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Compensation & Benefits

Published July 2008

SEC Regulations and Executive Compensation

  Kellye Whitney

Post-SEC rule revision, talent managers must balance compliance, competitiveness and shareholder responsibility to design compensation packages that attract and retain the best talent.

Thanks to the less-than-stellar behavior of executives at companies such as Enron, WorldCom and Tyco, there is a general perception in the media that executive pay has gotten ahead of itself.

In 2006, the SEC adopted revisions to its rules governing the disclosure of executive compensation, party transactions, corporate governance matters and compensation arrangements, among other things. The revisions, the first since the early '90s, were necessary because the agency found pieces of compensation weren't being disclosed or were not disclosed clearly.

Adjustments were made to catch innovative ways of compensating senior executives, and as a result, talent managers and compensation experts are seeing a lot of change in executive-pay disclosure.

"It began probably as early as 2000 with the blowups with Enron and other major companies," said Ed Speidel, senior vice president at Radford Surveys and Consulting, a business unit of Aon focused on executive and broad-based pay.

"Some of the actions around executive pay at that point in time have gotten worse," he said. "Prior to Radford, I worked at other Fortune 500 companies' boards and comp committees. [They] didn't understand the interconnection of contractual benefits, supplemental executive retirement-plan benefits, changes in pay and long-term incentives and how they all come together to bring a much higher level of executive pay than anyone expected."

"The use of stock is essentially what the SEC is looking to protect. In the very recent past, the SEC has enforced regulations more because of problems that came up," said Tom Casey, senior vice president at nGenera. "The Enron scandal is the best one. People were encouraged to have stock as part of their compensation and retirement plans, encouraged by the CEO to not sell and to keep it for as long as they could. And people lost their retirements and everything else. There needs to be somebody that looks at the interests of shareholders, where stock is a vehicle of compensation in the companies in which they choose to invest."

Expert Assistance

Stock isn't the only consideration on talent managers' executive-pay agenda. They must work closely with compensation experts to create transparent, competitive and comprehensive compensation packages that reward and motivate executives without raising red flags.

"Everything has to be disclosed: amounts, events (what happens when executives retire or voluntarily resign) and performance measures (what does it take to earn the bonus or the stock award, profitability, growth targets)," said Kevin Nussbaum, president of consulting firm CBIZ Human Capital Services. "Nobody will ever get into any issues with fair-market-value compensation for fair-market-value performance.

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