Executive-Pay Summaries Conceal as They Reveal

By David Cho and Carrie Johnson
Washington Post Staff Writers
Friday, February 16, 2007

The first overhaul in 15 years of executive-pay disclosures has been billed as the most transparent window ever into the clubby world of corporate compensation.

But as these filings have begun to roll out publicly, analysts are finding there's a catch.

Due to an accounting loophole for stock options and an eleventh-hour rule change made by securities regulators just before Christmas, some of the biggest names in technology, health care and financial services will be able to cloud what their top executives make.

The anomaly is being discovered by compensation consultants who have been hired by firms to draft these filings. In some cases, it is lowering the compensation figures reported by firms, they said. In others, executives who should be named in the filings as the five highest-paid officers in their companies are being replaced with employees making less.

The Securities and Exchange Commission's first changes to pay disclosures since 1992 were meant to be user-friendly. Shareholders could look at a summary table and easily see what the top executives of a company were taking home in salary, perks, retirement bonuses and stock options.

Now, that summary table "won't give you the full picture," said Brian Foley, a compensation consultant based in White Plains, N.Y. "It misses a big part of the puzzle."

SEC officials said they had no control over which companies used the stock options loophole. But they said the agency's late December rule change will provide more accurate figures in the long run and will better reflect what an executive is making in a given year. Although the summary table may not provide full information on options, that data will be included elsewhere in the filing, they said.

No issue in the SEC's history has generated as much interest as the new executive-pay disclosures, Chairman Christopher Cox said last year, adding that the agency had received more than 20,000 comments about it from businesses, trade groups and investor advocates.

While hailing the new filings as a breakthrough, several academics and analysts were critical in interviews of the way the disclosures handle stock options. They also questioned whether the average shareholder could page through these filings to link different tables and charts.

"The proxies will provide you three or four times as much information as before," Foley said. "But . . . now you will have to pick through the mess to get the value of the options. It's not going be in plain English."

Employees who are granted stock options can buy a company's stock at a set price within a specific time frame. They then can reap a windfall if the price goes up, but typically they can sell only a portion of these shares each year. This "vesting period" often keeps prized workers from defecting to a rival.

The story behind the loophole began when an accounting rule, FAS 123R, came into effect last year and changed the way companies account for these options.

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