Financial Times, September 4, 2007 article

How much should a company reveal to investors about how it rewards top executives?

That is a new conundrum in the debate over executive pay and perks in the US, thanks to new rules aimed at forcing more disclosure from companies about how they pay their chief executives.

This week the Securities and Exchange Commission will continue to send letters to about 300 companies that it has decided are not yet complying properly with new executive compensation disclosure rules.

The rules - marking the biggest overhaul to US pay and perks in 14 years - require management to provide a single figure representing an executive's total compensation, as well as a "narrative" explaining how compensation committees arrive at the package.

The SEC has spent the past few months since the latest proxy season examining companies' first submissions since the rules were passed last year.

However, the review has thrown up evidence, the SEC says, that some are not disclosing enough about how performance relates to pay. John White, director of the division of corporation finance, says: "If on reading them [company filings] we thought the disclosure of the performance targets was vague or incomplete, we have generally asked for more information."

The new rules were designed to make it easier for investors to compare pay packages across publicly listed companies. Christopher Cox, SEC chairman, has said that shareholders "should not need a machete and a pith helmet to go hunting for what the CEO makes".

Yet the problem is that performance-related pay targets are competitively sensitive. For example, management may balk at describing how an executive's pay is tied to whether he or she makes a specified acquisition within a certain period.

The Business Roundtable, which represents the interests of chief executives, warns that companies should not be asked to detail proprietary information that would place them at a competitive disadvantage.

Mr White says companies need not make such disclosures under a "confidentiality treatment standard" dealt with under the US Freedom of Information Act.

Yet Ron Mueller, a lawyer handling executive compensation at Gibson, Dunn & Crutcher, says that while such a standard exists, it has typically been used to protect sensitive information in commercial contracts and is untested in executive compensation.

"No one is really certain how it applies in this context," he says.

Another complicating factor is that, unlike in the UK and continental Europe, executive compensation policies and practices vary considerably between US companies. One might link compensation to sales targets and cash flow, while another might make more use of non-financial goals.

Jack Dolmat-Connell, president of DolmatConnell & Partners, an executive compensation consultancy, says: "We work with 100 companies on this kind of stuff. They are saying: 'How should we interpret this?' Every company is attacking this differently - which seems to be against what the SEC wants."

The SEC wants greater clarity in disclosures. Yet some experts say the amount of data now required has mushroomed.

Laura Thatcher, a lawyer at Alston & Bird in Atlanta, says the part in a company proxy statement devoted to executive compensation used to run to 10 pages. Now, it can stretch to about 60. "That's a huge amount of information for the public to digest," she says.

Mr White says the SEC plans to issue a report in the autumn. He says the new rules have already led to "substantially increased disclosure that is beneficial to investors".