The Securities and Exchange Commission sent letters to
350 companies last summer and fall critiquing the way they described the
pay of their top executives. But the federal watchdog isn't happy with
most of the answers it got.
A majority of the companies have now received second
letters, according to an SEC official, and of 26 companies whose cases
were closed, 21 were chided for not giving enough information about the
role of individual performance in their pay decisions.
Sandra Leung, Bristol-Myers's general counsel and
corporate secretary, promised to do better in the future -- in so many
words. In an Oct. 10 letter, she said Bristol-Myers will elaborate in
future filings "on the manner in which the named executive officers'
performance against individual financial and operational
objectives...impacted their resultant compensation." And Robert Zito, a
Bristol-Myers spokesman, added that this year's proxy statement "will
certainly be prepared consistent with our response to the SEC comment
letter."
The increasing SEC scrutiny could spur changes in how
companies calculate compensation, including moving away from individual
performance as a measure of success -- one of the areas the SEC focused
on as particularly weak -- in favor of companywide financial targets,
such as earnings or stock prices.
"Quantifying individual performance targets isn't the
easiest thing to do," said James D.C. Barrall, a Los Angeles attorney
and executive-pay specialist at Latham & Watkins LLP, who expects to see
such a shift.
The companies most likely to change would be those that
use performance targets they'd prefer to keep confidential, such as
return on capital, said Ronald Mueller, a compensation expert at the law
firm Gibson, Dunn & Crutcher in Washington, D.C. "In my experience, some
companies switched to performance targets that they would be more
comfortable disclosing," he said.
Another possible result is that companies will stuff
even more information into company proxy statements, which are already
larded with charts and footnotes. That could mean an additional table
with top officers' individual goals and how their pay stacks up against
colleagues' rewards. Scott Olsen, head of the rewards practice at
PricewaterhouseCoopers in New York, says a lot of people think that's
what "the SEC is looking for."
The scrutiny could have the unintended consequence of
pushing companies to focus on short-term measures such as earnings or
stock prices, which, critics say, can distort how companies are managed.
An obsession with stock prices was one factor in the raft of corporate
frauds that accompanied the end of the dot.com boom. Last year a panel
organized by the U.S. Chamber of Commerce, the nation's largest business
lobby, recommended that CEOs stop giving quarterly earnings guidance as
part of a push to refocus on long-term results.
The review by the SEC is part of its effort to bring
more information about executive pay to shareholders after years of
high-profile pay packages and perquisites that many view as excessive.
Shareholder advocates are also pressing hard to give shareholders a
greater say in executive pay.
Letters from the 26 completed cases were recently made
public on the SEC's Web site. The others will be posted 45 days after
the SEC considers itself satisfied.
![[James Tobin]](http://s.wsj.net/public/resources/images/HC-EM749_Tobin_20070212221656.gif)
In last year's proxy statement, Boston Scientific
Corp. said the board's compensation committee calculated the CEO's
salary by assessing his objectives, the company's performance and broad
market data "provided by our compensation consultants." It said it gave
CEO James Tobin a 3% raise after reviewing "whether the company had met
or exceeded quarterly sales and earnings targets, the performance of our
Taxus stent system, our product-development initiatives and business
integrations, as well as other matters."
The SEC wasn't satisfied and asked for "substantive
analysis and insight" into how the board's compensation committee
determined specific pay, according to its Sept. 26 letter.
In response, Mr. Tobin wrote on Nov. 9 that his
"limited" raise reflected that "the company had only achieved quarterly
sales and earnings targets in two of four quarters in 2005, Taxus market
share lagged expectations and the launch of Taxus in Japan had been
delayed." The company didn't state the specific quarterly targets.
Spokesmen for Baxter International Inc.,
DuPont Co., Safeway Inc. and Electronic Data Systems
Corp. -- other recipients of SEC letters -- said it is too early to
offer details beyond their response letters because they're still
discussing possible changes with directors or preparing their 2008 proxy
statements.
"We are just now completing financial reporting and
analysis for the year and are evaluating performance and potential
compensation decisions with our board," said a spokeswoman for Baxter, a
health-products concern in Deerfield, Ill.
David P. Scharf, Baxter's corporate secretary and
associate general counsel, wrote that there were limits on what he was
willing to tell the SEC.
In his Oct. 22 response, he said additional information
will be limited by the company's desire to avoid disclosing confidential
information about unquantifiable "qualitative elements" of each top
officer's pay. In any case, he continued, such revelations would not
provide "substantial value to investors in understanding our
compensation policies and decisions."
Write to Kara Scannell at
kara.scannell@wsj.com1
and Joann S. Lublin at
joann.lublin@wsj.com2
