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SEC proposes more disclosure on executive compensation

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Lost in all of the dialogue on Capital Hill last week about immigration, the economy and windfall oil profits was a hearing on executive compensation. Christopher Cox, chairman of the Securities and Exchange Commission, was the sole witness before the Senate Committee on Banking, Housing and Urban Affairs.

"Just to be clear, the commission does not propose getting into the business of determining what is the proper method or level of compensation," said Cox.

"Surely many executives deserve every penny they're paid, and more. It should go without saying that being a CEO requires a rarefied collection of attributes and skills that are in all too short supply. At the same time, I needn't cite here the several notoriously public cases of extravagant wastes of shareholder assets by gluttonous CEOs and pliant compensation committees," said the former California congressman.

The concern over the big salaries, benefits and severance packages paid to certain executives reached a fever pitch recently when documents filed with the SEC showed that Lee Raymond, the former chief executive officer at Exxon Mobil (NYSE: XOM) received a retirement deal worth more than $350 million when he left the company in January.

The SEC has been focusing on a new proposal that would require more disclosure and reporting of compensation plans for top corporate executives. The proposal would require a "total figure" for all annual compensation, better definition of retirement benefits, a clear description of payments if an executive is terminated and all compensation for board members.

The agency just finished a period that allowed for individuals and organizations to comment on the proposals. Investors from San Diego used the opportunity to sound off on the proposed rules.

"I just got my dividend check from General Motors -- 25 cents a share, down from 50 cents a share. I would sincerely appreciate GM's board of directors and executives take a 50 percent cut in their salaries and compensation. It's not right that GM employees should be stripped of their retirement and health coverage, while the talking heads carry on as usual," wrote M.S. of Chula Vista in a comment to the SEC.

"I agree with people that say that too often executives are richly rewarded when their companies' performance is below par," suggested C.A. of La Mesa. "Without better disclosure, shareholders, employees and the general public cannot evaluate whether executive pay packages are unjustly enriching executives at shareholder cost or providing fair compensation."

The enhanced flow of information that would result from the rules proposed by the SEC would not only give investors a better handle on executive pay, it also would clarify the process by which compensation packages are determined.

"We believe that it is of critical importance that shareholders actively monitor executive compensation to ensure that it is rational, based on performance and aligned with the interests of shareholders," said Jack Ehnes, executive director of the California State Teachers' Retirement System, in a letter to the commission.

"We believe that the proposed rules would enhance not only disclosure relating to executive and director compensation, related party transactions, director independence and board committee functions, and also board accountability," said Ehnes. CalSTRS manages a stock portfolio invested in 3,000 domestic companies worth more than $140 billion.

But, there are some concerns that these new rules could be a new version of the Sarbanes-Oxley legislation that was enacted in response to corporate accounting scandals in the wake of Enron and other bookkeeping scandals.

The American Bankers Association is concerned that the disclosure requirements for directors would create a big problem for many institutions.

"We have long maintained that, unlike the rest of corporate America, banking organizations are different, as they are in the business of making loans, taking deposits, and providing trust and other services to customers -- customers that include bank executive officers and board members and their companies. Unfortunately, the proposal does not recognize that distinction," said Sarah Miller of the ABA.

"The proposal will force publicly traded banking organizations to disclose to the world everyday, commonplace transactions. No director wants the contents of his or her bank and trust accounts or, for that matter, the loans extended to family member companies widely broadcasted. As a result, the proposal will have an exceedingly chilling effect on the ability of all banks and bank holding companies to find quality directors to sit on their boards," said Miller.

Another part of the proposal requires the disclosure of the total compensation paid to up to three non-executive employees who earn more than any of the named executive officers. For some companies that could cause some big problems.

"These non-executive employees, while albeit highly paid, have no ability to influence or direct the affairs of the company," said Henry Hopkins, chief legal counsel for investment firm, T. Rowe Price.

"As shareholders, executive pay and the equity incentives paid out to employees are the relevant data points, not the compensation of the firm's top salesman or investment banker," said Hopkins.

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