NEWSMAKER #3 Christopher Cox

If the stock options backdating scandal was bad news for hundreds of executives, it was practically a ringing endorsement for Securities and Exchange Commission Chairman Christopher Cox and his efforts to make executive compensation more transparent. On July 26, the SEC adopted tougher disclosure standards for companies to report “total compensation,” including projected values for stock options, retirement payouts and other compensation, such as severance pay, for a company’s highest-paid executives.

    Though much of the backdating ended in 2002, when the Sarbanes-Oxley Act required executives to file with the SEC within two days of exercising stock options, news of it did not come to light until after the executive compensation rule was proposed in January. The final rule, therefore, included a last-minute addition: Companies must explain how they arrived at the exercise price of their stock options if the price is lower than the value of the options on the date of the grant.

    The new rule is the latest attempt by regulators to shine a light on the compensation agreements that take place behind boardroom doors. The average CEO pay, according to a University of Southern California study, was 369 times greater than the pay earned by the average worker last year. That compares with 131 times more in 1993 and 36 times more in 1976. The Business Roundtable, whose members include some of America’s largest companies, says pay for executives last year was 179 times that of a typical employee.

    As a former corporate finance lawyer, Cox brought with him an understanding of the SEC’s regulatory history and an appreciation for the unintended consequences of disclosure laws. A tax law introduced in 1993 said companies could not take deductions on compensation of more than $1 million unless it was pegged to performance. This spawned an era of stock options and the growth of less transparent means of compensating executives. The era may have ended when Cox established the new disclosure rules.

    To avoid unintended consequences of his latest proposal, Cox says the SEC “will soon issue further accounting guidance that will help honest companies to avoid any problems with the law.”

Background: Christopher Cox was a Republican congressman representing a district in California’s Orange County from 1989 until his swearing in as chairman of the Securities and Exchange Commission in 2005. A 1977 graduate of both the law and business schools at Harvard University, Cox developed his expertise in venture capital and corporate finance law. As a congressman, he sat on a number of committees with oversight of the U.S. capital markets.

Workforce Management, December 11, 2006, p. 23 — Subscribe Now!