The US Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC) have a message for chief executive officers: Disclose your full salaries and perks or be penalized.

The IRS began its first full year of conducting executive compensation reviews by citing officers, on February 22, at 42 companies for underreporting US$700 million in pay.

The SEC took enforcement action last year against General Electric Co and Tyson Foods Inc for not reporting perks. The SEC is tightening disclosure regulations. The US Treasury Department is writing guidelines for companies explaining rules passed in October.

"It's very tough to get your hands around what the whole compensation package is," SEC Chairman William Donaldson said in an interview on February 10.

"We're going to change what must be reported, and the form in which it is reported, so you don't have to be Sherlock Holmes or a CPA to see what the payments are."

US CEO compensation climbed 60 per cent, to an average of US$10.7 million, from 1996 to 2004, New York-based pay consulting firm Pearl Meyer & Partners found in a study. As pay accelerates, it's more likely to involve stock grants and deferred compensation that can be manipulated and hard to follow, says James Halloran, an analyst at Cleveland-based National City Corp.

"A meaningful approach is to ask how much is the guy taking out of a company, and is it relevant to making an investment decision," says Halloran, 59, who helps choose investments for the US$33-billion National City Private Client Group.

"You can't do that now. You get data, but not real information."

'Little as possible'

The IRS added pay reviews to its 8,000 annual corporate audits last year after a pilot project that began in 2003, says Keith Jones, 47, director of field specialists for corporate audits.

The project, which examined 24 unidentified companies in industries including banking, airlines and manufacturing found under-reported pay, such as executives transferring stock options to family controlled partnerships to avoid taxes.

The Treasury Department will issue guidance in the next six months to companies on implementing the new tax law that places limits on deferred compensation and perks, says William Sweetnam Jr., benefits-tax counsel for the Treasury Department in Washington.

Most deferred-compensation plans at US companies fail to meet the new requirements and will need to be rewritten, Jones says.

The plans let executives delay receiving, and paying taxes on, a portion of their salaries, while the money continues to earn interest.

As Alan Beller, director of the SEC corporate finance division, puts it: "Too many companies are disclosing as little as possible."

CEO pay surge

The SEC is reviewing pay-disclosure regulations passed in 1992 because companies are making greater use of stock options or grants, insurance policies and deferred pay for top executives, Beller says.

"There are ways executives are being compensated that we didn't imagine back then," he says.

Last year, a pay practice survey by North Barrington, Illinois-based Clark Inc of the 1,000 largest US companies by sales found 94 per cent of the firms that responded had deferred-compensation plans, 60 per cent of which had been started in 1996.

CEO compensation has grown 6.5 times faster than the average US worker's pay since 1990, reaching an average of US$8.1 million in 2003 for the 365 largest US companies by revenue, indicates the Institute for Policy Studies, a Washington-based nonprofit research group.

The rapid growth prompted Congress to pass tax legislation in October that limited deferred-compensation programmes.

Reporting errors

The American Jobs Creation Act now requires that deferred amounts be reported to the IRS, puts limits on deposits and withdrawals from plans, and adds tax penalties of interest plus 20 per cent on money removed prematurely.

US President George W. Bush signed it into law on October 22, 11 days after its passage by Congress.

"Congress moved on the issue because they were troubled they couldn't get their arms around the deferred-compensation question," Sweetnam says. "No one knew how big the deferred compensation is."

The IRS audits in the pilot project show why legislators were concerned: Most filing errors found related to deferred compensation, particularly premature company-tax deductions for payments, and incomplete reporting.

The IRS investigators found that executives had too much flexibility in deciding when to pay into the plans, in using money as loan collateral or in liquidating plans, Jones says.

Pensions, bonuses

The bankruptcies of Enron Corp and WorldCom Inc, and related allegations of executive fraud, led Congress to pass the Sarbanes-Oxley Act in July 2002, which increased white-collar criminal fines and prison time as much as 10-fold.

After Sarbanes-Oxley, the SEC began investigating pay under Donaldson, who became chairman in February 2003, the same year the IRS began its pilot program.

"Corporate corruption is an issue the Bush administration has worked hard to defuse," says Patrick McGurn, a vice-president at Rockville, Maryland-based Institutional Shareholder Services, the largest US corporate governance adviser to fund managers.

"Sarbanes-Oxley, going after things like executive pay, have kept corporate corruption from being a political issue."

The IRS and SEC are considering five areas where reporting may be changed: Pensions, options, perks, bonuses and deferred compensation.

