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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