It’s greek to me…
A week and a half ago, SEC Chairman Chris Cox gave a speech at USC where he criticized what’s masquerading as disclosure under the new rules: “I have to report that we are disappointed with the lack of clarity in much of the narrative disclosure that’s been filed with the SEC so far. Based on the early returns, the average Compensation Disclosure and Analysis section isn’t anywhere close to plain English. In fact, according to objective third-party testing, most of it’s as tough to read as a Ph.D. dissertation.” Cox went on to say that some CD&A disclosures clocked in at more than 13,500 words, which he called “a far sight longer than a full-length feature in the New Yorker.”
While Cox didn’t give any specific examples during his speech, we’re quite sure that some of the language in the proxy that Tenneco (TEN) filed yesterday fits the bill:
Our compensation programs are structured to support organizational goals and priorities and stockholder interests. The committee has not in the past had, and does not currently have, a policy requiring all compensation to be deductible under Section 162(m). Amounts payable under the TAVA Plan do not qualify for the performance-based compensation exemption under Section 162(m), as the committee retains discretion in making bonus awards. In addition, the TAVA Plan was not submitted to stockholders for approval.
That was near the end of the 12 page 5,600-word CD&A — the fin de siecle, so to speak. Of course, it’s hard to imagine that anyone save Tenneco’s in-house legal team would actually make it through something like that. Or understand it.
But that wasn’t the only thing in Tenneco’s proxy. There was also this interesting non-disclosure disclosure on company paid-for perks: “Each of our executives receives a modest perquisite allowance designed to avoid any discussion regarding specific perquisites for specific individuals.” Translation? We’re now required to disclose such things as country club memberships and corporate jet usage, but we don’t want to, so we’ve decided to figure out a way around the rule.”
What investors wind up with instead is that before Mark Frissora left to run Hertz (HTZ) last July, he received $91K worth of perks. What sort of perks were they? There’s no hint in the filing, other than a mention of a $40K allowance and “gifts and the value of travel and spousal travel.”
See, it’s perfectly clear!
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April 4th, 2007 at 7:12 pm
“Each of our executives receives a modest perquisite allowance designed to avoid any discussion regarding specific perquisites for specific individuals.” - LOL! You really can’t make this stuff up, way better than fiction. Really strange that pay consultants (they used a prominent firm here) think plans should be designed to skirt disclosure.
Tenneco’s proxy is also interesting b/c they disabled bonus bank feature of their EVA bonus plan (a feature explicitly designed by SS to smooth out payments and avoid one time windfalls that aren’t justified) due to, you guessed it, deferred compensation regs.
April 5th, 2007 at 9:26 am
As in house counsel at a publicly traded company, I would be happy to shorten our disclosure on executive compensation. However, as someone with over 10 years of experience practicing in the area, I sincerely struggled understand the SEC rules, no less comply with them (which I sincerely believe we did). If the SEC would like plain English disclosure, it would be helpful if they wrote the rules in plain English. I have been at conferences this year where the SEC Staff attorneys have stated that the rules are clear yet compensation consultants like Mark Borges blog every day to try and untangle pages and pages of SK 402 (which is the Compensation Disclosure rules for those who are lucky enough not to recognize the reference).
I’m not bitter about the rules and philosophically agree with the SEC’s objective of clarifying compensation, yet the CD&A section of the compensation rules has six primary parts, 15 subparts and five separate instructions for those items. That doesn’t include the volumes of secondary sources — including some issued by the SEC which aren’t rules “rules” but you better comply with them or else you’ll have to defend why you didn’t during a review. The required tables are even more confused. Also, I’ve never been through an SEC review where they told me my disclosure was too detailed and to eliminate information because it’s not relevant.
To be clear, there are companies out there who seek to muddy the disclosure. However, many of us are swallowed by parts and choking on subparts while throwing up the left over instructions. I appreciate what Chairman Cox is saying but he really needs to get the message to the Staff as well and issue rules that reflect his stated desire.
April 5th, 2007 at 11:33 am
I recently read the First Horizon (FHN) proxy and annual report. Having held the stock for over 10 years and being considered a financial expert it should be a quick read… after reading the proxy compensation section I thought I was reading something in Polish. The new metric I am looking at this season is the ratio of pages in the proxy divded by the pages in the 10-K/annual report.
My SEC recommendation is here is Joe or Joe Ann Doe’s W-2 (or all taxable transactions 1099’s, 1098’s, etc) and how it breaks down into the components. The next category would be if we fired them tomorrow we would theoretically have to write a check for $x, if they resigned tomorrow we would owe $y.
April 5th, 2007 at 1:08 pm
Frustrated by -
Truly interesting inside insight. As somebody who analyzes these docs, I don’t per se mind lengthier disclosures. I’d rather see more than less. My frustrations are:
1. Why can’t they typically distinguish btwn compliance and communication; comply but also communicate. So, okay, you disclose first to comply, in text that passes legal muster. But the docs can still, additionally, attempt to *communicate* with a plain english summary (or even Q&A). Like Buffet’s 10Ks - they comply in detail, of course, but then additionally he communicates in plain english. Like the Tenneco proxy above, i had a chance to look at that, and they’ve got a whole EVA based bonus plan, but it horrendously explained. Unless you worked with these before, there is no earthly attempt to make that plain.
2. Why do pay consultants (I was a pay consultant for 8 years) come in and get to say, “let’s tweak your plan to avoid disclosures or avoid the spirit of the regs.” This continues to amaze me. Plan design should be a function of business goals, shareholder needs, and talent requirements, but committees let regs drive design. For example, the SAR surge was driven by consultant-fed attempt to skirt expensing loopholes. And a lot of these long term plans are advertised as “less dilutive” (fewer shares used) because the consultants tell the companies that, because they knowingly use a legalistic definition of dilution, when economically there aren’t
April 5th, 2007 at 4:34 pm
The Berkshire proxy is nice in the fact they disclose what Buffett and Munger reimburse the company for personal phone calls, postage, etc. Which in Buffett’s case, out of his $100,000 salary * 60% = $60,000 in AT earnings he reimbursed the company $50,000. Nice value there.
Do wish they would disclose the other high comp CEO’s in the businesses as they only show three people and only one makes more than $100,000.
April 5th, 2007 at 9:20 pm
Thanks, “frustrated by” for providing some perspective about how folks like you are handling this. Clearly, there’s still a lot of work to be done, given what you describe.