Speech by Commissioner Atkins addressing executive compensation proposal

By:  Cydney Posner

In a recent speech before the Society of Corporate Secretaries and Governance Professionals, SEC Commissioner Paul Atkins expressed his views on, among other things, the SEC's proposed executive compensation rules. Although not quite as inflammatory as his most recent remarks on option backdating (see my postings of 7/10/06 and 7/11/06), the speech does merit some attention in that it provides some insight into the SEC's intentions with regard to the proposal.

While lauding the proposal as helping to provide shareholders better information for their investment decisions, Atkins cautioned that it is important for the SEC "to tread carefully in this area. Our goal should be to design regulations that provide a framework for shareholders to receive clear, comprehensive, and non-boilerplate compensation information that is comparable from year to year as well as from company to company. We must avoid double-counting, which can distort investors' understanding of compensation. We also must avoid imposing disclosure requirements that will skew business decisions." For example, Atkins expressed concerns about proposed disclosure of compensation to employees who are not executive officers, noting his agreement with the many commenters that have pointed out the potentially severe competitive ramifications of this provision. In contrast to shareholders' legitimate interest in knowing how boards are compensating executives, this "disclosure is not offset by the need for sunlight since non-executive compensation decisions are not subject to the same conflicts of interest as executive compensation decisions. We have received virtually universally negative comments on this aspect of the proposal. I have to say that I have extremely deep reservations about this aspect of our proposal."

Other concerns raised by the proposal include the requirement to use "total compensation" to determine the top five "named" executive officers, for whom disclosure is necessary: "The total compensation figure turns in part on components that are the product of assumption-laden calculations. This could lead to a somewhat arbitrary group of named executive officers that changes from year to year." An additional issue highlighted by Atkins is the prospect of double-counting that would be required by a number of provisions in the proposal. Atkins is concerned that investor confusion may result from requiring companies to disclose stock and option awards both at grant date fair value and subsequently upon vesting or exercise or modification of the award. He notes that the SEC is "taking a close look at these" concerns as it moves toward adoption of the rules.

Finally, Atkins touched briefly on SOX 404, contending that "[c]ompanies and auditors have been far too conservative in exercising their judgment with respect to identifying and testing internal controls. As a consequence, external consulting and audit costs have ballooned." (Nah, the problem couldn't possibly be attributable to any conduct by regulators….) Characterizing the stories he has heard from issuers as "frightening," Atkins acknowledges that expenses for large companies have "far outpace[d] everyone's estimates. For small companies, the money and time diverted to Section 404 implementation are having a tangible effect. In the real world, of course, resources are limited. The more that companies spend on things like internal controls, the less they can invest in developing and marketing products, hiring and retaining talent, and embracing new technologies. That does not mean that internal controls and other organizational costs are not important. They are; but, there must be a balance." Atkins agrees with those who contend that the impact of this regulatory burden makes smaller companies less competitive and that the effect is demonstrated by the "rush of new offerings to London" to avoid the regulatory burden. He is, however, optimistic about the chances for real change in light of the pledges by both the SEC and the PCAOB to take steps to streamline SOX 404 implementation.