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@gsb.stanford.edu SEC Reforms and Executive Pay August 2001 Compensation Research By Karen K. Nelson
Assistant Professor of Accounting The SEC's aim was to empower stockholders and bring CEO salaries in line with company performance. But did it? Recent research conducted by Karen Nelson, an assistant professor of accounting at the Business School, reveals that investors viewed the change in proxy laws as more a hindrance to business than a tool to keep salaries in line. To achieve this goal, the SEC made two main changes to its regulations. First, the SEC required companies to more prominently disclose in corporate financial statements the compensation, including a dollar value on stock options, of their five highest-paid employees. The second change transformed proxy bylaws so that any shareholder with either $2,000 worth of shares or 1 percent of a company's stock could submit a proxy on executive compensation packages. Prior to this regulatory change, determining executive compensation was considered "ordinary business" and not subject to shareholder voting. One probable reason for the market's negative reaction to the proxy reform, Nelson says, was the likelihood of small, unsophisticated shareholders putting forth proposals that made poor business and strategic sense. For example, a proxy at BellSouth by a small shareholder proposed that the CEO's compensation be limited to no more than two times what the president of the United States makes on the grounds that no corporation is more complex than the United States. While BellSouth responded that it was not practical to set an arbitrary salary level well below that of market level, the proxy still received 15 percent of the vote. "The downside is that it brings out of the woodwork all of these investors who have a political agenda, who have a personal agenda, and who don't understand how compensation should be set," says Nelson. "In particular, it brings out people who are focusing solely on pay levels or levels of pay for performance." | |
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