Fess Up Lads

National Post column Feb. 18:

NEW YORK CITY - The Securities & Exchange Commission is circulating for comment tougher rules to crack down on excessive executive compensation. Among reforms will be the requirement that companies disclose on one-page in plain English the complete tally sheet paid to their top brass.

"The rules are about wage clarity and not wage controls...and not to impose salary caps," SEC's new Chairman Christopher Cox told newspapers at the time of the announced new policies.

Reviews have been mixed but predictable. Wall Streeters, corporate law firms and Republicans have complained about the imposition of more red tape.

But investors, money managers and pension funds have been clamoring for years to arrest the greed that's gripped executive suites and that continues despite scandals.

But even defenders of the status quo had to be shocked by a recent "eye popping" study by Harvard Law School Professor Lucien Bebchuk. In 2003, he said the top five executives in all public companies received a collective compensation which was equivalent to 10% of their companies' combined profits.

That magnitude of profit skimming should worry free enterprisers as well as investors. It should also worry the Ontario Securities Commission which must adopt these draconian new rules.

The SEC is circulating its 370-page policy proposal for comments and plans to impose them in time for the 2007 proxy season.

Highlights include more true independence and more professionalism when making decisions on the part of corporate compensation committee members.

Cronies are often embedded in these committees and approve piecemeal perqs which, under these rules, will now have to be fully disclosed every year in total.

Disclosure will now extend from salary, bonuses and stock options profits to retirement bonuses, pension entitlements, other incentives, discharge package and other perquisites.

Hopefully, regulators will zero in on the two most egregious, hidden benefits:

-- Entertainment budgets. There's abuse here and the public would be shocked at the amounts involved.

-- Use of private jets. It's an open secret that executives give "free rides" to friends and family. This is justified, by executives, on the basis that the plane was flying from A to B anyway with empty seats. But that's unacceptable.

And even when compensation is paid, it's inadequate. They usually reimburse the company the equivalent of a first-class ticket. But a chartered round trip on a four-seat jet between Toronto and Miami would cost at least US$25,000. First-class tickets for four return would cost a fraction of that.

Which brings up another point. Securities regulators are not the only persons who should be weighing in on this. The Internal Revenue Service and Revenue Canada should require corporations to disclose entertainment and jet perqs because they are "taxable" benefits to executives that aren't being taxed.

Executives using jets for any personal use should pay the full cost or, at the very least, be taxed on the difference between what they defray and the true cost to the corporation.

One New York money manager, who asked to remain anonymous said in an interview jets determine his investing choices: "When a public company gets a corporate jet for the CEO I consider it a sell."

The call for a crackdown has increased along with the amount of greed.

A recent study showed that median executive pay among the Standard & Poor 500 increased from US$2 million in 1993 to US$6.6 million in 2003, according to accounting professors from Wharton and Vanderbilt Universities.

Watchdog organization, the Corporate Library in Portland Maine, said executive compensation increased 15% in 2003 and 30% in 2004 or "about 10 times' the inflation rate."

Besides full disclosure, the SEC is cracking down on the cronyism which is rampant in compensation committees. Some expect these committees will be shaken up as much as Sarbanes-Oxley has shaken up audit committees.

These links, between cronies on boards and compensation, is the root of the problem. In a 2005 study by Wharton Accounting Professors called "Back Door Links between Directors and Executive Compensation", the issue was quantified.
A total of 22,074 directors working at 3,114 companies were surveyed as to their business or social associations. Where associated, executives reaped an average of US$450,000 more per year from their boards.

"Directors who serve on multiple boards may look like outsiders, but they are not really outsiders and may indulge in mutual back scratching," said Scott Richardson, Wharton Accounting professor.

Canadian regulators should also crack down on cronyism and hidden compensation in step with the SEC's reforms in order to protect the market's integrity north of the border too.