'Leaves you guessing'

When Jack Welch, 69, retired as General Electric's CEO in September 2001, his pension was US$9.6 million a year, indicates a study by the Corporate Library, a Portland, Maine-based consulting firm.

The figure wasn't disclosed in filings.

The Library calculated the amount by analysing company charts of potential amounts of pension payments based on years of service.

"They provide the table, but that still leaves you guessing," says Paul Hodgson, a compensation analyst at the Corporate Library.

In September, General Electric reached a settlement with the SEC regarding the company's failure to disclose some of Welch's retirement package. The SEC valued the package, which included a New York apartment, bodyguards and a leased Mercedes-Benz, at US$2.5 million a year. General Electric agreed to full disclosure of future accords without saying they committed any wrongdoing or paying a fine.

After the retirement perks were revealed in Welch's divorce proceedings, he asked Fairfield, Connecticut-based General Electric to cancel them and paid the previous year's costs.

Perks

"We believe the settlement represents a constructive conclusion to this matter," General Electric spokesman David Frail says.

Welch, contacted in Florida, declined to comment.

Perks only have to be reported if the total exceeds US$50,000, or 10 per cent of total cash salary, under the SEC regulations passed in 1992.

Among perks that companies reported to the SEC in 2003, when their most recent data was released, were a US$42,301 country-club fee for Irving, Texas-based ExxonMobil Corp CEO Lee Raymond; a forgiven US$2.5 million loan for Atlanta-based Home Depot Inc CEO Robert Nardelli; and US$35,000 for a car and the use of a plane for Redwood City, California-based Oracle Corp CEO Larry Ellison.

The IRS and compensation consultants say reported planes, cars and apartments may be only a hint of the benefits CEOs receive.

"There is a lot of under-reporting of benefits," says Diane Doubleday, a compensation consultant at Mercer Human Resource Consulting in San Francisco. "Companies are calling perks `business expenses."'

Consulting contract

The tax law passed by Congress last October directed the Treasury Department to write rules to limit tax breaks on the use of corporate planes, Sweetnam says.

Last March, the SEC began an informal inquiry into alleged unreported perks involving Don Tyson, former chairman of Tyson Foods, the company said in filings with the agency.

While Tyson Foods reported as much as US$235,000 in annual travel reimbursements for Don Tyson and an US$800,000-a-year consulting contract, the SEC questioned whether the company adequately disclosed an additional US$1.7 million in bonuses from 1997 to 2003, indicate the filings.

Last December, Tyson Foods, the world's largest meat processor, offered to pay US$1.5 million to settle an SEC investigation into allegations it failed to disclose the benefits and Don Tyson, 74, agreed to pay US$200,000, indicates a commission filing submitted by the Springdale, Arkansas-based company.

The settlement requires SEC commissioners' approval, the filing said.

Companies lax

The Tyson case shows why disclosure alone may not rein in pay. As Tyson Foods negotiated with the SEC on its failure to disclose Don Tyson's bonuses, the company's directors, on July 30, 2004, awarded him a US$1.2-million annual contract for as many as 20 hours a week of consulting, access to corporate skyboxes and vacation homes, 150 hours' use of the company jet, and 1,500 hours' worth of security services, indicate filings.

That was on top of a pension of US$750,000 a year.

"We reviewed our recent experiences with the SEC's investigation and revised our disclosures," says Gary Mickelson, a Tyson company spokesman. SEC spokesman John Heine declined to comment.

While the IRS rules say bonuses must be tied to performance measures, the pilot audits found that companies were lax on imposing standards, says Catherine Fernandez, chief of the IRS executive-compensation unit. Company filings also provide investors with little detail on the performance criteria, Beller says.

Options

The median CEO bonus at 123 companies with revenues of more than US$1 billion rose 31 per cent, to US$860,000, last year, indicates a study by Philadelphia-based Towers Perrin. Total compensation rose 25 per cent, to US$4.2 million, among the survey group, made up of the first companies to provide pay data to the SEC.

In 1992, when the SEC last set compensation-disclosure rules, companies were given the choice of providing current cash value for options awards or a chart of 10-year appreciation.

In some cases, the options are worth more than the cash awards. At Wells Fargo & Co, the fifth-largest US bank, CEO Richard Kovacevich, 61, received US$8.97 million in cash for 2003. He also received stock options worth about US$8 million on their grant date, using a Black-Scholes pricing formula, a 10-year term, a stock volatility rate of 26.75 per cent, and a comparable US Treasury yield for the risk-free interest rate.

The result is discounted by 27.5 per cent to adjust for vesting restrictions and the inability to be traded.

Bloomberg News

(China Daily 03/14/2005 page2)