SEC Announces Companies Must Disclose Pay and Benefits
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MARGARET WARNER: Today’s move by the Securities and Exchange Commission is the first major step under new chairman Christopher Cox to address the soaring pay and perks doled out to corporate management, but not fully disclosed to stockholders.
CHRISTOPHER COX: Our purpose here today is to help investors keep an eye on how much of their money is being paid to the top executives at the companies in which they invest.
MARGARET WARNER: Executive pay has soared in the past decade, along with perks, bonuses, stock options and retirement packages. And they eat up a greater percentage of company earnings than ever before.
Some packages, once disclosed, have prompted SEC action. General Electric was forced to settle with the agency in 2004 for not adequately disclosing tens of millions of dollars in perks for former CEO Jack Welch, details only made public in his estranged wife’s divorce filings.
Other companies, like Tyson Foods and Disney, have also settled SEC charges of misleading investors on the size of pay packages. Today’s proposed new rules, the most sweeping overhaul in 14 years, would require companies to disclose in proxy statements and other filings the following: A total compensation figure for the company’s five top officers, and its directors; the dollar value of stock options granted these executives, not just the number of options as now required; all perks once they hit the $10,000 mark, not the current trigger of $50,000; and what these executives will get in annual payments and benefits after retirement or change in duties, whether forced, voluntary or because of a merger. The Commission will vote on whether to officially adopt these rules after a 60-day public comment period.
So what impact would these new rules have on companies and, potentially, on executive compensation itself? We get two views. Nell Minow is editor and founder of the Corporate Library, a watchdog Web site on corporate governance. And John Castellani is president of the Business Roundtable, an association of 160 CEO’s of leading U.S. corporations. Welcome to you both.
MARGARET WARNER: Nell Minow, how much more will investors know if these rules go into effect than they know now and why does it matter?
NELL MINOW: Well, I’ll answer the second part first. It matters because the pay package tells us a lot about the company’s strategy, about the company’s priorities and it tells us a lot about the effectiveness of the board in providing oversight. They’ll know a lot more than they know now. Right now it’s a little bit like a treasure hunt. All the little pieces of the pay are hidden in various places and some of them are invisible or obfuscated. This puts it all in one place.
MARGARET WARNER: You mean in a proxy statement?
NELL MINOW: And other filings — and other filings too — like the change of control provisions. So you have to look all kinds of different places. And that’s one of the things people pay me to do.
Now you’ll be able to find it all in one place and you’ll be able to also see — and I think this is very important — what the compensation committee says about how they arrived at that figure, what they’re trying to achieve with it.
MARGARET WARNER: So how does the Business Roundtable feel about this and more specifically your members?
JOHN CASTELLANI: Well, what the SEC proposed today is absolutely consistent with what the Business Roundtable called for three years ago and that is greater transparency and greater disclosure of compensation practices, compensation amounts so that shareholders can look at the total package and decide whether or not they’re getting the right value for the companies they’re about to invest in.
MARGARET WARNER: If you’ve always supported this, why was it necessary to have the SEC pass such a rule? Why aren’t companies just doing this in their proxy statement?
JOHN CASTELLANI: Well, the SEC sets the rules for the proxy statements. And so it’s important that all 17,000 publicly-traded companies are treated the same way. That’s why it’s been important.
But what we’ve seen over the last three or four years have been companies and their compensation committees delving much deeper, going — being more transparent and being more active when they establish compensation practices and compensation levels at their companies.
MARGARET WARNER: So, Nell Minow, do you, (a) hope and/or, (b) expect that by having this be more public — these total amounts — that that will somehow affect the level of compensation that is set by the compensation committees for these top executives?
NELL MINOW: Well, there’s one more piece. And that is you can lead an investor to a disclosure; you can’t make him think. I think I agree very much with what one of the commissioners said today, which is that if these rules go through and pay continue to be excessive, then the investors have no one to blame but themselves. The investors have got to respond to this, and I hope they do that.
MARGARET WARNER: Now when you say pay is excessive, what do you mean?
NELL MINOW: Well, I mean in terms of performance. Right now the dollar that you invest in paying the CEO has the lowest return on investment of just about any other expenditure that the corporation makes. The fact is that we’re not making money. The shareholders are not making money by paying CEO’s enormous amounts because the pay is not tied to performance.
If pay is tied to performance — nobody is happier than I am when the CEO makes a ton of money as long as the shareholders make money too.
MARGARET WARNER: Do you think the executive pay is excessive?
JOHN CASTELLANI: No, I can’t tell you how much a weak hitting shortstop for the Washington Nationals should make, much less what the leader of the largest financial institution in the world should make. The market sets those.
I think what is important here is boards of directors balance compensation so that it’s not overly dependent on one form of compensation, that it’s tied to long-term values for the shareholders and that it’s tied to the performance of the company and of itself.
Beyond that, we know that the government can’t regulate and shouldn’t regulate what compensation is. That’s up to the shareholders.
MARGARET WARNER: Do you agree with Ms. Minow, though, that currently it is really not tied to performance?
JOHN CASTELLANI: It has been tied to performance in the majority of companies. There are specific goals that are set out by boards of directors, whether you’re talking about revenue, market share, product development, leadership development.
There are a whole set of factors that boards use, responsible boards use. We’ve seen them go back and do better jobs than they have in the past.
MARGARET WARNER: Now, when you say excessive, Ms. Minow, for people who don’t follow this at all, just give some examples of what you mean by excessive pay where you believe based on your analysis that in fact the pay was way out of line for what this executive deserved.
