South-Western - Management  
S.E.C. to Require More Disclosure on Executive Pay
Topic Human Resources Management
InfoTrac Reference A140981267
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Key Words Securities Exchange Commission, executive compensation, wage clarity
News Story

The Securities and Exchange Commission (S.E.C.) voted unanimously this week to change the way that companies report their pay for senior executives with the goal of achieving greater disclosure on actual total compensation. The rule is expected to be enforced beginning with the 2007 proxy season. The new rule was suggested after corporate scandals at the New York Stock Exchange and Tyco International brought criticism of excessive executive pay. The rules established for disclosure of executive pay by the Commission in 1992 sought greater disclosure as a way to combat excessive pay practices. In the meantime, companies have skirted the pay issue by coming up with hidden benefits for executives, ranging from paying their taxes to allowing them free use of corporate jets.

The committee says that the new proposal is meant to prompt compensation committees to be more exacting. Companies will now need to provide a figure for total executive compensation, including perks, stock options, and retirement benefits for the CEO, CFO, and three other top paid officers as well as all directors.

The pay of the average worker remained almost flat from 1990 to 2004 when adjusted for inflation. However, the average chief executive pay has risen from $2.82 million to $11.8 million, a ratio of more than 400 to 1. Experts like Lucien A. Bebchuk, director of the corporate governance program at Harvard Law School, believe that the new rule will not lead to a decline in pay packages of executives. Rather, as Bebchuk says, the new rule will increase levels of “outrage constraint.” Bebchuk also believes that when the information about total compensation for executives becomes public, the gap between what top workers are paid and what the average worker is paid will become even more glaring.

The new rule will be difficult to enact because it will involve properly valuing stock and other perks at the time that they are given. Balancing the need for information with the need to protect sensitive information from competitors will be another challenge.

Questions
1.

Research the U.S. Securities and Exchange Commission in your textbook or on the Internet at http://www.sec.gov. What is the S.E.C. and what is its role and responsibilities?

2.

What has prompted the S.E.C. to institute the new rule regarding executive compensation disclosure?

3.

The article mentions that executive pay has risen at a rate of 400 to 1 since 1990, while the pay for average workers has remained flat. Research compensation in your textbook and on the Internet. In your opinion, what conditions or factors have caused this phenomenon? Be prepared to discuss your ideas in class.

4.

The article states that the new rule is expected to lead to greater disclosure but not to significant reduction in executive pay. Why? What do you think the effects of the new rule will be?

Source “S.E.C. to Require More Disclosure on Executive Pay,” The New York Times, January18, 2006, pA1(L).
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