Adoption of Executive Compensation Rules a Boon to Business Journalists

By Kevin Sweeney
July 28, 2006 08:43 AM

The Securities and Exchange Commission gave the proxy statement a major face-lift this week, adopting sweeping measures on executive compensation disclosure.

The rules include a stipulation that companies must report the timing and price of stock option grants. Many companies currently are facing investigations related to the backdating of stock options.

The SEC is also requiring organizations to report the pay and perks of their top five senior executives, provide tables that clearly display compensation and disclose the value of severance packages to CEOs involved in M&A activity. The unanimous approval of the rules by the Commission represents the biggest overhaul of executive pay in nearly 15 years.

Slated to become effective next year, the new measures will likely offer business journalists a clearer picture of how pay is distributed at the top of the companies they cover.

“The new data are going to provide a gold mine of information, in my opinion,” says Tom Petruno, markets columnist for The Los Angeles Times. “Just the fact that the SEC ordered more disclosure on certain items, such as pension plans and stock options, is going to increase scrutiny of proxy statements in the press.

“That is going to make for a lot more news coverage of executive compensation, and probably more shareholder outrage.”

Executive compensation has made major headlines in recent years. The pay packages of former GE CEO Jack Welch, former NYSE chairman Dick Grasso and Tyco CEO Dennis Kozlowski raised many eyebrows both in the general public and the business press.

Petruno says it will be interesting to see if these new rules render actual change in how corporate America calculates compensation.

“The bigger question is, will more news stories and more shareholder outrage translate into action in terms of reining-in what many people believe is runaway executive pay,” he says. “Look at the Home Depot annual meeting this year, where the CEO basically refused to take questions about compensation. The company obviously wasn’t very worried about what shareholders thought of its executive compensation decisions.”

Business reporters should keep an eye out for any change in tone from boards of directors. Responsible for approval of pay packages, they will likely face greater scrutiny for their decisions under the new rules.

The relationships between board members and company executives should also be reported when they are questionable.

While the SEC measures give incentive for parties to enact change, Petruno points out that such incentive has to turn into action for these rules to carry the weight they potentially hold.

“The key, as usual, rests with the institutional investors like pension funds,” he says. “How much trouble are they willing to make to get boards of directors to justify executive pay levels? Certainly, with the new SEC-ordered disclosures, those who are concerned about executive comp are going to have a lot more ammo to use against companies. But will they step up?”

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