BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE JUDICIARY COMMITTEE
                             Senator Noreen Evans, Chair
                              2011-2012 Regular Session


          SB 1208 (Leno)
          As Amended March 29, 2012
          Hearing Date: April 24, 2012
          Fiscal: Yes
          Urgency: No
          NR


                                        SUBJECT
                                           
           Publicly Traded Corporations: Retiree Compensation: Disclosure

                                      DESCRIPTION  

          Current law requires publicly traded corporations to file a 
          statement annually with the Secretary of State (SOS) disclosing 
          the compensation paid, as defined, to each member of the board 
          of directors, and the five most highly compensated executive 
          officers.  This bill would require publicly traded corporations 
          to disclose in the annual statement, the names and the total 
          annual compensation of the corporation's five most highly 
          compensated retirees. 

                                      BACKGROUND  

          Under existing law, publicly traded corporations must file with 
          the Secretary of State (SOS) an annual statement disclosing the 
          compensation, as specified, paid to each of the members of the 
          corporation's board of directors and its five most highly 
          compensated executive officers who are not board members, and of 
          the corporation's chief executive officer, if not among those 
          executive officers.  The SOS must in turn make that information 
          publicly available, as prescribed. 

          Since the mid-1980s, the average yearly compensation for top 
          executives at large, publicly traded corporations has increased 
          dramatically.  The American Federation of Labor and Congress of 
          Industrial Organizations (AFL-CIO) reports that according to 
          data from the Bureau of Labor Statistics in 2010, the average 
          chief executive officer of a large corporation in 1980 made 
          approximately 42 times more than the average worker.  By 2010, 
                                                                (more)



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          executives were earning 343 times the pay of the average worker. 
           According to the author, much of the increased executive pay 
          comes in the form of incentive compensation, which rewards an 
          executive for performance while on the job. Until recently, many 
          companies did not allow incentive pay to be added to an 
          executive's base salary for the purpose of calculating 
          retirement benefits. Companies are now reportedly adding 
          incentive compensation to the calculation, exponentially 
          increasing the retirement compensation executives and their 
          surviving spouses receive every year for the rest of their 
          lives.

          Currently, in their annual public filings, publicly traded 
          corporations must publish compensation tables indicating the 
          dollar value of different forms of compensation received by 
          executive officers and board members.  This information, which 
          is made publicly available, is the most visible indication of 
          executive compensation at publicly traded corporations.  Where 
          executive's pensions are structured and defined as contribution 
          plans, executive retirement information is included in the 
          report to the SOS.  However, the annual increase in the value of 
          an executive's pension plan-from pay raises and continued 
          employment-is not required information.  Thus, under current 
          Securities and Exchange Commission (SEC) regulations, the actual 
          value of executive pension is largely hidden from public view 
          (17 C.F.R. 229.402(c).)  Additionally, corporations are only 
          required to report annual compensation paid to their current 
          executives.  Because executives collecting pensions are no 
          longer employed by the time the payments begin, the corporation 
          has no duty to disclose the payments.  (Bebchuk & Fried, Pay 
          without Performance: The Unfulfilled Promise of Executive 
          Compensation, Harvard (2004) at 99-100.)

          This bill attempts to address the lack of public disclosure 
          regarding what highly compensated retirees at publicly traded 
          corporations are actually paid during each year of retirement.  
          According to the author, if enacted, SB 1208 would be the first 
          attempt by any state to require disclosure of the actual 
          compensation awarded to retirees. 

                                CHANGES TO EXISTING LAW
           
           Existing law  provides for the formation and regulation of 
          corporations and requires that domestic and foreign publicly 
          traded corporations file annually with the Secretary of State 
          (SOS) a report disclosing the compensation, as specified, to 
                                                                      



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          each of the members of the board of directors, and the 
          corporation's five most highly paid executive officers. (Corp. 
          Code Secs. 1502.1(a)(4), 2117.1(a)(4).)  

          Existing law  requires the number of shares issued, options for 
          the shares granted, and similar equity-based compensation be 
          reported in the board of directors' and five most highly paid 
          officials' compensation.  (Corp. Code Secs. 1502.1(a)(4), 
          2117.1(a)(4).)


           Existing law  defines compensation as all plan and nonplan 
          compensation awarded to, earned by, or paid to the person for 
          all services rendered in all capacities to the corporation and 
          to its subsidiaries. (Corp. Code Secs. 1502.1(b)(3), 
          2117.1(b)(3).)

           Existing law  requires the SOS to make the above information, 
          along with other information in the report, publicly available, 
          as specified. (Corp. Code Secs. 1502.1(c), 2117.1(c).)

           This bill  would define "total compensation" as all plan and 
          nonplan compensation including the number of any shares issued, 
          options for shares granted, and similar equity-based 
          compensation, and all perquisite and other personal benefits, 
          granted or awarded to, earned by, or paid to the person for all 
          services rendered in all capacities to the corporation and to 
          its subsidiaries.

           This bill  would require that publicly traded corporations report 
          to the SOS the total compensation, as defined, of each member of 
          the board of directors, the principal executive officer, the 
          principal financial officer, and each of the three most highly 
          compensated executive officers other than the principal 
          executive officer or principal financial officer. 
          
           This bill  would require publicly traded corporations to report 
          to the SOS the total compensation and names of each of the 
          corporation's five most highly paid retirees. 

           This bill  would identify the five most highly compensated 
          executive officers as "the principal executive officer, the 
          principal financial officer, and each of the three most highly 
          compensated executive officers," in conformity with Security and 
          Exchange Commission regulations. 

