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New York Times, October 10, 2007 article


The New York Times




October 10, 2007


S.E.C. Finds Fault on Pay Disclosures

SAN FRANCISCO, Oct. 9 — Corporations are falling short in explaining to investors how executives are compensated and for what, Securities and Exchange Commission officials said Tuesday in their first review of corporate filings since new pay disclosure rules were put in place.

The S.E.C. called on corporations to give investors more insight into how they made compensation decisions and to ensure that proxies were “clear, concise and understandable.” Corporate boards, regulators said, could also do a better job in discussing how they chose performance targets, severance packages and the peer companies they used as comparisons for their pay practices.

“We found ourselves asking this question over and over and over again: Where’s the analysis?” said John W. White, the S.E.C.’s top official in charge of the new rules, calling it the “the biggest shortcoming” of compliance with the new pay disclosure rules.

“We saw a great deal of detail this year, but what was missing was a discussion of how and why those philosophies and processes resulted in the numbers.”

Mr. White’s remarks here Tuesday, before an annual conference attended by nearly 600 human resources managers and compensation advisers and watched online by 3,500 more, followed the release of findings from the commission’s initial review of pay disclosure practices at 350 public companies.

Federal regulators spent this summer reviewing compensation reports, sending inquiries to companies and chief executives they believed had failed to provide enough information — and in the process making waves among executives and compensation advisers.

About 250 letters were sent at the end of August and 100 more in September, requesting that companies provide additional explanation and data. Most were big corporations, and all were companies that filed this spring under the new disclosure guidelines adopted last year. No additional letters are expected to be sent this year, and the S.E.C. is not expected to consider any changes in the rules until 2008.

Regulators said that the bulk of their requests ask companies to make changes in future filings, though in some cases, they are asking companies to amend this year’s filing.

The reviews are continuing, and all correspondence between the S.E.C. and the companies will be published 45 days after issues are resolved.

So far, no company has been penalized for not complying with the new disclosure rules. But in an interview Tuesday, Mr. White left open the possibility for such action next year.

“We will be looking for companies to reflect on the things that were in the report and the need for analysis, clarity and presentation,” he said. “When we are reviewing next year, people will be on notice of the shortcomings this year.”

The pay reforms put in place last year were aimed at making the process of setting executive compensation more open.

Including the value of retirement benefits and severance payouts, rather than just salaries, stock options and bonuses, was supposed to paint a more complete picture of compensation packages. More stringent disclosure rules were supposed to make it easier for investors to see the links between pay and performance. And highlighting all of an executive’s financial benefits as a single number was supposed to make executive pay packages easier to compare to each other.

Over all, Mr. White said that investors were better served with the vast amounts of new data and that some company efforts were “quite admirable.” But he said that there was still plenty of room to improve.

In his speech, Mr. White said companies needed to do a better job of discussing how they arrived at their decision, not just describing it. Companies provided a great deal of detail about how much compensation they awarded, he said, but many fell short in explaining how one part of a pay package related to another — whether generous stock options were balanced by a lower annual salary, for example, and how severance packages related to total compensation.

The failure to disclose specific performance targets generated the most comments from regulators. Companies were required to outline the performance measures they used to determine bonuses, but the rules also allowed those who feared disclosure could cause “competitive harm” to opt out — and many companies used the loophole.

Regulators said they intended to crack down on companies that omitted disclosures about performance targets but did not explain why the targets were omitted, or give any context for gauging how difficult the goals would be to achieve.

Regulators repeated the message that they have been sending for months: Companies need to make their compensation reports easier for investors to understand, in short, crisp prose and plain English. They also encouraged the use of executive summaries, tables and charts.

“To say it simply: Presentation matters,” Mr. White said.

Alan Beller, a lawyer and former S.E.C. official who began the pay disclosure overhaul, said of compensation reports, “It isn’t easy. It requires the ability to tell a story, not fiction.

“There is a lot of disclosure that doesn’t focus on the important stuff and a lot of disclosure that focuses on the minutiae.”


Copyright 2007 The New York Times Company




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