Looking hard at executive pay: the SEC's proposed disclosure rules on executive compensation will force public companies to look intently at revising their proxy statements. Beyond that, there's a gathering governance storm over executive pay and executive severance.

• Author: Marshall, Jeffrey

Periodically, some prominent corporate outsider--former Securities and Exchange Commission Chairman Arthur Levitt, Vanguard Funds founder John Bogle or another recognizable name--issues a jeremiad against excessive executive pay. Recently, business legend Warren Buffett added his voice to the chorus. The issue is white-hot, and it has clearly become a governance issue, not just a compensation one.

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"The compensation world is under a real spotlight these days," says Derrick Neuhauser, senior manager and regional leader of the Compensation & Benefits Practice at BDO Seidman LLC. "Inside the Beltway, particularly, it's become something of a pinata to kick." And agitation certainly doesn't stop at the Beltway. "There's a lot of momentum among shareholders for procedures to hold compensation committees accountable for their decisions," says Richard Ferlauto, an official at the American Federation of State, County and Municipal Employees.

Even directors themselves have started to sense that something is amiss. A recent survey by PricewaterhouseCoopers with Corporate Board Member magazine found that fully 70 percent of directors polled in the U.S. thought that compensation was too high at U.S. companies--though perhaps not necessarily at their own.

Of course, what's "excessive" to outsiders may seem appropriate to those inside. The issue is almost certain to become more of a political football in 2007, when the next proxy season starts. By that time, the Securities and Exchange Commission's (SEC) bold proposal for far greater disclosure about executive pay--unveiled in January--will presumably have kicked in. Companies then will be forced to divulge details about their executive compensation at an unprecedented level, and in a clearer format, though SEC Chairman Christopher Cox has consistently maintained that the rules are aimed only at disclosure, not at setting or limiting executive pay.

Indeed, the SEC's request for greater disclosure will almost certainly raise issues for others besides the CEO--even though median direct compensation for CFOs at the largest companies, based on recent data, is about a third of that for CEOs (compensation specialist Equilar Inc. reported the numbers for 2005 at $2.55 million versus $7.38 million, respectively).

The comment period on the SEC's disclosure proposals was scheduled to end April 10. While too lengthy to summarize here, the proposals would add a whole new dimension of disclosure, both about the company's five named executive officers (NEOs) and, potentially, a handful of others who may be paid even more.

One key provision of the rules is a "tally sheet" that would summarize compensation, both in the current year and going forward under a possible change of control or retirement for key executives. While that used to be presented as a formula, Neuhauser says, it will now need to be calculated in far more detail.

"On the amount of disclosure, I don't think anyone has comprehended the level they are asking for," Neuhauser says. He notes that he recently outlined the proposal to a compensation executive at a very large financial services firm, who responded with a shocked, "Are you kidding me?"

As currently written, the rules would place the "principal financial officer" just below the "principal executive officer" in the summary compensation tables, assuring a high level of attention...