NEW YORK (AP) - Shareholders who complain that executive pay is getting out of control have a new tool for pressing their case: They are demanding that companies spell out why their top brass deserves generous rewards.
Corporate boards like to tout the idea that pay is directly linked to performance, and most shareholders have no quarrel with that premise. What they don't like is when companies fail to disclose how they calculate pay, often using 'competitive factors' as a justification.
It's a lame excuse. Sticking with it will only result in intensifying pressure from investors to knock down executive compensation and give them more of a say over its size.
The median pay for CEOs at Standard & Poor's 500 companies was $8.3 million in 2006, including salary, bonuses, perks and all stock options and awards granted during the year, according to an Associated Press calculation.
A recent report by the Congressional Research Service helps to put that figure into a real-world context. CEOs make, on average, 179 times as much as rank and file workers, almost double the 90-to-1 ratio in 1994, according to the agency's calculations.
Corporate America had an opportunity this year to state its case for such a wage gap. For the first time, the Securities and Exchange Commission demanded that companies be more specific about actual pay figures, through enhanced compensation tables and footnotes. Proxies with those details started arriving this spring.
Board compensation committees also were required to lay out their thinking behind executive pay in a new narrative section to the proxy statement called 'Compensation Disclosure and Analysis.'
What shareholders got from most companies may as well have been a map of canals on Mars. The proxy reports were long, complex and padded with legalese and jargon that ultimately didn't tell investors everything they wanted to know.
Few companies offered tables that clearly stated what performance targets needed to be met to secure certain types of incentive-based compensation, and most stuck with generalities regarding pay, rather than providing specific metrics on such things as earnings or sales goals.
'The presentation of the information wasn't the way that many in the investor community had been expecting,' said Mark Borges, a principal for Mercer Human Resources Consulting. 'Companies are not being as rigorous with that information as required.'
Level 3 Communications Inc., for instance, didn't provide the target levels for its annual bonus program because it considers the information 'confidential' and disclosing it could 'cause competitive harm.' In its proxy statement, it just talked about 'certain financial and strategic goals' that executives had to meet.
Google Inc. disclosed that individual and company performance goals were factored into cash bonuses for executives, but it did not give specific metrics used to arrive at those inputs.
Granted, this was the first time companies had to tell their stories about executive pay, and many have complained of the daunting task of integrating the new material into their proxy statements.
A survey of 128 mid- to mega-capitalization public companies by compensation consultants Pearl Meyer & Partners found that respondents on average rated the new proxy process as a 4 on a scale of 1 to 5 -- 5 being the hardest. Under the old rules, the average was 2.4.
The SEC is already pushing for more readable and complete disclosures. In March, SEC Chairman Christopher Cox noted that the CD&A sections read more like Ph.D dissertations than plain English, and have been much too long -- some coming in at dozens of pages.
'Retails investors deserve better,' he said then. 'It's clear that many companies are letting lawyers have the final say on the CD&A.'
If companies aren't more forthcoming going forward, they can count on increasing pressure from shareholders to give them a say over executive pay. That issue had surprising success during this year's proxy season, with investors winning a nonbinding advisory vote on compensation at a handful of companies, including Verizon Communications, Motorola Inc. and Blockbuster Inc.
Congress has gotten involved, too. The House of Representatives already passed a bill that would give shareholders a voice in setting pay packages. A similar bill has been proposed in the Senate.
The momentum on this issue should push boards to consider 'the communications aspect of disclosure,' said Joseph Rich, chairman of compensation consultants Pearl Meyer & Partners. He notes that compensation committees should be thinking about 'what we do, how we do it and was what happened appropriate.'
Investors don't have a problem with rewarding success -- they just want to know the rules of the game. The burden now lies on companies to give them that, or face a corporate world where shareholders dictate CEO paychecks.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
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