Donaldson Expects Rule Changes on Executive Pay

SEC Chairman William H. Donaldson said corporate boards need to know the full extent of an executive's compensation, including retirement packages. (Jay Mallin -- Bloomberg News)

The SEC already has begun to show its enforcement teeth on this issue, most prominently in a September settlement with General Electric Co. that accused the company of failing to "fully and accurately disclose" sumptuous benefits given to former chairman John F. Welch Jr.

Those perks, which did not become public knowledge until they were disclosed in Welch's divorce proceedings, included use of corporate aircraft, a New York apartment, laundry, flower arrangements, sports tickets and much more.

The GE settlement did not include a fine. But many shareholder watchdog groups and advisers to corporate boards viewed it as a signal of the SEC's resolve to address the issue. Tyson Foods Inc. also recently disclosed that the SEC may file civil charges over perks given to former chairman Donald J. Tyson.

Brandon Rees, a research analyst in the investment office of the AFL-CIO, said companies should be required to be much more forthcoming about the dollar value of all perks and benefits afforded to current and former executives. "Right now there is pretty wide latitude and a lot of gray area," he said.

Paul Hodgson, a senior researcher at the Corporate Library, an investor advocacy group, said corporate boards are increasingly asking for "tally sheets" that total up the value of all pay, perks and benefits given to current and former executives.

"For those boards that have requested and been given the total cost, most have had what is being called a 'holy cow moment,' as in 'Holy cow, we're paying them that much?' " Hodgson said. "There is also a growing awareness that if boards haven't figured this out, they will be open to breach of fiduciary duty charges for not doing their job properly."

Hodgson and others said one reform could be to require companies to disclose these tally sheets so investors have an easier time assessing exactly how their money is being used to pay executives.

Executive compensation is under scrutiny in Congress as well. For example, Andrew C. Liazos, an attorney at McDermott Will & Emery LLP, said the corporate tax bill passed by Congress yesterday would put new restrictions on executives' ability both to defer and to accelerate payment of retirement benefits.

Starting in 2005, the bill would make it harder for executives to defer payment of certain retirement money until they are in a lower tax bracket. It would also make it harder for them to take big lump-sum retirement payments right away, a practice that has been criticized because it can allow executives to cash out before their companies file for bankruptcy protection.

Meanwhile, even as shareholder groups embrace the possibility of stronger compensation disclosure, many say the most significant change to address the pay issue is one the SEC is already struggling with: giving shareholders a stronger hand in selecting corporate directors.

Donaldson has expressed his desire to reach some kind of agreement that would allow shareholders to nominate board candidates under certain limited circumstances. But business groups are adamantly opposed to the idea, and it could still fail. Investor advocates say this could mean compensation will continue to escalate no matter what happens with disclosure rules.

"There is no shareholder response or possibility of shareholder response and certainly no regulatory response that will make anywhere near the difference that an end to the 'Let me put you on my board and you can show your gratitude by hiking my pay' system will," said Nell Minow, co-founder of the Corporate Library.