Amid a public outcry, federal regulators are forcing companies to reveal more information about how much they pay their top executives.
The Securities and Exchange Commission (SEC) is also changing a formula that critics say allowed companies to understate how much their senior executives are paid. At issue is how public companies report stock options and stock awards in regulatory filings. Such awards often make up most of top executives’ pay.
Company policies that encouraged excessive risk-taking and rewarded executives for delivering short-term profits were blamed for fueling the financial crisis. The administration of US President Barack Obama imposed pay curbs on banks that received federal bailout money. Since then, eight of the largest such banks have repaid, or said they will repay, their federal money largely to escape caps on executive pay.
And the Federal Reserve has given the 28 biggest US banks — including Goldman Sachs, JPMorgan Chase & Co, Citigroup Inc, Bank of America Corp and Wells Fargo & Co — a February deadline for submitting next year’s compensation plans. The Fed also will be encouraging, though not requiring, banks to revise this year’s pay plans if they are out of step with principles the Fed has proposed to limit risk.
Anger over lavish Wall Street pay has led some US banks to take pre-emptive action. Goldman Sachs, for example, has said it won’t give cash bonuses to 30 top executives. Instead, they’ll be paid in stock that can’t be cashed in for five years.
The SEC was to meet yesterday to adopt expanded disclosure rules for compensation at all public companies. The rules include information on how a company’s pay policies might encourage too much risk-taking. SEC officials have said they want the new rules to be in place by spring, when companies send annual proxy disclosures to shareholders.
“It’s going to force [companies] to think about these issues a decent amount,” said Ray Russo, a corporate attorney at the law firm Paul, Weiss, Rifkind Wharton & Garrison.
Firms will have to disclose how pay is determined in departments involved in the riskiest activities or departments that produce a big chunk of company profits.
The new requirements were proposed by the SEC and opened to public comment in July. They build on rules the agency adopted in 2006.
“The turmoil in the markets during the past 18 months has reinforced the importance of enhancing transparency, especially with regard to activities that materially contribute to a company’s risk profile,” the SEC said when it floated the proposal last summer.
Under current rules, companies don’t have to reveal the full value of stock options they give an executive. Instead, they must disclose in their annual proxy statements only the portion of an options award that vests that year.
The new rule will require companies to show in a summary table the estimated value of all stock-based awards on the day they are granted. The SEC’s 2006 rules had relegated those totals to a separate table that investors often overlook or find hard to decipher.
An example is the case of a company that decides its CEO deserves US$10 million in stock options to vest in equal installments over four years. Under current rules, the company would have to include only US$2.5 million — one-fourth of the total — in the summary table.
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