Porn for the business pages

I've written so much about the SEC's executive compensation disclosure rule that I'm not up to adding much to the mass of words.  See, e.g., and more generally peruse my Executive Compensation archive.

Today we see the main fruits of the rule – a lovingly long WSJ report on compensation, led by this article, which compiles ten suggestions on what to do about executive compensation. Marc Hodak gets it right:

The main problem with these suggestions is the utter lack of coherence among them with respect to their impact on agency costs, which ought to be the central concern of boards and the public. The writers and their sources clearly fail to distinguish how current compensation plans might be a cause, an effect, or a solution to the problem of agency costs. Instead, their suggestions stem from the premise that CEOs are systematically overpaid. The writers trot out the same anecdotal stories meant to prove this premise to disguise the fact that it remains unproven in any meaningful sense. Even the boldest critics of CEO pay don’t pretend to know what the “right” amount of pay ought to be based on market logic. They simply assert that it should be less than it is now, perhaps some multiple of "average worker pay," for subjective reasons having to do with “public confidence” or social welfare.

Actually, I'm not sure that the point of the article was to say something intelligent about compensation. It occurred to me in reading it that in all my blogging on the topic last year, I missed an important function of the disclosure rule: to provide fodder for business journalists. After all, after you've said that executives are overpaid and greedy 800 times, how many more times can you say it? A number is worth a thousand words. And the WSJ section has lots and lots of numbers.

In other words, the executive compensation disclosure rule, whatever else it accomplishes, provides porn for the business pages. Wanna see who made the biggest bucks?  Here's a naughty little peek. The article Hodak justly criticizes basically functions as the plain brown wrapper, or maybe the appearance of redeeming social value.

Comments

[Robert]

The NYT gets its shorts in a knot.

Executive Pay: A Special Report -- More Pieces. Still a Puzzle By Eric Dash in the New York Times on April 8, 2007

nytimes.com/2007/04/08/business/yourmoney/08pay.html

"It’s like reading through Tolstoy's ‘War and Peace,' " said Lynn E. Turner, a former S.E.C. chief accountant ... "What is missing is a clear, succinct story about how the compensation committee came to the amount they were going to pay."

Many shareholders say the new proxies require more work, not less, to decipher. Pay consultants say some of the new data is so dizzying that they are not sure how to sift through it; some charts even require another set of charts to interpret them. And a new section in proxies, meant to explain clearly how executives are compensated, is overrun with mind-numbing corporate-speak and legalese.

... Amid all this attention, the Securities and Exchange Commission made its first attempt to overhaul pay disclosure in 15 years. ... its goal was to tighten reporting loopholes that allowed large chunks of an executive's pay to go unnoticed. Regulators also wanted to provide investors with a clearer understanding of how corporate boards make compensation decisions.

Yet greater disclosure has also made it more challenging to peruse proxies, which have grown exceedingly long. Pfizer's compensation report runs over 17,000 words. I.B.M. needed 47 pages to explain how its chief executive, Samuel J. Palmisano, and other senior managers were paid last year. Its proxy included a lengthy preamble that bills itself as a helpful "guide to executive pay at I.B.M.," as well as a reference table just to make sense of its five different bonus programs and three types of retirement plans. The only thing missing was a simple way for the average investor to tally executive pay at the company in less than an afternoon. ...

Still, even professionals have found most compensation reports to be heavy lifting. "We are very quickly moving to a situation where every proxy comes with its own hand truck — it might be readable, but page after page after page you blur out," said Brian T. Foley, an independent compensation consultant in White Plains. "For sophisticated shareholders, it is probably useful. For the ordinary guy, it becomes a doorstop."

And those are just the ones in which the writing is clear. Clarity Communications, an investment relations firm, analyzed the new compensation discussion sections of 40 big companies that filed their proxies before March, to measure their readability. The company used three standard tests that gauge sentence length and word complexity. From Clarity's perspective, all 40 companies fell short. Even state insurance contracts were easier to read.

"The numbers have added a great deal to investors' understanding, but we have a way to go on the English prose that accompanies the numbers," said Christopher Cox, the S.E.C. chairman, in an interview. "If the real purpose was to get a message across to the retail audience, no company would do this," he added. "A retail products company would never let the legal department write its sales copy."

Companies, for their part, say they are struggling just to gather all the detailed data just to comply with the new rules, let alone tell the story behind it. (The S.E.C. did, after all, provide 372 pages of detailed rules for a "principles based" analysis.) Boilerplate reports have been a result. ...

Navigating the summary compensation table in new proxies also presents challenges. In the new category of "total compensation," the S.E.C. said it intended to provide investors a single figure that offered an easy way to compare pay packages. But there is not just one way to tabulate annual pay. There are at least three. And the results are based largely on how companies record stock options and incentive payouts.

While most people consider "total pay" as the amount an executive takes home for the year — the figure that appears on his or her tax return — the S.E.C.'s new requirements produce a very different figure: what the company books as the executives' compensation expense, which is an accounting number.

And compensation committees look at pay packages a different way: the total amount that executives receive if the company performs as they expect — what they call "the pay opportunity." Depending on what method is chosen, an executive's total pay package can be cast in at least three different lights.

[Robert Schwartz]

The problem is the SEC's theoretical basis.

More disclosure will not make minority shareholders the equals of insiders. Investors want to spend their reading time reading more important stuff, like novels and histories.

Accounting numbers are bureaucrat's numbers not investors numbers. They record history in loving detail and give only faint clues as to value.

The most readable disclosures will inevitably be written by committees of accountants and lawyers. Malcolm Gladwell will not be available. And the accountants and the lawyers will not be pushed out of the process as long as they and their clients are subject to draconian liabilities for the sins of management.

The SEC's efforts at plain language have been a sad joke. The commission staff consists of lawyers and accountants who would NOT know plain language if it bit them in broad daylight. They can run stuff through MSWord and feed back grammar comments. But it will never be like being edited by Harold Ross or Maxwell Perkins.