Compensation Reporting Reforms

By: Paul R. Dorf, Ph.D., APD

However, since the SEC will require companies to disclose the "fair market value" of stock options at grant as part of a new Total Annual Compensation reporting requirement, we will likely have more questions about pay for performance. It can be argued that option grant values do not have a direct correlation with the company's past performance, nor are they a predictor of future performance. Additionally, since the proxy reporting of option grant values will happen much later (up to 12 -16 months later), bear markets will show overstated option values, and bull markets will have understated option values.

Some of the other proposed changes include:

* Lowering the Perquisite Disclosure Threshold - it is currently $50,000 or 10% of salary and bonus. The new rules would lower this to $10,000.

* Requiring companies to explain in a summary and analysis section of their proxy statements the goals and objectives behind executives' pay and the various factors directors weigh when determining a specific number.

* More specifics about payments in the event of a "change of control", and the provisions that trigger financial awards under certain transactions would be presented in greater detail.

* There would also be a table that better illustrates how much executives hold in the form of restricted stock and other outstanding equity rewards.

* More disclosure of retirement plans, and potential payments and benefits

* Adding a Director Compensation Table - it is currently reported in a narrative form, and a table would make it more transparent. This would include retainers, meeting fees, chair fees, equity awards, etc.

Overall, we believe that the proposed transparency is good for shareholders and for business, and should help to alleviate any confusion over executive pay levels. However, it has been noted that this overhaul could have an unintended consequence, further inflating executive pay. This will make solid and reasonable benchmarking all the more important.
The vote is set for January 17, 2006, and we will keep you posted about the results.

Human Resources
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