Let the sun shine in. The Securities and Exchange Commission has proposed new rules that would shed light on executive pay. If the rules pass in time for next year's proxy season, and it's widely assumed they will, companies will have fewer places to hide or disguise CEO compensation.
But 2007 is a lifetime away. The 2006 proxy season is in full swing. That's right, it's that joyous time of year when companies release their proxy statements and shareholders learn how much cash executives stashed during the previous year.
Some firms have revealed more than ever before, hoping to please shareholders and governance watchdogs. For most companies, however, the dirty details are still hidden or obscured.
The key to hiding pay: Use as many words and as few numbers as possible. The SEC has been pushing companies to use more numbers since 1992, the last time it overhauled pay disclosure rules.
Before that overhaul, companies put all compensation information--even salary and bonus numbers--in paragraphs rather than tables, says Mark Borges, a principal with Mercer Human Resources Consulting. Borges tracks proxy statements on his blog at CompensationStandards.com.
In 1992, the SEC required companies to use a Summary Compensation Table, which makes salary, bonus and perk information easy to find. But other aspects of executive pay packages remain obscured by language that's difficult to read and even harder to interpret.
Now, the SEC is overhauling those text-heavy parts of the proxy, forcing companies to add more tables filled with juicy numbers.
A major target: Pension plans. Despite all the complaints about soaring CEO pay, some executives wait until retirement to get really rich. But the value of an executive's pension "is totally out of sight, out of mind, nowhere to be found unless you're a pension actuary," says Mike Kesner, who leads the executive pay practice at Deloitte Consulting.
Under the current rules, finding pension information is like going on a treasure hunt. Last year, for example, Pfizer used a typical pension table in its proxy. The ubiquitous table shows how much a hypothetical executive would pull in after retirement, given various pay levels, listed down the left side of the table, and years of service, listed across the top.
Interpreting that table isn't easy. Like many companies, Pfizer bases an executive's pension on his "final average compensation." But what's that?
Three of the components--salary, bonus and long-term incentive plan payouts--are easy to find in the proxy. But "final average compensation" also includes restricted stock awards granted on or prior to April 26, 2001, and any additional "performance-contingent share awards" granted for performance periods beginning before Jan. 1, 2001.
Huh? In other words, to determine an executive's pension, investors would have to research stock awards in proxy statements more than five years old. If Chief Executive Henry McKinnell received a restricted stock grant in 1980, investors would have to find it.
This year, Pfizer added up its executive pensions, instead of forcing investors to hunt for the numbers like starving animals in search of food. McKinnell will receive about $6.5 million per year when he retires. The total present value of his pension benefit? More than $83 million.
But Pfizer is far ahead of the disclosure curve. "If you take a look at other proxy statements, you're not going to see one-tenth of this information," says Peggy Foran, the pharmaceutical firm's senior vice president for corporate governance.
Borges knows of only two other companies that summed up their pension liabilities this year: Colgate-Palmolive and Bank of New York.
Another mysterious source of executive pay: Change-in-control agreements, which kick in when a merger or acquisition eliminates an executive's job.
After a merger, departing officers often receive twice their last salary and bonus. But the biggest windfalls come from stock options, says Shirley Westcott, managing director of policy at Proxy Governance, a consulting firm.
Departing executives can often vest their options ahead of schedule, reaping millions. "That's even surprised some compensation committees, because they had not been tallying it up to see what the aggregate dollar amount might be," Westcott says.
Despite the significance of these payouts, disclosure is vague. ConocoPhillips, for example, says a departing executive would receive "two or three times" his salary and bonus. The company lists five other elements of its change-in-control package, but it gives no estimate of the total potential payout.
The new SEC rules, as currently proposed, would require such an estimate. If they pass, the numbers will be huge. J J Mulva, the energy firm's chairman and CEO, made $8.3 million in salary and bonus last year. But he has almost $190 million in outstanding options, which he could exercise under the change-in-control agreement. ConocoPhillips had no comment.
Smaller sums can be hidden from investors as well. Executives often receive restricted stock that they can't redeem for several years. Sometimes, however, they collect dividends on those shares before they technically own them. For firms that pay high dividends, this can amount to hundreds of thousands of dollars.
The new rules will require companies to disclose these sums. For a sneak peak, check out UnumProvident's proxy statement. The insurance firm disclosed that Thomas Watjen, its chief executive, earned $57,000 in restricted stock dividends last year.
But CEOs shouldn't fret. Once these loopholes are closed, more can surely be found.