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Companies Vary on Pay Disclosures

The SEC’s diktat on disclosing performance goals for executive compensation seems to be falling flat on managements, as more and more companies are increasingly reluctant of disclosing their performance targets for this season. A recent poll conducted by Watson Wyatt Worldwide, a leading global consulting firm, indicated that a significant number of large US companies …

The SEC’s diktat on disclosing performance goals for executive compensation seems to be falling flat on managements, as more and more companies are increasingly reluctant of disclosing their performance targets for this season. A recent poll conducted by Watson Wyatt Worldwide, a leading global consulting firm, indicated that a significant number of large US companies are unwilling to disclose performance goals for their executive pay programs in their 2008 proxy statements.  

The Watson Wyatt poll indicated that about 58 percent of the 135 publicly traded companies have expressed their reluctance to disclose their performance goals, as against 42 percent of those who have evinced interest in filing their proxy for 2007 fiscal year. Finance experts believe that this defiant attitude of the companies is a noteworthy setback to the SEC requirements, which adopted new disclosure rules, effective for the 2007 proxy season, as part of an effort to provide greater transparency to investors on the executive pay. 

Industry experts, who attribute the reluctance of companies to fears of competitive disadvantage, believe that companies are required to furnish proper information on why they think disclosing such information would harm their business interests. “SEC is specifically questioning reliance on these excuses with a detailed explanation on why, including a specific discussion of how disclosure of performance targets affects the business decisions of competitors,” Esther Moreno, an expert on corporate and securities law and the Detroit based partner at Holland & Knight’s business section, a firm into legal corporate consulting told CE Online. She says that  the excuse of competitive disadvantage will not serve the purpose. If the companies feel they will be at risk by sharing  performance goals, they’ll have to substantiate it, she says. 

Corporate law veterans also attribute the lenient attitude of the companies to the compassionate rules of the SEC. They say that while the rules do not make disclosure of performance targets mandatory, it merely requires a public company’s compensation discussion & analysis (CD&A) section to explain all material elements of the company’s compensation of all the listed executive officers. “Additionally, instruction 4 to Item 402(b) of the SEC rules provides an exemption from having to disclose specific target levels with respect to quantitative or qualitative performance factors if they involve confidential trade secrets or confidential commercial or financial information that would result in competitive harm for the company,” Moreno explains. 

Citing company fears, experts say that companies which mostly use performance targets data for routine guidance of its employees and other staff, fear that such disclosures will result in the exposure of crucial information to competitors, which will have adverse impact on the company prospects. 

Ira Kay, global director of executive compensation consulting at Watson Wyatt, feels that setting sufficiently challenging performance goals and appropriate corporate performance metrics is an  important part of the executive pay process. “The SEC has put significant pressure on companies to reveal their goals so that shareholders can determine if programs are paying for performance. However, companies are still struggling with the decision of whether to disclose this information,” said Ira Kay, in a media statement. 

Moreno points out that there is no clarity on what would happen in the wake of an impasse between a company and the SEC. “It is currently not clear what will happen in the event of an impasse between a company and the SEC. The comment letters from the SEC have not prevented companies from going effective on registration statements. If a comment letter is outstanding for more than 180 days prior to a company’s fiscal year-end and the comments remain unresolved, a company must disclose it in its Form 10-K. So there’s no escape as such,” she says. 

The poll also found that a majority of companies continue to believe the rules will not improve company performance. About 77 percent of the companies polled believe that the disclosure rules will not have much effect on corporate performance, a slight increase from last year. However, the number of companies that think the rules will improve performance nearly doubled, from 11 percent in 2006 to 21 percent in 2007, the survey said.

Corporate law veterans who also support this view believe that though new rules have improved the quality of available information on executive compensation to investors; it hasn’t really improved  company performance. “I do not believe that the new executive compensation disclosure rules and specifically, the SEC’s view on performance targets and other aspects of what is required for the CD&A will improve the company performance,” says Moreno adding that the question on whether the SEC has gone too far and whether it was trying to embarrass companies to be more forthcoming on disclosures needs to be essentially debated.

Moreno feels that the compensation committees should be guided by its own relevant factors while drafting the performance target programs and not merely by the fears of disclosure requirements. “A presumption by the SEC staff that disclosure of performance targets is essential and helpful for the company performance will force the pay committees to consider changes to a company’s compensation program only to avoid disclosure of performance targets, which is not correct,” reiterates Moreno.

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