A late December move by the Securities and Exchange Commission, altering the way in which U.S. companies must report the value of executive stock-option grants, is being criticized by investors and a key lawmaker as ill-conceived and poorly timed.

The move effectively allows companies to report a lower value for option awards by disclosing values as they vest, rather than upon award. The commission's original rules, approved in July, required companies to disclose option award values at the time of the grant, thus giving investors a better idea as to the overall value the board placed on the award, according to supporters of the original provision.

"We're disappointed and feel it's a step back from full transparency for investors," Amy Borrus, deputy director at the Council of Institutional Investors, told Governance Weekly. "Investors will need to do more work to determine" the full worth of pay packages.

Commission officials argue the change will give investors a more accurate picture of executive pay packages because it will prevent the reporting of compensation that might not be realized. "The object is to report accurate numbers...reporting "phantom" pay that will never be received, is just as misleading as routinely under reporting it," SEC Chairman Christopher Cox said in a statement.

Cox also noted that the new rules will require reporting of option awards in a manner consistent with that mandated by the Financial Accounting Standards Board for corporate financial statements, thus providing "maximum clarity and consistency for investors."

The interim final rule was not subject to comment before its release and will apply to all companies filing proxy statements on or after Dec. 15, 2006, which was the same effective date for the other new disclosure rules. The SEC said it would accept public comments on the rule change for 30 days after the rule is published in the Federal Register and will make changes in February, if necessary.

Industry groups, including some like the Business Roundtable that supported the original rule, are welcoming the change, calling it a "more fair and balanced" way to report stock options, which will allow shareholders to determine what executives will receive, rather than what they may obtain.

Timing Questioned
Some investors have questioned the commission's decision to publicly announce the switch on the last business day before the Christmas holiday.

"They did it at the worst possible time, during the holiday season, with no chance for investors to respond, and they made it as a final rule," said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County, and Municipal Employees (AFSCME). "They should not be surprised to see this outrage."

SEC officials are rejecting the suggestion that the announcement was timed to avoid public scrutiny, saying the information was posted publicly as soon as it was approved by the federal agency overseeing regulatory policies. "Commissioners approved the amendment on Dec. 15, and we posted it as soon as it was cleared by the Office of Management and Budget, which just happened to be late in the day on Friday," SEC spokesman John Heine told Governance Weekly.

Ferlauto predicts the last-minute reversal and resulting outcry will translate into higher support for shareholder resolutions seeking to tie pay to performance and to give investors a greater say on pay packages. Ferlauto also said he expects these concerns will resonate on Capitol Hill, where leadership of committees now rests with Democratic lawmakers who traditionally have been more responsive to criticism from labor and other groups of "excessive" executive pay.

"[T]his slippage is regrettable both substantively and for not having been open to more public discussion," Rep. Barney Frank, the incoming House Financial Services Committee chairman, said in a statement. "Backtracking by the SEC on this important matter of stock options reinforces my determination that Congress must act to deal with the problem of executive compensation."

Frank, a Massachusetts Democrat, will hold hearings to address the growing "inequality gap" evidenced by today's executive compensation packages, committee spokesman Steven Adamske told Governance Weekly, though no schedule has been set.

Focus Remains on Options, 'Say on Pay'
The SEC's rule reversal is not the only issue serving to ensure investors remain focused on executive pay in 2007. In recent months, options backdating has generated controversy as more than a hundred companies face regulatory or internal probes over allegations that executives received awards timed to coincide with share price lows.

Most recently, the board of Apple Computer has been criticized over option awards for CEO Steve Jobs. A special committee of the board said Dec. 29 that Jobs was "aware of or recommended the selection of some favorable grant dates," but did not benefit financially, The Wall Street Journal reported.

Board members, including former U.S. Vice President Al Gore, said the committee defended Jobs and gave no indication the company would hold him accountable for grants that the Cupertino, Calif.-based firm has acknowledged were backdated.

Backdating also will remain a focus in light of proposals filed by some activist investors including the Amalgamated Bank's LongView fund, which is asking companies to permanently fix grant dates or set dates for making option awards that will be announced before a fiscal year begins. (An exception would be made for awards to executives recruited from the outside, according to the proposal text, provided that the strike price is not linked to the release of material, non-public information that could affect the stock price.)

The LongView fund, with the Connecticut Retirement Plans and Trust Funds, has filed the proposal at Apple Computer, among other firms.

Labor funds, public pension funds, and individual activists have so far filed more than 30 "say on pay" proposals that seek an advisory shareholder vote on compensation. That proposal, which was introduced by AFSCME last year, averaged roughly 41 percent support at seven companies in 2006. This week, the New York City Employees' Retirement System announced it would target Par Pharmaceutical, Blockbuster, and Home Depot with the resolution.

Home Depot, a principal target last year for investors frustrated over failures to tie pay to performance, this week announced the resignation of CEO Robert Nardelli, who leaves with a $210 million separation package that includes $20 million in cash severance.

Nardelli received roughly $225 million during his six-year tenure as the company's stock price fell and the home improvement giant lost market share to rival Lowe's, Bloomberg News reported.

Frank denounced Nardelli's severance package as a "consolation prize for bad performance,'" and said the company's example illustrates why shareholders need more power to influence corporate pay decisions, according to Bloomberg News. Frank said he would sponsor legislation to allow shareholders to vote on executive compensation packages. A similar measure proposed by Frank stalled last year when Republicans controlled Congress.

Nardelli's exit follows other high-profile CEO departures including that of Henry "Hank" McKinnell at Pfizer, and Bill Ford Jr. at Ford Motor, that, analysts say, are a growing sign that boards are heeding investor demands over performance and executive compensation.

"Boards are sensitive to these issues and are responding to shareholder concerns," said Thomas Lehner, the Business Roundtable's director of public policy.