Will revealing more be enough? A new SEC executive compensation proposal has sparked debate about just how to go about disclosing more. Financial Executives Research Foundation looks into the potential impact of the new rules.

• Author: de Mesa Graziano, Cheryl
• Position: Executive compensation

Call it a tale of two executives who "gave at the office." In 2004, Brad Anderson, the CEO of Best Buy Inc., voluntarily gave 200,000 of his stock options--worth up to $7.5 million--to non-executive employees of the consumer electronics company.

Conversely, in January, Richard Scrushy, former CEO of HealthSouth Corp. was forced to repay the company $47.8 million in bonuses. Though Scrushy was acquitted of criminal charges in connection with a $2.7 billion accounting fraud, the Alabama Circuit Court ruled that the bonuses should not be retained since they were tied to the company's financial performance (which was later found to be misstated).

This latter case, among other examples related to executive compensation at The Walt Disney Co., Tyco International and the New York Stock Exchange, has led to increased focus on executive compensation. Virtually all of the recent corporate scandals in the U.S. were related to executive compensation in one form or another, notes James T. Brady, compensation committee member of the board of directors of T. Rowe Price Group Inc. (He also serves as audit committee chair of T. Rowe Price, Constellation Energy Group, McCormick & Co. Inc. and Aether Systems Inc.)

"Incentive arrangements led people to do things that were counter to the company's goals and not in the best interest of shareholders. I'd be hard-pressed to find a case where executive compensation was not an element," he says.

Since the task of creating these senior executive incentives falls largely to compensation committees of boards of directors, it would seem that boards of directors may be due for some rethinking on managing the process and then better communicating with shareholders what exactly top executives are getting paid.

In the Sarbanes-Oxley era, direction for boards and other decision-makers may be coming from the U.S. Securities and Exchange Commission (SEC) in the form of more disclosure. On January 17, the SEC announced that it unanimously voted to publish proposed rules to amend disclosure on executive and director compensation. In his opening remarks during at the meeting, Chairman Christopher Cox noted that the commission had not undertaken significant revisions to its executive compensation rules in 14 years, and that current rules don't reflect changes that have occurred in the marketplace. "Simply put," he said, "our rules are out of date."

Components of the SEC Proposal

Current proxy disclosures would be refined to include improved narrative disclosure on the compensation of the CEO, CFO and the three other highest paid executive officers, a change from current rules that don't specifically name the CFO. Disclosure is also required for three additional non-executive employees if their pay exceeds that of the top five named executives. The existing compensation committee report and performance graph would be replaced with a Compensation Discussion and Analysis section that focuses on the...