SEC to Crack Down on Executive Comp Disclosures

By Lisa Valentine

It’s not enough just to report executive compensation; SEC Division of Corporation Finance Deputy Director Shelley Parratt is calling for companies to embark on “enhanced disclosure” that will describe how and why a compensation decision was made and what role performance targets played in the decision.

She also told companies that they should be proactive in their disclosures rather than waiting for the SEC to pressure them into it. Companies, reasoned Parratt, should want  to provide more information. She said, “…after all, it is your disclosure.”

Specifically, Parratt is calling for an analysis of why companies made the compensation decisions they did. She’s less interested in the “framework” of the decision and more interesting in hearing the reasons behind it. In other words, forget all the technical mumbo-jumbo about process and get to the meat. And if the decision was totally subjective, the company should come clean and say it has no basis for the compensation decision it made other than it perhaps felt good.

“When a company explains its compensation decision-making processes but does not explain why it made the compensation decisions it made, we will ask for enhanced disclosure of the analysis,” warned Parratt.

Another focus area for Parratt is pay for performance, something that investors are keen to understand. When performance targets are not met at some companies, the company ditches the target and awards the bonus anyway.

Since some performance targets may contain competitive or trade secrets, the SEC does make allowances for companies to omit some targets. However, it does appear that the SEC is ready to crack down on omissions and ask companies to explain exactly why the target should be kept a secret. And companies better have a good excuse.

And, if the company tries to explain their executive compensation by saying that it benchmarked compensation against peer companies, the SEC will ask for a list of those peer companies.

She stated, “When it comes to performance targets and disclosure, a company must first determine whether corporate or individual performance targets are material to its compensation policies and decisions. Making this determination often involved difficult judgment calls and, depending on the circumstances, we may question your conclusions.”

It’s pretty unlikely that companies will disclose more than they are required to, especially about such a touchy and high-profile subject as executive compensation. If Parratt wants companies to disclose their analysis about compensation, she should be prepared to force the issue. And it looks like the SEC is ready to do just that. She warned, “Now is the time to undertake an earnest attempt to prepare the best possible executive compensation disclosure consistent with the principles set forth in the rules.”

 

Ken Lewis Burns in Effigy

By Lisa Valentine

$2.24 billion in quarterly losses is pretty significant, even if you are the second largest bank in the U.S. But did Bank of America’s CEO Ken Lewis really deserve no salary and no bonus?

Can the Special Master of Executive Compensation (an absolutely ludicrous title reminiscent of a Monty Python skit) Kenneth Feinberg really do that?

In a world of government intervention, we guess he can. He is, after all, the special master.

Ok, Ken Lewis may have made a few dubious decisions, including (allegedly) neglecting to disclose losses at Merrill Lynch to shareholders, but to his defense, Lewis was under a heck of a lot of stress. Did he do the best job a CEO could have done at the time? Who knows. Yes, he’s under investigation by the SEC, Congress, and the attorney generals of three states.  While it’s unclear what those investigations will uncover, Lewis has already been tried and convicted by Feinberg.

Something is just not right. I hardly think of Ken Lewis, a 40 year veteran of the bank, as someone with a total disregard for shareholders (as well as the U.S. taxpayers that have bailed out the bank). Isn’t no pay a bit harsh? (Lewis’ base salary is $1.5 million, not unheard of for a CEO of a large, once-profitable organization; Obama receives a base salary of $400,000.) When Obama vowed to limit executive compensation, did he really mean to zero?

Executive compensation continues to be a scapegoat issue for the financial crisis because it’s so easy for the masses to understand. Executive compensation has gotten out of hand, and companies that have accepted government funds should not be allowed to waste taxpayer money, but this seems like an extreme reaction that sets a very dangerous precedent.

Who in their right mind is going to want to work in financial services? I can hear Willie Nelson singing now, “Mama, don’t let your babies grow up to be financial services industry CEOs.”