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Wall Street Journal, January 29, 2008 article


The Wall Street Journal  

January 29, 2008


SEC Unhappy With Answers on Executive Pay

January 29, 2008; Page B1


The Securities and Exchange Commission sent letters to 350 companies last summer and fall critiquing the way they described the pay of their top executives. But the federal watchdog isn't happy with most of the answers it got.

A majority of the companies have now received second letters, according to an SEC official, and of 26 companies whose cases were closed, 21 were chided for not giving enough information about the role of individual performance in their pay decisions.

In writing to one of them, Bristol-Myers Squibb Co., the SEC noted that individual performance "was a primary determinate of compensation" but that the New York drug maker didn't properly describe how that measure translated to the pay it handed out.

Sandra Leung, Bristol-Myers's general counsel and corporate secretary, promised to do better in the future -- in so many words. In an Oct. 10 letter, she said Bristol-Myers will elaborate in future filings "on the manner in which the named executive officers' performance against individual financial and operational objectives...impacted their resultant compensation." And Robert Zito, a Bristol-Myers spokesman, added that this year's proxy statement "will certainly be prepared consistent with our response to the SEC comment letter."

The increasing SEC scrutiny could spur changes in how companies calculate compensation, including moving away from individual performance as a measure of success -- one of the areas the SEC focused on as particularly weak -- in favor of companywide financial targets, such as earnings or stock prices.

"Quantifying individual performance targets isn't the easiest thing to do," said James D.C. Barrall, a Los Angeles attorney and executive-pay specialist at Latham & Watkins LLP, who expects to see such a shift.

The companies most likely to change would be those that use performance targets they'd prefer to keep confidential, such as return on capital, said Ronald Mueller, a compensation expert at the law firm Gibson, Dunn & Crutcher in Washington, D.C. "In my experience, some companies switched to performance targets that they would be more comfortable disclosing," he said.

Another possible result is that companies will stuff even more information into company proxy statements, which are already larded with charts and footnotes. That could mean an additional table with top officers' individual goals and how their pay stacks up against colleagues' rewards. Scott Olsen, head of the rewards practice at PricewaterhouseCoopers in New York, says a lot of people think that's what "the SEC is looking for."

The scrutiny could have the unintended consequence of pushing companies to focus on short-term measures such as earnings or stock prices, which, critics say, can distort how companies are managed. An obsession with stock prices was one factor in the raft of corporate frauds that accompanied the end of the boom. Last year a panel organized by the U.S. Chamber of Commerce, the nation's largest business lobby, recommended that CEOs stop giving quarterly earnings guidance as part of a push to refocus on long-term results.

The review by the SEC is part of its effort to bring more information about executive pay to shareholders after years of high-profile pay packages and perquisites that many view as excessive. Shareholder advocates are also pressing hard to give shareholders a greater say in executive pay.

Letters from the 26 completed cases were recently made public on the SEC's Web site. The others will be posted 45 days after the SEC considers itself satisfied.

[James Tobin]

In last year's proxy statement, Boston Scientific Corp. said the board's compensation committee calculated the CEO's salary by assessing his objectives, the company's performance and broad market data "provided by our compensation consultants." It said it gave CEO James Tobin a 3% raise after reviewing "whether the company had met or exceeded quarterly sales and earnings targets, the performance of our Taxus stent system, our product-development initiatives and business integrations, as well as other matters."

The SEC wasn't satisfied and asked for "substantive analysis and insight" into how the board's compensation committee determined specific pay, according to its Sept. 26 letter.

In response, Mr. Tobin wrote on Nov. 9 that his "limited" raise reflected that "the company had only achieved quarterly sales and earnings targets in two of four quarters in 2005, Taxus market share lagged expectations and the launch of Taxus in Japan had been delayed." The company didn't state the specific quarterly targets.

Spokesmen for Baxter International Inc., DuPont Co., Safeway Inc. and Electronic Data Systems Corp. -- other recipients of SEC letters -- said it is too early to offer details beyond their response letters because they're still discussing possible changes with directors or preparing their 2008 proxy statements.

"We are just now completing financial reporting and analysis for the year and are evaluating performance and potential compensation decisions with our board," said a spokeswoman for Baxter, a health-products concern in Deerfield, Ill.

David P. Scharf, Baxter's corporate secretary and associate general counsel, wrote that there were limits on what he was willing to tell the SEC.

In his Oct. 22 response, he said additional information will be limited by the company's desire to avoid disclosing confidential information about unquantifiable "qualitative elements" of each top officer's pay. In any case, he continued, such revelations would not provide "substantial value to investors in understanding our compensation policies and decisions."

Write to Kara Scannell at kara.scannell@wsj.com1 and Joann S. Lublin at joann.lublin@wsj.com2

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