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CEOs' fuzzy math

First there was the golden parachute, then the golden shower curtain. Now there is the golden "hello," where top executives are given huge front-end compensation packages when they transfer from other companies. No matter how obscene executive pay gets, there's always another multimillion dollar wrinkle waiting to be exposed. But shareholders and institutional investors who have tried to get control of this runaway train have been stymied. It is often extremely difficult to obtain clear information about the riches being rained down on those at the top, and you can't stop what you can't see.

Addressing this lack of transparency was one of the goals announced by the Securities and Exchange Commission last July when it proposed changes that require publicly traded companies to clearly disclose total executive pay. SEC chairman Christopher Cox said at the time, "There will now be one bottom line number, including all options, for an executive's total compensation, and that number will be comparable from company to company."

The change was a hard-fought agreement among investors, companies and the SEC. As originally designed, it would have required that companies give shareholders the ability to instantly discern the total compensation for top executives. Under a Summary Compensation Table, all salary, stock options and perks would be added up into a single figure.

But on the Friday before Christmas, without any advance notice, the SEC changed course. The agency announced a modification to the agreed-upon rule so that companies would have the ability to obscure the full value of executive pay by dividing the value of stock-option grants over a number of years as they vest. The change, the SEC said, was in accordance with financial accounting practices.

That might be true, but it will make it far more difficult for investors to know the full value of their company's executive pay levels and to compare them across companies.

The fallout from the change has been swift and angry. Institutional investors felt blindsided. They had not been consulted, yet the SEC took the rare step of making the new rule effective almost immediately, meaning that the 30-day public comment period is irrelevant.

If the SEC doesn't reverse course, the new Democratically led Congress should take a look. Rep. Barney Frank, D-Mass., who will head the House Financial Services Committee in the new Congress, has said he is "very disappointed" with the new change and the way it came about.

The obtuse nature of executive compensation reporting to investors is one of the reasons that these packages have gotten so out of control. By not providing a single number announcing the entirety of a stock-options grant, the value of an executive's compensation remains clouded and often underreported. Yet once again, the SEC has sided with corporate America over shareholders.

[Last modified January 7, 2007, 21:54:40]