BILL ANALYSIS �
SB 1208
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Date of Hearing: July 3, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1208 (Leno) - As Amended: May 7, 2012
SENATE VOTE : 21-15
SUBJECT : Corporations: Disclosure of Compensation: Retirees
KEY ISSUE : Should a corporation include in the statement THAT
IT fileS with the Secretary of State the names OF, AND
COMPENSATION paid to, its five most highly compensated retirees?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill seeks to provide greater transparency to corporate
shareholders, potential investors, and the public generally
regarding the amount of compensation that corporations pay to
retirees. California law already requires publicly traded
corporations, both domestic and foreign (i.e. out-of-state), to
file statements with the Secretary of State that disclose, among
other things, the compensation paid to the corporation's board
of directors, the five most highly compensated executives who
are not members of the board, and the chief executive officer
(CEO) if he or she is not among the top five most highly
compensated executives. This bill would expand on this in a
complimentary manner by requiring that the annual statement also
include the names of, and retirement compensation paid to, the
corporation's five most highly compensated retirees. The bill
would also reformulate the existing requirement by specifying
that the five executive officers whose salaries must be
disclosed shall consist of the principal executive officer
(PEO), the principal financial officer (PFO), and the three most
highly compensated executive officers other than the PEO or PFO.
This reformulation is more consistent with U.S. Security &
Exchange Commission (SEC) disclosure requirements; though, the
requirement to include the compensation levels for retirees in
not yet contained in current SEC disclosure requirements. The
author and many supporters of this bill contend that this bill
will provide greater transparency about corporate retirement
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compensation practices, especially at a time when pension
packages for average workers appear to be shrinking while those
given to executives typically are much more generous. Opponents
mainly argue that this bill is unnecessary, because SEC rules
already provide transparency by requiring corporations to
disclose executive pension information proxy statements, which
must be filed with the SEC and available on the corporation's
Internet website. Supporters counter that these do not provide
adequate information, in large part because the proxy statements
are based on estimates of what current executives will receive
when they retire and not on the actual amount of compensation
that is paid annually to retirees.
SUMMARY : Requires a publicly traded corporation to disclose, in
its annual statements to the California Secretary of State, the
names of, and the annual compensation paid to, the corporation's
five most highly compensated retirees. Specifically, this bill :
1)Modifies an existing requirement that publicly traded
corporations doing business in California file a statement
with the California Secretary of State that includes the name
and compensation of the corporation's five most highly
compensated executives, in order to specify that the five
named executives shall consist of the Principal Executive
Officer (PEO), the Principal Financial Officer (PFO), and the
three most highly compensated executives who are not either
the PEO or the PFO.
2)Provides that the statement described above shall also include
the total compensation paid to the five mostly highly
compensated retirees for the most recent fiscal year.
Specifies that the statement must also include the name of
each of those five retirees.
3)Defines "total compensation," for purposes of the above, to
include the number of shares issued, options for shares
granted, and similar equity-based compensation, and all
perquisite and other personal benefits, so long as the
compensation is granted, awarded, or paid to the person after
the person's retirement from the corporation for services
rendered in all capacities to the corporation and to its
subsidiaries prior to his or her retirement.
EXISTING LAW :
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1)Requires, under the Corporate Disclosure Act (CDA) of 2002,
domestic and foreign publicly traded corporations to file an
annual statement, setting forth specified information, with
the California Secretary of State. Specifies that the
statement must be filed within 150 days after the end of its
fiscal year on a form prescribed by the Secretary of State.
(Corporations Code Sections 1502.1 and 2117.1.)
2)Provides that the statement described above must disclose,
among other things, the compensation paid to each member of
the corporation's board of directors, each of the five most
highly compensated executive officers who are not members of
the board, and the chief executive officer if he or she is not
among those five executive officers. (Corporations Code
Sections 1502.1 (a)(4) and 2117.1 (a)(4).)
3)Defines "publicly traded corporation" to include any
corporation, either domestic or foreign, that is an "issuer,"
as defined in the Securities Exchange Act of 1934, and has at
least one class of securities listed or admitted for trading
on a national securities exchange, or on a bulletin board or
electronic service, as specified. (Corporations Code Sections
1502.1 (b)(1) and 2117 (b)(1).)
