Stepping up its campaign to shed light on the mysteries
of executive pay, the Securities and Exchange Commission has sent
letters to nearly 300 companies across America critiquing disclosures in
this year's proxy statements and demanding more information.
The SEC's requests could set up a confrontation over
details the agency wants that companies say are competitive and should
remain secret. The federal securities regulator, for example, wants to
know more about the targets and benchmarks companies use when they tie
pay to performance.
The SEC's letters, which were faxed to chief executive
officers, have caused much consternation -- and some complaints.
Companies are racing to set up emergency meetings of their board
compensation committees to answer the questions. Some are considering
lobbying as a group against certain SEC requests, such as providing more
information about specific performance goals, lawyers say.
Companies contacted by the SEC are of all sizes and
come from a variety of industries, corporate lawyers say. Recipients of
the letter include drug makers Pfizer Inc., Schering-Plough
Corp. and Bristol-Myers Squibb Co.; insurance firm Prudential
Financial Inc.; Coca-Cola Co. and General Electric Co.
American Express Co. is expecting to receive one, according to a
person familiar with the matter. "CEOs aren't used to getting
communications from the SEC," said one attorney. "They're a bit
anxious." In forwarding his letter to a colleague, one annoyed chief
scrawled in the margin: "What the hell is this?"
In the case of Pfizer, the SEC asked the big drug maker
to more fully describe the work performed by the board's independent pay
consultant. "I don't think this kind of detail will be of additional
benefit to investors," sniffed a person familiar with the situation. "Do
they want [Pfizer] to tell how many Diet Cokes he drank at the
meetings?"
The SEC does want Pfizer to better explain how the
board compensation committee used "tally sheets," compilations of data
of the kind usually prepared by a board's outside pay consultant and
then used by the compensation committee in making executive-pay
decisions. The sheets offer a more complete picture of the true value
and possible future cost of executive-pay packages.
Last year, investor activists criticized the
compensation package for the then chief executive, Henry "Hank"
McKinnell. They took advantage of Pfizer's voluntary proxy disclosure
that he could have pocketed a lump sum of $83 million if he had retired
at the end of 2005. Mr. McKinnell unexpectedly quit as CEO in July 2006.
The SEC's letters, which were sent last week, represent
the SEC's first review of new disclosure rules governing executive pay.
The commission approved the rules last year amid growing disquiet about
executive pay and the options-backdating scandal.
"The letters are intended to help issuers better
explain why they've paid executives what they've paid them," said John
Nester, an SEC spokesman. The agency is giving most companies until
Sept. 21 to either respond or provide reasons why they can't; the
letters will be made public later this year. The SEC will send out
another batch soon.
SEC Chairman Christopher Cox has made revamping
executive-pay disclosure a priority, in particular giving investors more
information about pay and benefits that were previously shrouded in fine
print or not disclosed. Over the past several months, Mr. Cox and his
staff have complained publicly that disclosures were either written in
legal jargon, too vague or not easily understandable.
"We're seeing a lot of really vague disclosure" about
individual performance goals and targets," John White, the SEC's
director of corporation finance, said in a recent speech.
One question that has generated a lot of concern
relates to performance targets. Under the SEC's rule, if a company ties
executive pay to performance, it must disclose the targets, or if
disclosing them would result in competitive harm, explain how difficult
it is to meet them. Now, the SEC is asking companies to document why the
targets should be treated as confidential and excluded.
Laura Thatcher, the Atlanta-based head of the
executive-compensation practice at law firm Alston & Bird LLP, said
about seven of her clients received letters. She is urging them to
cooperate fully but expects some resistance, especially about how they
measure performance in calculating the pay of individual executives.
"There's going to be some rubber hitting the road when it comes down to
disclosing these individual measures," she said.
The SEC is also asking companies to discuss whether
they expect executives to meet future targets. Typical wording: "If
disclosure of the performance-related factors would cause competitive
harm, please discuss further how difficult it will be for the named
executive officer or how likely it will be for you to achieve the target
levels or other factors."
Moreover, the SEC is asking companies to name specific
competitors used to create industry benchmarks for pay. It also wants
additional information about the role played by the chief executive in
setting his own compensation or that of other employees.
In the case of one company, the SEC "wanted information
for each individual, what were the business objectives that needed to be
met, were their individual performance factors taken into account and,
if so, disclose those," said John Wilson, a partner at law firm Foley &
Lardner. Another company was asked to explain the "significant
disparity" in pay granted to its CEO compared with the other top four
executives whose pay was disclosed, one lawyer said.
Some letters posed highly technical questions, even
though SEC officials had previously encouraged companies to simplify
their often wordy proxies. "With comments asking companies to 'expand'
their disclosures and to 'provide additional discussion,' the result in
many cases will be longer, not necessarily more concise or readable"
proxy statements, said Ronald Mueller, a partner who specializes in
executive pay at law firm Gibson, Dunn & Crutcher.
Some questions might prompt additional disclosures by
companies this year. A more likely response will be promises of enhanced
executive-pay revelations in 2008 proxy statements.
Write to Kara Scannell at
kara.scannell@wsj.com1
and Joann S. Lublin at
joann.lublin@wsj.com2
