SEC Considers New Rules on Divulging Executive Pay

by Scott Horsley / National Public Radio
Morning Edition, January 11, 2006

The average American worker's pay rose only about 2 percent last year, but things were a lot better in the corner office: A preliminary study of CEOs' pay found increases averaging 12 percent. And the gains in 2004 were even bigger.

The Securities and Exchange Commission will soon consider new rules on the reporting of executive pay, so shareholders can make better decisions about how much is too much. Commission Chairman Christopher Cox says the government does not intend to limit compensation. But it does want to give investors a better idea of what executives make, including salary, stock options, and corporate perks.

Some shareholders have already begun to complain about excessive pay. Julie Goodridge, who runs a small asset management company in Boston, filed a shareholder resolution with ExxonMobil, asking for a review of its compensation. Goodridge was alarmed when she learned former CEO Lee Raymond made more than $80 million in 2004.

"I don't care how much money ExxonMobil is making. That's just an absurd rate of pay," Goodridge says.

Raymond wasn't even the highest-paid CEO. In a 2004 survey by the Corporate Library, he ranked seventh.

While some critics, like Goodridge, argue there's no justification for huge CEO paychecks, others say they'd be willing to go along if those payoffs were somehow tied to company performance. But in most cases, they're not. Bloomberg columnist Graef Crystal has been studying executive compensation for years and says there's almost no connection between which companies perform best for their shareholders and which bosses get the biggest raises.

"We could do this in Las Vegas, where I live, very easily," Crystal says. "Just pull some handles on a slot machine and pay the CEO on that basis."

The SEC hopes to make it easier for shareholders to comparison shop among CEOs by distilling various forms of compensation into a simple format-possibly a single number. But Crystal is not optimistic that will keep CEOs' pay in check. While companies generally try to keep other labor costs at or below the competition, Crystal says board members rarely want their CEO to make less than the other guy. And so, there's a sort of "Lake Wobegon effect," in which all the chief executives are above average.

"It becomes a circular spiral upwards. That's what I think is driving the system more than any other factor," Crystal says.

There are occasional exceptions. Ethan Berman, who runs a risk management company in New York, asked his compensation committee to reduce his bonus this year, and instead of giving stock options to him, to spread them around to employees at the firm who lead by example. Berman said, "that, as much as any other attribute, will create value in the long run."

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