Executive pay will soon be exposed
We investors may not spend much time thinking about the Securities and Exchange Commission, but it spends considerable time thinking of us.
With a resounding 5-0 vote, the commissioners of the SEC have approved a long-awaited addition to disclosure rules about executive compensation. The new rules look poised to expose dodgy policies, discourage their use, and give us greater insight into a previously murky corner of corporate America, all in one fell swoop. Here’s how.
After Dec. 15, 2006, companies will be required to provide a table detailing the base salary, stock grants, stock options and any corporate perks (if they add up to at least $10,000 in value) for the CEO, CFO and the next three highest-paid executive officers.
The total compensation amount will be there in black and white, and options should be listed in full detail, too — grant value and effective date, the date the options were actually granted, the whole shebang.
There’s more to the new set of rules, such as tables outlining payments to directors and retirement benefits apportioned to the top five executives. A proposed “Katie Couric” clause, asking for data on the highest-paid regular employees, was nixed in favor of compensation information about the three next highest paid policy-making employees. Assuming that Katie doesn’t gain decision-making power over new employer CBS right away, she should be able to keep her salary secret under those rules, at least for a while.
Not only will we all have greater insight into executive pay and option grant practices, but the reporting itself could easily become quite cumbersome (or embarrassing) for companies that like to hand out options like lollipops.
Some boards may feel the need to simplify or eliminate their options-grant policies, and a few boards have already made such changes to their executive pay policies.
The worst of this year’s options backdating scandals would likely never have happened at all if public oversight had been this open to begin with.
Maybe now we can go back to the wholesome motivating tools that stock options were always meant to be.
Ask the Fool
Q: Is there any way for me to buy odd lots (say, 10 or 25 shares) of listed common stock without paying a lot of extra money? Must I buy round lots of 100 shares? — J.V., Huntsville, Ala.
A: Most brokerages don’t restrict how many shares of stock you can buy. You can buy 13 shares, or 76 shares, or even just one share. You should pay attention to what percentage of your investment is going to commissions.
If you’re spending $250 on 10 shares of a $25 stock but are paying a $20 commission to your broker, then that represents 8 percent of your investment, which is too costly (20 divided by 250 is 0.08, or 8 percent). Aim to pay no more than 2 percent in commissions. If you buy $1,000 of stock in a company and pay a $20 commission, then that’s 2 percent. Some brokerages sport commissions as low as $8 (sometimes lower) — with a $400 investment, an $8 commission is just 2 percent. Learn more at www.broker.fool.com.
Q: After what percentage gain is it best to sell a stock? — L.M., Columbus, Ind.
A: Don’t think in terms of percentages. Instead, consider whether the company is still executing well. Many people bail out after a certain gain, perhaps 10 percent or 30 percent. But it’s often more profitable to hang on to the stock for years or decades, as long as you retain faith in it. Why would you have wanted to sell Microsoft shares in 1990, after even a 100 percent gain? It would have kept doubling your money for many years.