Speech by SEC Commissioner:
Open Meeting Statement: Proposed Revisions to the Executive Compensation and Related Party Disclosure Rules
Commissioner Cynthia A. Glassman
U.S. Securities and Exchange Commission
January 17, 2006
Thank you, Mr. Chairman. I am pleased to support this proposal on disclosure of executive compensation and related party transactions as well as the other proposed changes that Dan has done an excellent job describing. Executive compensation has been the subject of spirited academic discourse and news headlines for quite some time now. Management theorist Peter Drucker posited that a sensible executive compensation structure is one that "portrays economic reality and asserts and codifies the achievement of American business: [namely] the steady narrowing of the income gap between the boss man and the working man." However, over the last quarter century, that gap has widened, as chief executive compensation as a multiple of the pay of average workers has surged in the last 20 or so years, reportedly reaching multiples of over 300 according to various sources. Seemingly high executive compensation is particularly concerning when a company's performance is poor.
Having said that, we should not be setting executive compensation levels. What we should be doing is making sure disclosure regarding executive compensation is clear and comprehensive, so that the market can evaluate the appropriateness of a firm's compensation of its senior management and directors.
My understanding is that our current requirements should be generating comprehensive compensation disclosure - but some of the requirements are ambiguous or antiquated, and there seem to be ways of getting around others. It also appears that the current requirements need to be clarified to ensure that additional forms and amounts of compensation are disclosed. Likewise, clarifying and updating the disclosure requirements regarding related parties and public companies' transactions with them should foster more informative disclosure. Therefore, I fully support the principles-based nature of this proposal. As I have said before, if it looks like compensation, and it feels like compensation, it is compensation and it should be disclosed.
I realize that there is some reluctance to providing robust compensation information, but this is information that shareholders have a right to know. If these disclosures make boards of directors or management teams think twice about the nature or level of the compensation, so be it. If they are uncomfortable seeing the amount of total executive compensation revealed and disseminated publicly, then perhaps they should not be paying it.
Regarding the specifics of the proposal, I think requiring both the comprehensive tables and the new "plain English" narrative CD&A makes sense. The tables will enable comparability across companies, while the narrative will provide context for each particular company. I note that in rationalizing and enhancing what is required, you are also proposing to eliminate the compensation committee report and the performance graph, which should help offset some of the cost of preparing the disclosure.
Further, as presented, the new requirements are neutral in the sense that they do not seem to encourage or discourage any particular type of compensation, something our existing requirements may do. What is surprising to me is how complex the tables need to be to capture all of the information. Perhaps a positive unintended consequence of this proposed requirement is that pay packages will be simplified and better formulated.
I would note that there are conforming changes in this proposal for business development companies and portfolio manager disclosures, so I suggest those constituencies review the proposals as well and submit comments if they have any concerns.
Which brings me to my questions, which I raised with you in our discussions and which I know you are going to ask in the proposing release.
- First, is there a simpler way to accomplish these objectives?
- Regarding stock options, is the measure of the valuation for the executives the most appropriate, in that it takes into account the turnover of some group, whether it is all employees or the group that contains the executives? If we are looking for comparability across companies, why don't we just assume that the executive will stay through the vesting period or some other period and not reduce the option's value for estimated forfeitures?
- Regarding option repricings and material modifications, why do you believe that the full fair value of the option after repricing should be reported in the tables as opposed to the incremental compensation cost required by FAS 123R?
- Although the proposed disclosure applies only to the CEO, CFO, the three highest paid executive officers and up to three other highly compensated non-executives, am I correct that registrants may have to compute total compensation for a larger number of executive officers and other employees because the rankings may not be obvious given everything that has to be calculated and included in this number?
- Why is your proposed treatment of small business issuers different? If they have more complex compensation structures, why shouldn't they have to explain them as comprehensively as the larger companies?
- Do the existing certification requirements for CEOs and CFOs cover the accuracy and completeness of the compensation disclosures? I'd like the answer made clear in the proposal.
- An editorial in one of this morning's papers suggested our proposal doesn't adequately capture the cost of future pension payments. Is there any validity to this criticism?
Thank you. As I said, I support the recommendation pending a review of the final proposing text. I appreciate the work of all of the staff on this.
Alan, since this is your last open meeting, I want to take the opportunity to thank you for all of your work on Sarbanes-Oxley, Securities Act Reform, this proposal and all of the too numerous to be mentioned ways you have helped investors, the Commission, and me personally. You predated me here by only about two weeks, but by the time I arrived, you were already a fixture at the Commission. Your leaving will be a great loss. You are going to be missed, and I wish you well in the next phase of your career.