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A Gift to Shareholders from the SEC
By Graham Summers July 28, 2006
How would you like double-digit raises every
year for the next 13 years?
Become a CEO.
According to Business Week's 54th Annual
Executive Compensation Survey, between 1990 and 2003 the average
CEO's pay increased 313%. Over the same time period, corporate
profits only rose 128%.
If that discrepancy between CEO pay and
corporate profitability seems a little strange, consider that pay for
the average worker at these companies only rose 49% for the same
period.
And because the Securities Exchange Commission
(SEC) didn't require companies to be completely transparent
regarding executive compensation, CEOs added to their already cushy
paychecks via sketchy transactions such as forgiven loans (essentially
corporate giveaways) and options backdating: moving the date of an
option back to lower its initial buy price.
One of the more famous examples of these deals
involves former General Electric CEO Jack Welch. During Welch's 2002
divorce, it was revealed that GE covered Welch's rent for his New
York apartment, as well as his country club memberships and tickets to
sporting events. As if that wasn't enough, the company also covered
the salaries for the staff at Welch's numerous homes.
I'm appalled at this excess. But the lack of
SEC regulation requiring detailed accounts of executive compensation
has been disturbing for another reason. It makes it much harder to
determine insider trading at these companies.
If an executive makes $1 million in salary and
$10 million in stock compensation, a $50,000 purchase of his
company's stock isn't too compelling. I want to know exactly what
these guys are getting in the way of compensation. How else can you
gauge the significance of their purchases?
True, you can usually find the salary and
stock grants for most high-level executives in their companies'
Definitive Proxy Statements: form DEF 14A. However, the proxy
statement fails to reveal issues like forgiven loans, options
backdating, and other golden parachutes.
That all changed this week.
On Wednesday, the SEC voted 5-0 that companies
must disclose all information pertaining to executive pay. This
includes any kind of pay, whether it's a loan for a house, or
company car, or a severance package.
On top of this, companies will now have to
explain the timing of options granted to executives. That is,
companies will have to explain why they choose certain dates and
methods for granting options.
Best of all, the SEC ruled that all of this
information will have to be presented in a straightforward and
transparent manner. The rules come into effect December 15.
Just think of it as a Christmas present from the SEC. When gauging the significance of an insider
transaction, you need to take into account his salary and stock
compensation. And thanks to the SEC, this just got a whole lot easier.
Just look up SEC form DEF 14A.
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