Ceo Pay: Disclosure Is The Best Policy
It's only in the last year or so that the uproar over vast pay packages handed to CEOs has erupted. One reason for the long silence through much of the climb in executive pay: complicated, self-serving compensation plans that inadequately disclosed long-term compensation. The corporate proxy statement reporting the pay of its top five executives all too often became an exercise in obfuscation.
On June 23, the Securities & Exchange Commission proposed a series of welcome changes to improve the disclosure of executive pay. Under the plans, companies would be required to report in easy-to-read tables all compensation, including stock options, over not one but three years--which would allow investors to make their own judgments on whether increases in the boss's pay are justified.
The compensation committee would also be required to explain its awards in relation to the company's performance. In the proxy, a company would have to compare shareholders return with a broad market index, such as Standard & Poor's 500-stock index, and an industry peer group.
Of course, much of the rise in executive pay is due to the more generous use of stock options--whose values are often difficult to predict and understand. The SEC's proposal would require companies to disclose the potential value of an option if the stock rises by 50%, 100%, or 200% over a 10-year term. That's a welcome change because shareholders would be able to immediately assess the potential value of what until now has been an abstract award.
Despite some dangers in the proposals, the SEC is right to seek fuller disclosure. It could help keep the decision on what to pay ceos where it belongs--in boardrooms rather than in the halls of Congress.