SEC Sets New Rules on CEO Compensation

Executives will have to tell shareholders about stock options and retirement packages. New York Times business columnist Joseph Nocera discusses the new SEC rules with Sheilah Kast.

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SHEILAH KAST, host:

In government and in business, the buck is supposed to stop with the boss. Now the Securities and Exchange Commission wants to count all the bucks that stop with corporate bosses, and specifically what compensation they receive in addition to salary. Next week, the SEC is expected to announce stricter requirements on businesses to report what they're executives earn. The SEC wants to know about stock options, retirement benefits, country club memberships and other perks that have been more or less hidden from shareholders.

Joe Nocera is our friend from the business world and a columnist for The New York Times. He joins us from member station WFCR in Amherst, Massachusetts.

Hi, Joe.

Mr. JOSEPH NOCERA (The New York Times): Nice to meet you, Sheilah.

KAST: Nice to talk to you. Explain how these new SEC rules will work and how they compare to the way things are done now?

Mr. NOCERA: The--one of the things the SEC is going to do is force companies to put a dollar amount on stock options and executive GATS, which is a first. And that number will be huge, by the way. Then they will also force them to disclose retirement benefits, which heretofore have largely not been disclosed. And perhaps the most important thing is the SEC is for the first time going to force companies to give sort of a total compensation number, and that's going to have to be in one place where everybody can see it and there will be no doubt about what the CEO is making.

KAST: What prompted this change? Were shareholders clambering for it?

Mr. NOCERA: In a sense they were because over the course of time there have been example after example of benefits and perquisites that people didn't know about and that caused outrage when they came out. Let me give you two quick examples. First of all, in 2002, Jack Welches, the former chief executive of General Electric--his retirement benefits were disclosed when his wife divorced him and she put it in the papers. And it was a Manhattan apartment, a corporate jet, Red Sox tickets, this, that and the other thing. And there was a huge scandal over it. Another example is Gillette's chief executive, James Kilts. When he sold Gillette to Procter & Gamble after only running the company for four years, he wound up getting $175 million because the change of control caused his options to vest. And that's another thing that took the shareholders by surprise and caused a furor. So the SEC's basic position is it's the investors money and they have a right to know how it's being spent, and if they're spending hundreds of millions of dollars on the CEO, none of that should be hidden.

KAST: And investors may be really interested, among all these others, in the retirement packages, but workers will be especially interested given that so many companies are jettisoning employee pension plans these days.

Mr. NOCERA: Well, that's exactly right, and there have been several huge controversies over that, as you'll remember. Delta Airlines is a good example, where they had a secret pension plan for the CEO and a number of the senior executives. And when the work force found out, I mean they basically revolted and the CEO was forced to resign.

KAST: What impact will more detailed disclosure rules ultimately have?

Mr. NOCERA: Here's where we run into the law's unintended consequences, Sheilah. Every time there has been more disclosure--for instance, in 1992 when they had disclosure laws, it didn't decrease executive pay. It increased it. And the reason it increased it is because all the CEOs got to see what everybody else is making and they said, `Boy, why don't I get me some of that?' I mean, I hope that isn't what happens, but it could well be what happens.

But the problem is that shareholders don't really get to vote on this and they don't really get any input on this. And so to me the answer is to figure out a way to involve the shareholders more in what is, after all, how their money is being spent. And I think there's two separate ways to do this. One way would be to have shareholders simply vote on the pay package. A second possibility, which I think is somewhat more attractive, would simply be to have a system which we don't have at most companies, where a majority vote of the shareholder is all that's required to boot somebody off a board. So if the shareholders were upset with the amount of pay that the compensation committee members were giving to the CEO, they could simply vote the compensation committees off the board.

KAST: Our friend from the business world and scandal expert Joe Nocera is a columnist for The New York Times.

Thanks, Joe.

Mr. NOCERA: Thank you so much for having me.

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