Stepping up its campaign to shed light on the mysteries of executive pay, the Securities and Exchange Commission has sent letters to nearly 300 companies across America critiquing disclosures in this year's proxy statements and demanding more information.
The SEC's requests could set up a confrontation over details the agency wants that companies say are competitive and should remain secret. The federal securities regulator, for example, wants to know more about the targets and benchmarks companies use when they tie pay to performance.
The SEC's letters, which were faxed to chief executive officers, have caused much consternation -- and some complaints. Companies are racing to set up emergency meetings of their board compensation committees to answer the questions. Some are considering lobbying as a group against certain SEC requests, such as providing more information about specific performance goals, lawyers say.
Companies contacted by the SEC are of all sizes and come from a variety of industries, corporate lawyers say. Recipients of the letter include drug makers Pfizer Inc., Schering-Plough Corp. and Bristol-Myers Squibb Co.; insurance firm Prudential Financial Inc.; Coca-Cola Co. and General Electric Co. American Express Co. is expecting to receive one, according to a person familiar with the matter. "CEOs aren't used to getting communications from the SEC," said one attorney. "They're a bit anxious." In forwarding his letter to a colleague, one annoyed chief scrawled in the margin: "What the hell is this?"
In the case of Pfizer, the SEC asked the big drug maker to more fully describe the work performed by the board's independent pay consultant. "I don't think this kind of detail will be of additional benefit to investors," sniffed a person familiar with the situation. "Do they want [Pfizer] to tell how many Diet Cokes he drank at the meetings?"
The SEC does want Pfizer to better explain how the board compensation committee used "tally sheets," compilations of data of the kind usually prepared by a board's outside pay consultant and then used by the compensation committee in making executive-pay decisions. The sheets offer a more complete picture of the true value and possible future cost of executive-pay packages.
Last year, investor activists criticized the compensation package for the then chief executive, Henry "Hank" McKinnell. They took advantage of Pfizer's voluntary proxy disclosure that he could have pocketed a lump sum of $83 million if he had retired at the end of 2005. Mr. McKinnell unexpectedly quit as CEO in July 2006.
The SEC's letters, which were sent last week, represent the SEC's first review of new disclosure rules governing executive pay. The commission approved the rules last year amid growing disquiet about executive pay and the options-backdating scandal.
"The letters are intended to help issuers better explain why they've paid executives what they've paid them," said John Nester, an SEC spokesman. The agency is giving most companies until Sept. 21 to either respond or provide reasons why they can't; the letters will be made public later this year. The SEC will send out another batch soon.
SEC Chairman Christopher Cox has made revamping executive-pay disclosure a priority, in particular giving investors more information about pay and benefits that were previously shrouded in fine print or not disclosed. Over the past several months, Mr. Cox and his staff have complained publicly that disclosures were either written in legal jargon, too vague or not easily understandable.
"We're seeing a lot of really vague disclosure" about individual performance goals and targets," John White, the SEC's director of corporation finance, said in a recent speech.
One question that has generated a lot of concern relates to performance targets. Under the SEC's rule, if a company ties executive pay to performance, it must disclose the targets, or if disclosing them would result in competitive harm, explain how difficult it is to meet them. Now, the SEC is asking companies to document why the targets should be treated as confidential and excluded.
Laura Thatcher, the Atlanta-based head of the executive-compensation practice at law firm Alston & Bird LLP, said about seven of her clients received letters. She is urging them to cooperate fully but expects some resistance, especially about how they measure performance in calculating the pay of individual executives. "There's going to be some rubber hitting the road when it comes down to disclosing these individual measures," she said.
The SEC is also asking companies to discuss whether they expect executives to meet future targets. Typical wording: "If disclosure of the performance-related factors would cause competitive harm, please discuss further how difficult it will be for the named executive officer or how likely it will be for you to achieve the target levels or other factors."
Moreover, the SEC is asking companies to name specific competitors used to create industry benchmarks for pay. It also wants additional information about the role played by the chief executive in setting his own compensation or that of other employees.
In the case of one company, the SEC "wanted information for each individual, what were the business objectives that needed to be met, were their individual performance factors taken into account and, if so, disclose those," said John Wilson, a partner at law firm Foley & Lardner. Another company was asked to explain the "significant disparity" in pay granted to its CEO compared with the other top four executives whose pay was disclosed, one lawyer said.
Some letters posed highly technical questions, even though SEC officials had previously encouraged companies to simplify their often wordy proxies. "With comments asking companies to 'expand' their disclosures and to 'provide additional discussion,' the result in many cases will be longer, not necessarily more concise or readable" proxy statements, said Ronald Mueller, a partner who specializes in executive pay at law firm Gibson, Dunn & Crutcher.
Some questions might prompt additional disclosures by companies this year. A more likely response will be promises of enhanced executive-pay revelations in 2008 proxy statements.
- 208 Regulation