26 July 2006
SEC requires single figure disclosure of remuneration
In the United States, the Securities and Exchange Commission (SEC) has decide to go ahead with new regulations to increase the transparency of executive pay.
Currently American companies publish a huge amount of detail about what they pay their various directors, but because of the complexity of the pay, the difficulty of valuing stock options and the difficulty of attributing the value of deferred compensation to specific periods, it is very difficult to determine from the reports how much in total is actually being paid to each director. In future the SEC will require companies to publish, for each director, a single figure (in US dollars) that best indicates how much in total the director was paid in the financial year.
This is a big step forward and it will significantly increase the transparency of executive pay in the US. However the technical difficulty in determining the total value of pay cannot be overlooked. There are two main difficulties in determining the total value:
1) When compensation is given in the form of options there is the difficulty of appropriately valuing the option. How do we know that the valuations are given in a fair and consistent way?
2) When compensation is deferred, or conditional, there is the difficulty of knowing in which year it should be shown.
Click here to link to spreadsheet which displays an executive pay report layout. The proposed layout addresses both of the problems identified above. This is done by including an estimate of the present value of compensation in the year in which the compensation is awarded. That estimate is then revised in each subsequent year until the compensation is finally unconditional transferred. The changes in value of past compensation are added or subtracted to each year's compensation.
This approach ensures that poor valuation methodologies can have limited long term impact. It also ensures a consistent and realistic treatment of deferred compensation.
The layout forms appendix 2 of my book "Performance and Reward". See link "View the book" in the left hand column.
This suggestion was made to the SEC via their website on 26th July 2006. Unfortunately the SEC online facility was not able to upload the attached spreadsheet, so the comment posted on the SEC site is incomplete.
Currently American companies publish a huge amount of detail about what they pay their various directors, but because of the complexity of the pay, the difficulty of valuing stock options and the difficulty of attributing the value of deferred compensation to specific periods, it is very difficult to determine from the reports how much in total is actually being paid to each director. In future the SEC will require companies to publish, for each director, a single figure (in US dollars) that best indicates how much in total the director was paid in the financial year.
This is a big step forward and it will significantly increase the transparency of executive pay in the US. However the technical difficulty in determining the total value of pay cannot be overlooked. There are two main difficulties in determining the total value:
1) When compensation is given in the form of options there is the difficulty of appropriately valuing the option. How do we know that the valuations are given in a fair and consistent way?
2) When compensation is deferred, or conditional, there is the difficulty of knowing in which year it should be shown.
Click here to link to spreadsheet which displays an executive pay report layout. The proposed layout addresses both of the problems identified above. This is done by including an estimate of the present value of compensation in the year in which the compensation is awarded. That estimate is then revised in each subsequent year until the compensation is finally unconditional transferred. The changes in value of past compensation are added or subtracted to each year's compensation.
This approach ensures that poor valuation methodologies can have limited long term impact. It also ensures a consistent and realistic treatment of deferred compensation.
The layout forms appendix 2 of my book "Performance and Reward". See link "View the book" in the left hand column.
This suggestion was made to the SEC via their website on 26th July 2006. Unfortunately the SEC online facility was not able to upload the attached spreadsheet, so the comment posted on the SEC site is incomplete.