NELL MINOW: Well, Gary Wendt got $45 million –
MARGARET WARNER: Explain who he is.
NELL MINOW: The CEO of Conseco, and he got $45 million for walking in the door; that was $45 million cash for showing up.
Now I understand what opportunity costs are — he was giving up some money at his old job — but to give somebody cash as a signing bonus or to give the CEO of Global Crossing two million stock options at $10 a share below market so that’s a $20 million value walking in the door, that’s really sort of a bet against the future.
And I don’t agree with John. I agree with him on a lot of things but I don’t agree that the market is setting this pay. All of these other people, movie stars, rock stars, athletes, their pay is driven by the market because it’s an arm’s length transaction.
But CEOs pick the people who set their pay, and it’s very cozy.
JOHN CASTELLANI: Not true. I mean, what has happened particularly over the last three or four years is that the compensation committees of boards of directors must by the listing standards be made up of independent directors.
These are directors that have no tie to the management other than the fact that they are on their boards of directors. They are totally independent from the company and that they can get access to expertise outside of the company’s expertise on what they should be paid.
MARGARET WARNER: Mr. Castellani, one of the things — one reason we hear about all the time is how the gap has widened between what the average worker at a company makes versus what the CEO makes.
And I think in the ’80s it was sort of 40 times. The president usually made roughly 40 times what the average worker. Now it’s 430 times. Can you explain why?
JOHN CASTELLANI: One of the factors that has driven that has been the turnover in chief executive officers and a lot of it driven by shareholders who wants to see a change at the top.
You know at the Business Roundtable in the mid ’80s the average tenure of the CEO was eight-and-a-half years. It’s now five years and it’s dropping.
And what is happening is shareholders and boards of directors are asking for new leaders of the companies. They’re not saying, go get me the second or third best person to run this company. Go get me the best person to run that company. That person typically is working somewhere else and gives up a lot if they give up that job.
So you’ve seen compensation go up because of the turnover.
MARGARET WARNER: So you didn’t think that the examples she gave were excessive?
JOHN CASTELLANI: Again, I can’t tell you what the level is. But she was talking about an individual who came from a company where he had a very senior position, gave up all of the retirement benefits, the long-term compensation, to come and lead a different company. And they need to be compensated for it.
MARGARET WARNER: Now, that’s another area that the gap has opened up, Ms. Minow, is in the area of retirement. And this is of course a hot issue right now because some big companies are cutting back on the defined benefits for just their normal workers. How big is that gap? Give us some examples.
NELL MINOW: There is a huge gap. This is my favorite CEO compensation dodge. It’s called imputed years of service because CEOs are like dogs. One year on the job is like seven years. And so they will say, well, I’ve only worked five years but I am going have imputed years of service for my retirement plan and be treated as though I’ve worked for twenty years. And this is one of the big loopholes that these rules would change because companies would have to disclose these payments.
MARGARET WARNER: So how big are these? I mean, I read some of them today, some of these retirement packages that people get. I mean, they get tens of millions of dollars?
NELL MINOW: Yes, that’s right because when the SEC set up the original rules, they said, well, once the CEO leaves the company, his retirement really isn’t that important anymore. It’s not material; we won’t make them disclose it.
And, of course, that’s when people started hiding all the money in their retirement plans. You look at the Dick Grasso case –
MARGARET WARNER: — the New York Stock Exchange –
NELL MINOW: — the New York Stock Exchange — and he had a staggering — something like a $118 million retirement package.
MARGARET WARNER: What about the retirement package gap? Do you think these new rules will affect that? In other words, when investors or maybe institutional investors see there’s this, this and this and it really is huge, do you think that will –
JOHN CASTELLANI: Well, the key here is disclosure full disclosure and great transparency. And if these rules accomplish that, then the best thing that can happen is investors can look and they can decide that that person, that man, that woman, is worth the compensation they’re going to get not only now but also when they retire, or when they’re separated from the company. Or it’s not worth it and they can take their money and invest it elsewhere.
The key we think is disclosure and transparency. These rules should go a long way towards that in eliminating the surprises that I think have come as a shock to some investors in the past.
MARGARET WARNER: So you’re saying you think these rules might have an impact, at least at some companies?
JOHN CASTELLANI: Of course they will. And I think the harsh light of disclosure, of transparency, will always affect any group of people, boards of directors, in making decisions, and they should. They should be able –boards of directors should be constructing compensation packages that can withstand the light of investor and public scrutiny.
NELL MINOW: Absolutely. It makes the markets more efficient, and that’s what we’re both all about.
MARGARET WARNER: But I mean do you — you earlier said you can –what was your phrase? You can take an investor –
NELL MINOW: Right. But you can’t make him think.
MARGARET WARNER: But you can’t make him think, that’s right.
NELL MINOW: I think it’s not just the CEO that the investors will want to replace or they will take their money and put it elsewhere, I think they will work hard to get rid of some of the compensation committees that agree to these packages. And I think that’s the next frontier.
MARGARET WARNER: A brief final thought from you. So is the Business Roundtable behind the rules? And do they essentially reflect your input now or are you going to try to modify them?
JOHN CASTELLANI: Well, they reflect our principles that we issued three years ago, and we’ll have to see the final details when the rules come out next week.
MARGARET WARNER: All right, John Castellani and Nell Minow. Thank you both.
JOHN CASTELLANI: You’re welcome.