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Clarify Disclosure of Executive Compensation

The Securities and Exchange Commission could subject corporations’ disclosure statements to shareholders to a “reasonable person” standard similar to the one already in use in product liability law.

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Current law limits tax-deductable executive compensation to $1 million with the exception of bonuses tied to the executive’s performance. Shareholders must approve performance-based contracts before executives can be paid, and they can vote out the corporation’s board of directors if they are dissatisfied with how executives are being compensated.

This is a sound policy in principle. Tax deductions for ordinary and necessary business expenses such as rent, electricity bills, and reasonable compensation help make sure that a company is taxed only on its profits, and shareholders should be able to supervise executive pay and prevent excessive bonuses.

But in practice corporations do everything they can to dupe their shareholders, concealing the lack of accountability in performance-based pay for executives with long and deliberately confusing contracts.

The Senate version of the financial regulatory reform bill currently being considered would require regulators to clarify disclosures of executive compensation contracts. One simple step the Securities and Exchange Commission could take if the bill becomes law would be to subject corporations’ disclosure statements to shareholders to a “reasonable person” standard similar to the one already in use in product liability law. Giving shareholders more access would curtail excessive executive compensation.

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