Tell the SEC to keep an eye on executive pay

Idea exchange
April 2006

Tell the SEC to keep an eye on executive pay
From AFL-CIO's Executive Paywatch:

In the past few years, working families have seen their retirement security go up in smoke. But in the same period, corporate CEOs have gotten enormous new retirement packages worth millions a year.

Too often, executives' compensation packages have little to do with the performance of the companies they lead. And while executives are required to report their pay to the Securities and Exchange Commission (SEC), they often try to hide the true amounts behind complex accounting tricks.

We've all read the stories. A company lays off workers, forces employees to accept lower pay or fewer benefits or guts its pension plan. Then you find out the executives running the company are making off with millions of dollars a year.

For example, Samuel J. Palmisano, CEO of IBM—which announced it is freezing workers' pensions—will collect about $4 million a year when he retires. And Pfizer CEO Henry A. McKinnell—who chairs the organization called Business Roundtable, which led the fight to privatize Social Security—will earn more than $6.5 million per year during retirement.

Sunlight often is the best disinfectant when it comes to curbing abuses of executive compensation. Although companies are required to file documents describing their executives’ compensation with the U.S. Securities and Exchange Commission (SEC), these often are difficult for shareholders to understand. In recent CEO pay scandals, even boards of directors have claimed they were kept in the dark.

As executive pay continues to spiral upward, the SEC is considering updating and improving its pay disclosure rules. Unless an executive compensation consultant is hired to crunch the numbers, it is nearly impossible for investors to determine how much their executives are paid. For example, CEO pension benefits are poorly disclosed under the current rules, and CEOs take advantage of that fact to fatten their retirement pay.

The SEC is proposing new CEO pay disclosure rules in the first rule update since 1992. The SEC proposal will require companies to disclose executive compensation data in “plain English.” In addition, for the first time companies will be required to provide a dollar estimate of their executive’s pension benefits, as well as a “grand total” compensation figure. These changes will go a long way to make CEO pay more transparent and clear.

The SEC can and should go further in its proposed rule making. The biggest concern of investors is that CEO pay is not linked to performance. However, the proposed SEC rule does not require companies to disclose performance targets. Instead, companies can avoid telling their shareholders this information for “competitive reasons.” This lack of disclosure is unfair to shareholders, who, as the company owners, have a right to know.

By setting a new standard in how compensation is reported, the SEC can help investors better compare executive pay with company performance. But until the SEC requires companies to disclose the numerical targets that CEOs are being measured against, the executive compensation system will continue to be a “black box.” Executive pay reform will only happen when shareholders are allowed to see how CEO pay is set.

Urge the SEC to support CEO pay reform.

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