                                                                      



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                                        COMMENT
           
           1.Stated need for the bill
           
          In support of this bill, the author writes: 

            Having publicly traded corporations disclose for the first 
            time how much they pay their retired executives in a clear and 
            understandable way will help increase corporate transparency 
            and inform the public and shareholders during upcoming pension 
            reform debates.  Given the growing income disparity between 
            executives and average workers, it is increasingly important 
            for the public and shareholders to understand how these 
            disproportionate increases are created and authorized, so that 
            better informed decision can be made regarding future 
            financial commitments and priorities.
             
           2.This bill would provide information necessary for shareholders 
            and the public to make informed decisions

           SB 1208 would require publicly traded corporations to report the 
          total compensation of each member of the board of directors, the 
          principal executive officer, the principal financial officer, 
          and each of the three most highly compensated executive officers 
          other than the principal executive officer or principal 
          financial officer. This bill would also require that 
          corporations report information with respect to the 
          corporation's five most highly compensated retirees.  Under 
          existing law, corporations must report all compensation, as 
          defined. (See Background.)  This bill would replace 
          "compensation" with "total compensation" and add to the existing 
          definition "all perquisite and other personal benefits, granted 
          or awarded to, earned by, or paid to the person for all services 
          rendered in all capacities to the corporation and to its 
          subsidiaries." This bill would incorporate this definition with 
          respect to both current directors/executives and former 
          employees.  These changes reflect growing concern over wage 
          disparity and corporate transparency. 

          Statistics have long shown the increasing income disparity in 
          the United States.  It has been claimed that the wage gap has 
          reached levels not seen since the Great Depression, and a 
          growing body of economic research indicates that the rise in pay 
          for company executives is a critical feature in the widening 
          gap. (The Washington Post, With executive pay, rich pull away 
                                                                      



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          from rest of America, Whoriskey (June 2011).)  The AFL-CIO posts 
          on its website data emphasizing the pay disparity between 
          executives and the rest of the work force.  According to the 
          AFL-CIO, in 2010, the ratio of the average executive 
          compensation to the average American worker salary was 343 to 
          one. 

          The SEC has taken notice.  Pursuant to the Dodd-Frank Wall 
          Street Reform and Consumer Protection Act (2010), the SEC 
          expects to adopt rules regarding disclosure of 
          pay-for-performance, pay ratios, and hedging by employees and 
          directors this year. (See 
           Ưas of April 18, 2012.])  However, the SEC does not 
          propose to adopt rules requiring corporations to report 
          compensation of retirees.  Nor does the SEC require the 
          disclosure of executive pensions in present value terms.  
          Instead, corporations must disclose only the annual 
          contributions to the executive's account.  

          Under this system, pay raises and additional compensation for 
          years of service, are not reflected. In other words, firms are 
          not required to include the increase in value, as shown by the 
          present value, of the compensation retirees will actually 
          receive and corporations will pay out.  Compounding this problem 
          is the fact that the pensions for many executives are based on 
          the salary from his or her final year of employment.  Depending 
          on the corporation, compensation may include any or all of the 
          following: salary, bonuses, option-exercise gains, the proceeds 
          from sales of shares, and payout from deferred compensation.  In 
          the case of one executive, where the corporation was not 
          required to disclose the changes in his retirement plan, the 
          annual cost to the corporation went from $2.7 million to $5.8 
          million. (Bebchuk & Fried at 92-93.) 

          Arguably, the disclosures regarding benefit and pension plans 
          currently required by the SEC fall short of providing the public 
          with a clear picture of what many corporations are actually 
          paying retired executives.  Knowledge of a corporation's actual 
          expenditures is essential to making informed decisions about the 
          value of the corporation.  Because the provisions of SB 1208 
          would add to compensation calculations "all perquisite and other 
          personal benefits, granted or awarded to, earned by, or paid to 
          the person for all services rendered in all capacities," and 
          require the disclosure of the total compensation of the five 
          highest compensated retirees, investors will have more 
                                                                      



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          information by which to make informed decisions. 

           3.The proposed changes under this bill will impose little 
            additional cost to corporations
           
          Under current law, corporations must report the compensation 
          received by the board of directors and the five highest paid 
          executive officers.  Furthermore, all compensation paid to 
          retirees must be reported to the Internal Revenue Service, 
          indicating that corporations already have the information that 
          would be required by SB 1208 at hand. Therefore, the additional 
          burdens that would be imposed on corporations under this bill, 
          if any, should be minimal.  The author argues, "shareholders and 
          the general public are already entitled to know the total amount 
          of compensation that is awarded to executives while they are 
          working.  Since retirement benefits are also provided as a 
          direct consequence of services performed during active 
          employment, it makes sense that both forms of compensation be 
          disclosed, since they are both liabilities the company must 
          account for and eventually pay out."  Finally, because SB 1208 
          would only require the additional reporting of five compensation 
          payments, the proposed filing could be accomplished with a 
          simple addendum to current annual reporting requirements.  


           Support  :  Alliance of Californians for Community Empowerment; 
          California Labor Federation; California Nurses Association; 
          California Professional Firefighters; Consumer Federation of 
          California; California School Employees Association

           Opposition  :  None Known

                                        HISTORY
           
           Source  :  Author

           Related Pending Legislation  :  None Known

           Prior Legislation  :  AB 55 (Shelley, Chapter 1015, Statutes of 
          2002)  required that publicly traded corporations file 
          statements with the Secretary of State disclosing specified 
          information instead be filed annually instead of biannually. AB 
          55 also required additional, specific information included in 
          these statements. AB 55 made the information contained in the 
          statements open to public inspection and would require the 
          Secretary of State to make this information available on an 
                                                                      



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          online database.

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