But these forms sure are complicated, albeit in ways that almost certainly have nothing at all to do with an intent to obfuscate.

The companies, after all, are simply fulfilling the rules as laid out by the S.E.C. There might be a hint of the opacity to come in the language that the S.E.C. itself used in the announcement of its interim final rules — or, as the S.E.C. so movingly put it, “17 CFR Parts 228 and 229 [Release Nos. 33-8765; 34-55009; File No. S7-03-06] RIN 3235-AI80 Executive Compensation Disclosure.” What followed was 53 pages of prose that does not quicken the heart.

It is not just whiners like reporters and compensation experts who say that things have gotten out of hand. Warren E. Buffett of Berkshire Hathaway takes a few paragraphs in his 2006 annual report to skewer the complications of comp. In Berkshire’s portfolio of companies, Mr. Buffett writes, “I try to keep it both simple and fair.”

The self-serving cycle of executive pay follows a juvenile “all the other kids have one” logic, he says, and he does not tolerate it in his shop. He also dislikes it at the 19 other corporations whose boards he has served on. At Berkshire, he writes, “I am a one-man compensation committee who determines the salaries and incentives for the C.E.O.’s of around 40 significant operating businesses.

“How much time does this aspect of my job take?” he asks. “Virtually none. How many C.E.O.’s have voluntarily left us for other jobs in our 42-year history? Precisely none.”

Now that is about as clear as it gets. But what does Warren know? I’ll bet his umbrella stand doesn’t cost anywhere near $15,000.


Copyright 2007 The New York Times Company




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