July 26, 2006, 10:09PM

Executives` pay rules overhauled

By VINEETA ANAND and JESSE WESTBROOK

Bloomberg News

The Securities and Exchange Commission will require companies to disclose the timing and price of stock options awarded to executives to end abuses that triggered the biggest investigation of corporate wrongdoing in at least three years.

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The agency, as part of the most extensive overhaul of executive-pay rules in 14 years, will force companies to explain how they value options and why they choose grant dates for the first time. The commissioners, led by Chairman Christopher Cox, voted 5-0 Wednesday to adopt the regulations. Cox is betting that companies will rein in questionable pay practices if they`re forced to reveal them in explicit detail. While backdating stock options is drawing the most scrutiny, investors also object to other hidden benefits, from country club memberships to personal use of company aircraft.

The SEC said companies would have to say whether any of its option awards are timed ``in coordination with the release of material non-public information`` and why exercise prices don`t match the underlying stock price on the grant date.

Effective in 2007

The new rules, which will become effective for the 2007 annual meeting season, represent the most ambitious policy initiative the agency has undertaken since Cox took office last August. While the SEC`s previous chairman, William Donaldson, pursued aggressive enforcement to clean up corporate fraud, Cox is putting his stamp on the agency by emphasizing the power of open information to police executive behavior.

Last week, Brocade Communications Systems` former chief executive officer and ex-vice president of human resources were charged criminally in connection with backdating in the first enforcement case to emerge from the probe into stock options manipulation. The SEC, which is investigating more than 80 companies for similar violations, filed a civil fraud suit.

`Katie Couric clause`

The SEC also voted to seek more public comment on a controversial part of the disclosure rules nicknamed the ``Katie Couric clause`` after the former co-host of NBC`s Today show who was tapped to present CBS`s nightly newscasts.

The SEC will not immediately ask companies to provide pay details of three top-paid employees who are not executives. That proposal, part of the package of compensation rules the agency put out for public comment in January, will be considered later as a separate idea.

The proposal would apply only to companies with a market capitalization of more than $700 million. The new initiative would exclude disclosures about the pay of professional athletes, salesmen, entertainers and traders who don`t have management responsibilities, according to SEC staff.

Investor advocates lauded the SEC`s efforts to clamp down on stock options manipulation through extensive disclosure.

``We applaud the SEC for tackling this troubling issue so promptly,`` said Amy Borrus, deputy director of the Council of Institutional Investors. ``This is a red-letter day for shareowners.

Rich Ferlauto, a director at the American Federation of State, County and Municipal Employees, said the SEC missed an opportunity to let shareholders vote on executive pay packages.

`Golden parachute`

``What we didn`t get is any additional ability for shareholders to do anything about it when they learn how overpaid the chief executive may be,`` said Ferlauto, whose union represents members with $1 trillion invested in public pension funds. ``We`re disappointed.``

Commissioner Roel Campos of Houston said future reviews of executive compensation rules should consider ``an advisory shareholder vote on certain aspects of executive compensation.``

For the first time, companies will have to disclose the total pay, perks and lifetime retirement benefits of all five top-paid executives.

Companies will also have to disclose the value of ``golden parachute`` severance packages to chief executives as a result of mergers and acquisitions.

The SEC`s rules would still permit companies to avoid describing the performance targets to which CEO pay is linked, claiming that to do so would reveal competitive information.

Reuters News Service contributed to this report.