David Simonds

NOW there is nowhere for the bosses of corporate America to hide their bulging pay packets. In spite of years of defensive lobbying, they are having to reveal all under new Securities and Exchange Commission (SEC) rules that have just begun to take effect. This burst of sunlight could not have come at a worse time for them. It coincides with a shift in the control of Congress to the Democrats and the start of the presidential election campaign, in which “overpaid” chief executives will make an easy target.

Although barely one-tenth of the 2,000 biggest American companies have yet reported under the new rules, the tally of negative headlines is already mounting. “There are already plenty of examples of firms reporting chief-executive pay packages of millions of dollars more than expected,” says Paul Hodgson of the Corporate Library, a research firm. He reckons that the firms that have already reported are a representative sample likely to provide a good indication of the overall trend. Top of the heap so far is Ken Lewis, boss of Bank of America, with total pay in 2006 valued at $114.4m.

One area of generosity is the chief executive's future pension. Another is “deferred pay”, whereby a top executive leaves some part of his salary in the hands of the firm, as a loan of sorts. GE recently reported that Robert Wright, until recently the boss of NBC Universal, its entertainment subsidiary, has accumulated deferred pay worth $40m, the highest so far. Quite why a boss or firm should want to resort to this tactic has never been clear, although the suspicion has always been that the firms are offering managers unusually good returns at the shareholders' expense. Now the details of these arrangements are being published for the first time, so it will become clear whether that was so.

In a study of 100 firms that have reported, Mr Hodgson found that the perks given to chief executives, though relatively small, were much higher than those reported last year under the old, less exacting, disclosure rules. On average, the amounts reported in 2006 under the heading “other annual compensation” in 2006 were $192,000—131% higher than in the corresponding category in 2005. One reason for this jump was that the new rules require the disclosure of all perks worth $10,000 or more, whereas the old rules allowed firms to keep quiet about anything worth less than $50,000.

Of particular interest will be the data on personal use of the corporate jet. This is expected to decline sharply as firms start to charge the boss for personal flights in order to avoid embarrassing headlines. No company wants a repeat of the battering suffered by Tyson Foods after revelations that “friends and family” of Donald Tyson, a former boss, made undisclosed use of the corporate jet—valued at over $1m—without his even being on board.

Another likely target is the golden parachute for a departing boss, especially if he has left because of poor performance. This is increasingly a focus of activist shareholders, including hedge funds. On March 20th John Antioco, the boss of Blockbuster, a video-rental firm, announced that he would resign by the end of the year. Following a long battle over his bonus with Carl Icahn, a legendary corporate raider, he agreed to accept much less in severance than he had said he was entitled to under his contract.

The directors' cut

Boards have already started to pay greater attention to how they set the chief executive's pay and to being seen to do so in a way that serves the interests of shareholders. One reason is the requirement that compensation committees consist entirely of independent directors, introduced as a listing requirement by the New York Stock Exchange in the wake of the corporate scandals at the start of the decade. These committees must now hire compensation consultants, and many are insisting that they do no other work for the company. Previously, compensation consultants typically had other lucrative contracts, which may have swayed their judgment.

The new climate surrounding pay has already had an effect. Base salary has stabilised, though it was never the fastest-growing part of pay. Options, which even before the recent backdating scandal were losing their appeal, have been partly replaced by performance-related pay.

“Boards are being tougher with new hires, in particular, as it is hard to get a sitting chief executive to give up pay promised in his contract, at least without compensation,” says Russell Miller of Korn Ferry, a recruitment firm. Even being tough on new chief executives is not proving easy, however. Boards know that the choice of a boss can have a huge impact on a firm's performance. Executive talent is valuable. Private equity is on the prowl, offering packages with incentives that a public company can find hard to match amid all the denunciation of fat cats. Those are good reasons to expect pay to continue to grow, in spite of the outrage.

Not everybody is happy with the quality of the disclosures made so far. One issue is the length and complexity of the statements, which often run to 30 pages or more of opaque legalese. There are also complaints that the single number for total pay required by the SEC is misleading. “There is more than one honest answer to the question, ‘How much did you pay the chief executive?'” says Joe Grundfest, a former SEC commissioner who is now at Stanford University. The SEC requires firms to combine both the actual pay bosses receive each year and an estimate of the value of future performance-related pay, such as share options, which is calculated using a formula known as Black-Scholes. But the value of such options changes along with the firm's share price—they could even prove to be worthless. “The one certainty is that the option grant will not turn out to be worth the Black-Scholes valuation,” says Mr Grundfest. Which is why the SEC should require two totals to be published, argues Ira Kay of Watson Wyatt, a compensation consultancy. As well as saying what managers might earn, they should estimate what they have earned. Unlike the SEC's number, such “total realised pay” correlates well with firms' performance, says Mr Kay.

Such subtleties may not matter much to the headline writers. Outraged politicians in Washington, DC, smell blood. Barney Frank, chairman of the House financial services committee, is proposing legislation to require companies to seek the (non-binding) approval of shareholders for executive pay packages each year.

There may also be moves to toughen the tax treatment of executive pay, perhaps by removing tax benefits for performance-related compensation, at least above a certain level, says David Yermack, an economist at New York University. Share options and pensions may also come under fire. Given the growing number of middle-class Americans who have to pay the higher alternative minimum tax, Congress may feel that heavier taxes for corporate bosses have populist appeal. “Anything is possible in this climate,” says Mr Yermack, “so bosses may need to get used to the idea that more of their compensation will be subject to taxation.” At least they can afford it.