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SEC Makes Last-Minute Change to Stock-Option Disclosure Rule

December 27, 2006

The Securities and Exchange Commission, in a last-minute revision to executive compensation rules adopted in July, will allow companies to report the incremental value of stock-option grants year by year, rather than as a single dollar value of an executive’s total compensation.

The new rule, which was announced late on Friday, December 22, just before the Christmas weekend, came as a sad surprise to longtime advocates of greater compensation disclosure.

“The whole point of the disclosure rules is that the investor community wants to understand the compensation paid to executives,” Ann Yerger, the executive director of the Council of Institutional Investors told Workforce Management. “What the people, what the public, want is a snapshot of what this guy was paid during the year.”

The new change had been under consideration for some time since the commission adopted the compensation disclosure rules, an SEC spokesman said. That is in part because many companies had argued that it was difficult to put a single number on total compensation before the options are fully exercised.

Companies structure compensation so that executives earn their options over time. Thus, what an executive earns in a single year is not necessarily reflected in a total compensation figure. The new rule would, in theory, produce a number that would accurately reflect compensation for the year and how much it costs a company.

“The new disclosure requirements will be easier for companies to prepare and for investors to understand,” SEC chairman, Christopher Cox, said in a statement released with the rule change.

The rule is effective as soon as it is published in the Federal Register, the federal government’s daily publication for rules, proposed rules, and notices of federal agencies and organizations--possibly by the end of the year.  It will apply, however, to all proxy, information and registration statements filed on or after December 15, 2006.

The disclosure rules adopted by the SEC in July were meant to shed light on the total compensation enjoyed by executives and how much that compensation cost shareholders. The change will mean that companies will not have to disclose an executive’s estimated total stock compensation in a summary table on regulatory filings. Instead, only the value for the year being reported would be disclosed.

Those who oppose the latest change argue that the revised rule runs counter to the goal of giving individuals a full picture of an executive’s total compensation package.

“The issue here is that companies don’t want to disclose the full value of the rewards,” Yerger says. “They’ve won again and it’s a big step back for the SEC and investors."

But SEC officials have said the revised rule, which will apply to chief executives, financial officers and the three other highest paid executives in an organization, would force the disclosure of compensation as it is in a given year, not as it might be in a 10-year period.

One irony of revised rule, Yerger says, is that companies and boards of directors, if not the individual investor, will still want to know the estimated total compensation of other executives. To do so, they will continue to be reliant on the army of compensation consultants who are adept at parsing regulatory filings and other indicators of an executive’s pay package.

“The good news is they will not be out of work,” Yerger says.

The SEC decided to forego the public comment period that customarily precedes rule changes so that companies could follow the new rule in their next SEC filings. Though a comment period will exist to allow people to express their views of the change, the rule already is final.

--Jeremy Smerd