On July 1, the SEC voted to solicit comments on proposed changes to its proxy disclosure rules. Among the recommendations, the SEC is looking at reverting to its former stance on how companies disclose and value stock options granted to executives.
When the agency passed its executive compensation disclosure rules in 2006, it produced a last-minute change that required companies to disclose the value of options that are expensed in companies’ financial statements. However, critics argued that the number didn’t accurately reflect the value of the options that the executives received, since they vest over time.
The criticism has become louder in recent months as many companies’ proxies revealed large options awards to executives, but those options were underwater.
Under the proposed rules, companies would disclose the full grant-date fair value of equity awards for the year of the grant, meaning that it would be clearer how much that executive made in stock options that year.
“It is a very good idea to revert to the original rule because we will then be able to relate the amount of compensation awarded to that executive’s performance,” said Pearl Meyer, senior managing director with Steven Hall & Partners, a New York-based executive compensation consultant.
Other rules that the SEC is looking at would require companies to increase their disclosure around the performance metrics they use in setting up executive compensation.
“I think you are going to see some pushback from organizations about discussing what their incentive plans are based on,” said Deborah Nielsen, director of data operations at Salary.com.
“That’s definitely the most controversial of all of the proposed rules,” Meyer said.
The SEC has indicated that the rules will become effective in 2010, but experts advise companies to start thinking about them now.
“People will start to plan for them and not wait for them to be finalized,” said Scott Olson, a principal at PricewaterhouseCoopers.