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Half of Big Proxy Filers Exploit SEC Pay-Report Loophole

Nearly 50 of the 100 large publicly traded companies that filed proxy statements in 2007 did not disclose targets, such as the amount of net income or earnings per share that triggered annual bonus payments.

April 11, 2007
Related Topics: Compensation Design and Communication, Ethics, Latest News

Companies worried about disclosing too many details of their compensation plans under the new Securities and Exchange Commission rules may have found a loophole wide enough to drive a semi through—for now.

The SEC rules request that compensation committees reveal the financial targets they use to set annual bonuses and long-term incentives, in the hopes of explaining to investors how they link pay to performance. But if including those details might result in a competitive disadvantage, companies can choose to leave them off their proxies.

As a result, nearly 50 of the 100 large publicly traded companies that have filed proxy statements so far in 2007 did not disclose the targets, such as the specific amount of net income or earnings per share that triggered annual bonus payments last year, according to consulting firm Watson Wyatt Worldwide. Forty-five percent of those studied also failed to reveal the financial goals tied to long-term incentives like shares for performance.

“The SEC certainly left a loophole,” says Ira Kay, executive compensation consultant with Watson Wyatt. “Disclose your goals—unless you can argue it will cause competitive harm.”

Kay explained that while only half of the companies revealed specific financial targets, which would allow shareholders to fully grasp how they pay executives, 85 percent at least disclosed the general financial metrics used in their executive compensation plans, such as earnings per share or net operating income.

He added that companies linking their bonuses and long-term plans to relative total returns above their peer groups tended to disclose their targets, figuring they weren’t giving away competitive information. Companies that used earnings growth as a goal, on the other hand, tended to keep the exact amount a secret.

“If a company says it’s looking at 15 percent earnings growth as a target, its competitors start to wonder how it will meet that goal,” Kay says. “Will the company be opening a new factory in South Korea, or hiring new salespeople? It’s a legitimate concern.”

Legitimate or not, compensation experts agreed the SEC will not be satisfied batting .500. After all, it’s the disclosure of the actual financial targets that allows stakeholders to answer the essential question: Is there pay for performance?

“I suspect the SEC will have to deal with this as part of its wrap-up of the proxy season, especially if enough investors say that they aren’t getting enough specific information on these incentive arrangements and how they work,” says Mark Borges, an expert on financial reporting at Mercer Consulting.

Thomas Steichen, a securities lawyer and compensation expert at Fredrikson & Byron, agreed.

“Most people realize that this is very complicated, and it’s going to take a lot of SEC guidance to get companies on track,” he says. “At this point it’s kind of up in the air.”

Meanwhile, many companies also seem to be failing to pass the “plain English” requirement of the new disclosure rules. In a speech at a corporate governance conference last month, SEC chairman Christopher Cox said his agency’s early conclusions were that the latest proxies were overly complicated and difficult for the average investor to understand. Cox cited a study by Clarity Communications of Canada Inc., which found 40 proxies from U.S. companies—including those from General Electric, SunTrust Banks and Eli Lilly—loaded with jargon and legalese.

In March, John White, director of the division of corporate finance at the SEC, said the regulator is developing a plan for targeted reviews of a “critical mass” of these new disclosures, and is planning to prepare a report to convey its observations to issuers for next proxy season. He also noted the SEC will review comments it has received on amendments to the new rules adopted in December.

“These comments, plus our targeted reviews, could result in rule-making refinements for the next proxy season,” he told a conference.

Smaller companies may take the lead on the new pay disclosure rules.

“It’s been a lot easier for smaller companies to get their arms around this because they typically have simpler compensation schemes,” says David Danovitch, a securities lawyer at Gerston Savage. “Unlike with Sarbanes-Oxley, nearly every single one of our clients has said the new disclosure rules are a great idea. They’ve really forced compensation committees to look at their pay programs in a different light.”

Filed by Jeff Nash of Investment News, a sister publication of Workforce Management. To comment, e-mail

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