Investors calls for increased disclosure on executive compensation were answered today as the Securities and Exchange Commission (SEC) adopted an extensive and wide-reaching executive compensation disclosure package. The new rules are intended to advance the interests of shareholders through better disclosure.
The Commission's new rules require new tally sheet disclosure that will provide the first in focus snapshots of the total annual compensation packages paid to senior executives at U.S. companies. Clear and meaningful disclosure in "plain English" is now going to be required in the areas of pensions, deferred compensation, severance and perquisites. The staff also corrected many of the problems that investors had raised concerning the original proposal.
Shareholders called upon the Commission to keep compensation committee members on the hook for their decisions related to pay. The staff neatly accomplished this difficult task by creating a new slimmed-down Compensation Committee Report that will accompany the new beefed-up Compensation Discussion and Analysis (CD&A) section prepared by management. The staff also fixed the most glaring problems with the so-called Katie Couric rules by proposing to limit its application to highly-paid, senior-decision makers. The extended comment period on this provision should provide some additional fine-tuning.
The Commission's new rules are also asking for greater transparency on option grant programs and plans. Essentially, the new rules relating to option grant practices will look at 1) timing practices and, 2) practices involved in establishing exercise practices.
What do these new rules mean for investors? Since companies will be required to present an accurate picture as to why and how compensation decisions are made, investors can now better evaluate the actions of board members and will have access to more sophisticated tools to oversee their investments.