Compliance strategies.

• Author: Winder, Walton R.
• Position: U.S. Securities and Exchange Commission's proxy disclosure rules; 1993 Onmnibus Budget Reduction Act - Includes related article - The Compensation Committee

The new Securities and Exchange Commission proxy disclosure rules and the $1 million compensation tax deductibility limit contained in the 1993 Omnibus Budget Reduction Act (OBRA '93) are not isolated regulatory developments. Both are watersheds in the larger process of change in board governance and in the nature of the board's obligations to shareholders.

For members of board compensation committees, the pace of change has been particularly intense over the last two to three years. In essence, the government, various regulatory bodies, and shareholders have raised the standard of corporate accountability and expect more direct committee involvement in compensation program design and decisionmaking. Committees need to formulate a governance strategy and process that is consistent with all these changes. While regulatory compliance remains part of the process, the committee's primary attention needs to be focused on how to structure officer compensation most effectively to serve shareholders' interests.

Feature articles on executive pay have been an annual "rite of spring" in the business press for well over a decade. As the 1980s progressed, such articles appeared in greater numbers, with an increasingly critical tone. In the eyes of the media, rapidly escalating executive pay levels seemed to indicate that boards weren't providing appropriate oversight.

More substantive pressure for change came from institutional investors and shareholder groups, who turned the spotlight on what they perceived as questionable governance practices and confronted management and boards at companies that were performing poorly but paying generously. Once investors began talking directly with boards and senior management, it was natural for a more open dialogue to begin in all areas of board and committee governance.

In 1992, responding to concerns that existing proxy disclosure rules impeded this dialogue, the SEC liberalized shareholder communication rules and overhauled the proxy compensation disclosure format. It eliminated the narrative plan descriptions that were considered "boilerplate" and introduced expanded disclosure tables, a market performance graph, and a compensation committee report.

This past year, Congress joined the fray as well, legislating a cap on the deductibility of compensation in excess of $1 million for proxy-named executives, unless such payments meet specific performance-based criteria (or qualify under other exemptions). In taking...