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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, 2007, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.
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| Abandoning The "Couric Clause"
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Location: Blogs AAO Weblog (Public) |
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| Posted by: Jack Ciesielski |
7/20/2006 6:35 AM |
Nothing official from the SEC yet, but today's Wall Street Journal reports that the Commission might scrap the controversial "Couric clause" in its proposed revamp of executive pay disclosures. The rule would have required compensation disclosures for highly-paid nonexecutive employees as well as the top five executive employees. The SEC took plenty of heat for the proposal, particularly from the entertainment industry, which claimed that the disclosure of such information would bring competitive harm to them in the negotiation for talent, cause "morale issues," and provide limited useful information to investors. (For one example, check out Jeffrey Katzenberg's letter from SKG Dreamworks.)
The Journal reports that Paul Atkins, a Republican commissioner, has "extremely deep reservations" about the disclosures. He expressed them in this June 30 speech. (As the Journal's Jesse Eisinger points out: maybe investors should have reservations about Paul Atkins' role as an SEC commissioner, given his views on option backdating. In case you missed it in the speech linked above, Atkins thinks backdating is a dandy way to save companies from having to fork over cash to executives. No further comment. For now.)
The Journal also mentions that Chairman Christopher Cox is less concerned about the about pay disclosures "for actors and athletes than executives, because the stars' pay is set by market forces." Hmm...does that mean that pay for executives is NOT set by market forces? And don't these "market forces" thrive on information about things like - what people are getting paid?
I have the feeling that I'm in the minority on this one, but I think it would be a bad idea to scrap the nonexecutive pay disclosures. Sorry, Katie. Sorry, Howard Stern. If your firm's managers are concerned about the effect that disclosure of your pay would have on morale within a company, then maybe they need to polish their management skills. Or negotiate in a more disciplined fashion. (To Mr. Katzenberg: employees won't experience lower morale if they're wasting shareholders' time speculating imprecisely about a star employee's pay, but they would experience lower morale if they know exactly what the stars make? Oh. I see.)
It doesn't make sense to say that market forces work just fine when there's no disclosure for people in an organization that are most highly paid, just because they're not executives. One criticism of the expanded disclosures for execs is that it might set off more compensation escalation; the SEC has pretty much shrugged off that argument on the grounds that markets don't become more efficient or effective when there's less information. But it's contradictory to ignore that proposition (which makes sense) for one labor market (execs), while saying that a lack of sunshine works just fine in another labor market (non-execs).
If there's an effective safe harbor granted to non-executive compensation disclosures, does the SEC - or anyone else - really believe there might not be some title-jockeying after the new disclosure rules are released?
The information about the nonexecutive pay is more valuable than the dismissive treatment it's earning from all quarters, including shareholder representatives like Patrick McGurn of Institutional Investor Services, who is quoted in the Journal as saying: "It was the one thing in the package that we thought was a negative rather than a positive addition. Simply, it would focus so much attention on things that were completely unrelated to what's important to investors, which is pay for performance." Completely unrelated? Don't think so. Performance isn't just stock market performance; it's also about stewardship of assets, if you're a long-term investor. And the way the managers dole out compensation comes under the heading of "stewardship of assets." The disclosures would help investors assess how effectively their managers have minded their stewardship task.
Finally, consider that for years, investors and companies alike have mouthed the trite euphemism that we're in a service economy where "people are the real assets of the firm" and "outdated accounting principles don't begin to capture the value of the assets." Well, in some instances, the stars may be the whole company - and its most important asset. You can't begin to evaluate the effectiveness of those assets as a shareholder if you don't know what you're paying to procure them. Scrapping the non-executive disclosures will insure that shareholders will be left with only lip service praising the value of such intangible assets.
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