SEC Changing Disclosure Rules On Executive Compensation

Wednesday, 27 Dec 2006 | 6:57 AM ET

The U.S. Securities and Exchange Commission is changing the way companies disclose grants of stock option awards to executives, according to a press release on its Web site dated Friday.

How companies disclose stock option awards will now conform more closely to U.S. Financial Accounting Standards Board (FASB) rule "FAS 123R", according to the SEC's press release.

That rule requires recognition of the costs of equity awards over the period in which an employee works for the award, the SEC said. Stock options often vest three to five years after being granted.

The SEC said the amendment would "give investors a better idea of the compensation earned by an executive or director during a particular reporting period" and would in some cases reduce the possibility of overstating compensation.

In the press release, SEC Chairman Christopher Cox said: "The new disclosure requirements will be easier for companies to prepare and for investors to understand."

The New York Times, which reported the rule change on its Web site earlier on Wednesday, said the amendment would allow many companies to report significantly lower total compensation for top executives.

The paper cited an example that under the old rule, if a company awarded an options grant valued at $15 million to an executive this year, the full amount of $15 million would show up in the summary compensation table.

Under the new rule, the amount reflected in the table would be much smaller, with the remaining part of the $15 million included in later years, as the executive qualifies to exercise the options.

The paper said it marked a victory for corporations that had opposed the rule when it was issued in July, and a defeat for institutional investors that had backed the SEC's original rule.

"It was a holiday present to corporate America," the paper quoted Ann Yerger, the executive director of the Council of Institutional Investors, as saying yesterday. "It will certainly make the numbers look smaller in 2007 than they would otherwise have looked."

The new rules are an amendment of requirements set in July, when the SEC voted 5-0 to order better pay disclosure, requiring companies to give a single number for an executive's pay, instead of a jumble of figures scattered across proxy statements and quarterly and annual reports.

The New York Times cited Cox saying in an interview yesterday that the change reflected what the SEC had intended to do when it adopted the original rule in July.

The SEC said it would be soliciting comment on the amendments for 30 days after publication of the rules in the Federal Register.


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