SEC Set to Vote on Sweeping Executive Compensation Reporting Reforms

Annual Compensation Long Term Compensation Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h) (i) Name and Principal Position Year Salary ($) Bonus ($) OtherAnnualCompen-sation ($) RestrictedStock Awards(s) ($) Securities Underlying Options/SARs (#) LTIPPayouts ($) All OtherCompen-sation ($) CEO ___ Under the changes that are proposed we would add a Column (j) that would for the first time require corporate proxy statements to provide a column with a Total Annual Compensation figure for each of a company's five highest-paid executives and be far more specific about the value of their various fringe benefits and perquisites. This greater transparency would be looked upon favorably by shareholders and the media, but also poses some problems relative to valuation models, and the relative worth of equity. The SEC would also force companies to take the monetary value of the stock-option grants given to top executives and place those figures side-by-side with salary and bonus information. At present, we are required to report the number of Options/SARs granted, and not the value – in this table – but in the proposed rules, Column (g) would be modified to include a Black Scholes Valuation or other “fair market value” of the equity, which is in keeping with new FAS123R rules. However, since the SEC will require companies to disclose the "fair market value" of stock options at grant as part of a new Total Annual Compensation reporting requirement, we will likely have more questions about pay for performance. It can be argued that option grant values do not have a direct correlation with the company's past performance, nor are they a predictor of future performance. Additionally, since the proxy reporting of option grant values will happen much later (up to 12 –16 months later), bear markets will show overstated option values, and bull markets will have understated option values. Some of the other proposed changes include: Ø Lowering the Perquisite Disclosure Threshold – it is currently $50,000 or 10% of salary and bonus. The new rules would lower this to $10,000. Ø Requiring companies to explain in a summary and analysis section of their proxy statements the goals and objectives behind executives' pay and the various factors directors weigh when determining a specific number. Ø More specifics about payments in the event of a "change of control", and the provisions that trigger financial awards under certain transactions would be presented in greater detail. Ø There would also be a table that better illustrates how much executives hold in the form of restricted stock and other outstanding equity rewards. Ø More disclosure of retirement plans, and potential payments and benefits Ø Adding a Director Compensation Table – it is currently reported in a narrative form, and a table would make it more transparent. This would include retainers, meeting fees, chair fees, equity awards, etc. Overall, we believe that the proposed transparency is good for shareholders and for business, and should help to alleviate any confusion over executive pay levels. However, it has been noted that this overhaul could have an unintended consequence, further inflating executive pay. This will make solid and reasonable benchmarking all the more important. The vote is set for January 17, 2006, and we will keep you posted about the results.

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