The Advisors' Blog

– Ira Kay and Steve Seelig, Watson Wyatt Worldwide

As many of you have read, one of the items on SEC Chair Mary Schapiro’s “to-do list” for 2009 is to revise some of the executive compensation rules. She’s mentioned Say-on-Pay and whether the compensation committee considered if a pay program caused executives to take excessive risks as priority items, but she’s also mentioned the SEC will look at how executive pay is depicted on the Summary Compensation Table as worthy of consideration.

While the Chair’s latter comments may have been narrowly focused on the issue of the equity grant disclosures, known by most readers to have been changed right around Christmas 2006 to mirror the FAS 123R financial statement disclosures – the Associated Press resolutely ignores this change in its news stories – we thought it was a fine time to raise a more important issue with the rules.

From our perspective, showing start of the year grant fair values, as the rules would have required before the last-minute change, does not fix the problem of properly depicting how much an executive earned during the year – what we call realizable pay – it would only show the pay opportunity an executive could earn. In the spirit of getting a dialogue moving with the Corporate Finance Staff, we submitted a Petition for Rulemaking to the SEC last week to reconsider its approach to so that equity gains (or losses) are valued at year-end, same as you would depict a bonus earned or a change in pension value.

We feel strongly about coming up with a method to more accurately depict the actual value of what executives earn from year-to-year, especially as companies will likely confront Say-on-Pay advisory votes to accompany their 2010 proxies. Simply having shareholders look at the grant opportunities will not give them a full appreciation of whether their company actually ended up paying for performance. Adopting our approach might help shareholders be able to make that call with a minimum of extra effort.