Taking aim at performance targets.

• Author: Reda, James F.
• Position: COMPENSATION - United States. Securities and Exchange Commission

Short-term incentive plans enhance executive performance, but very little is revealed to investors about them, according to new research by James Reda and Associates LLC. And while companies are disclosing more about their plans, they have a long way to go before reaching full compliance with new U.S. Securities and Exchange Commission rules.

Earnings are the No. 1 performance measure across all industries, and companies are setting more difficult goals. Thus, the new rules have more closely aligned pay and performance and have informed shareholders of important performance goals.

Last year, the SEC started requiring companies to disclose executive pay-performance measures and goals. At the same time, many companies have been shifting the basis for their long-term incentive plans away from stock options to performance-share plans that are based on performance measures and goals.

Incentive compensation comprises the bulk of executive pay packages at publicly traded companies. Boards of directors and senior management are continually searching for the right performance measures to balance rewards with both financial and operational performance. It's a complex task, and the stakes have been raised.

The SEC asserts that if executive compensation performance targets are central to a company's decision-making process, they must be disclosed to investors. The new proxy disclosure rules require that all performance measures and goals must be released and compared with actual results. This disclosure requirement includes both short - and long-term incentive performance measures.

Although disclosure of executive compensation plans and programs has typically been the responsibility of human resources departments and general counsel offices, senior financial executives should not overlook their crucial role in ensuring compliance with the SEC's requirements.

There is evidence that some companies are resisting the SEC. A recent poll by Watson Wyatt of 135 large publicly traded companies found that 42 percent plan to disclose the specific goals used in their executive compensation plans on their 2008 proxies for the 2007 fiscal year, while 31 percent do not plans to release this information.

An Equilar study showed similar results, with larger companies being more compliant than smaller firms. Reda's results show that reporting has improved but, in most cases, is still far from full compliance and well below the implied survey results.

Even when companies have included discussion of performance goals in their proxy statements, the SEC has not been entirely satisfied...