4)Provides, under rules promulgated by the U.S. Securities and
Exchange Commission (SEC), that publicly traded corporations
shall file proxy statements with the SEC that disclose
information relating to the compensation, including retirement
compensation, paid to the PEO, PFO, and the three most highly
compensated executive officers other than the PEO and PFO.
Requires the statement to include information on up to two
additional individuals for whom disclosure would have been
required but for the fact that the individual was not serving
as an executive officer at the end of the last completed year.
(17 CFR 229.402 (a)-(h).)
5)Requires, pursuant to the above rule, that pension plans or
pension benefits provided to the covered executives must be
disclosed in both tabular and narrative form, and specifies
that the table relating to pension benefits include the
following information for each of the covered executives: (a)
The name of the executive; (b) the name and type of pension
plan; (c) the executive's years of service; (d) the present
benefit of accumulated benefits; and (e) any pension benefits
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paid to the executive during the past fiscal year. (17 CFR
229.402 (h).)
COMMENTS : This bill reflects a growing consensus that the
United States is witnessing a potentially unprecedented growth
in income disparity. Most dramatically, perhaps, the Bureau of
Labor Statistics reported in May of 2010 that the average
compensation paid to corporate CEOs was nearly 343 times higher
than the median wage of American workers, whereas in 1980 the
average CEO earned only 42 times as much as the average worker.
(See also "CEOs earn 343 times more than typical workers," CNN
Money, April 20, 2011.) This disparity is seen in retirement
compensation as well, and it appears that increasing pensions
for executives sometimes comes at the expense of pensions for
workers. As even the Wall Street Journal put it in 2003: "A
number of large companies are setting aside millions of dollars
to protect pensions of top executives, even as they forgo
contributions to financially strained pension plans for other
workers. (Ellen Schultz and Theo Francis, "Executives Get
Pension Security while Plans for Workers Falter," Wall Street
Journal April 24, 2003.) More recent reports indicate that the
compensation gap identified by the Wall Street Journal in 2003
has only grown wider. (See e.g. Peter Whoriskey, "With
Executive Pay, Rich Pull Away from Rest of America," Washington
Post, June 18, 2011; and Ellen Schultz, Retirement Heist: How
Companies Plunder from the Nest Eggs of American Workers (New
York: 2011).) In sum, the critique of executive compensation
levels, including retirement compensations, appears to reflect a
broad consensus of opinion, from "Occupy Wall Street" to the
Wall Street Journal.
According to the author, this transparency bill attempts to
"address the lack of public disclosure as to what highly
compensated retirees at publicly traded corporations are
actually paid during each year of the retirement." The author
believes that disclosure of this information is especially
important in light of the recent reports showing that executive
compensation of all kinds has grown dramatically while salaries
and benefits to the "average worker" remain stubbornly stagnant.
Existing SEC Disclosure Requirements : Partly in response to the
widespread critiques of executive compensation, including
retirement compensation, the U.S. Securities & Exchange
Commission (SEC) revised its disclosure rules, effective in
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2007, to require that retirement benefits be more fully and
clearly disclosed. (See 17 CFR 229.402 (h) (1).) In addition
to requiring more information, the 2007 rules required that
retirement pension tables be disclosed in separate tables in
SEC-required proxy statements. (The proxy statements are filed
with the SEC and are also posted on the company's website.) The
new rules also require that tabular information be accompanied
by a "succinct narrative description" that explains the elements
in the tabular information. (Id. (h)(3).) The tables on
pension benefits must include five elements: (1) The name of the
executive officer; (2) the name or type of retirement plan; (3)
the number of years of service credited to the named officer;
(4) the actuarial "present value" of the executive's accumulated
benefit to date; and (5) the dollar amount of any payments and
benefits paid to the named executive officer in the last fiscal
year. The new rules also require information on "deferred
compensation" plans. (17 CFR 229.402 (i).) A "deferred
compensation" plan is not technically a retirement benefit, even
though it often creates an obligation that continues after the
executive leaves the company. A "deferred compensation" plan is
simply an agreement between the company and the executive that
services presently performed by the executive will be
compensated at some point in the future. This apparently
creates a tax advantage for the executive or employee, who
presumably will receive the compensation when his or her overall
income - and corresponding tax obligation - will be lower.
While the new SEC disclosure requirements do indeed require that
proxy statements include detailed information about executive
pensions, from the perspective of those who support this bill
the SEC requirements have one critical flaw: they only apply to
the top five covered executives (i.e. PEO, PFO, and three
highest compensated executives) who are currently employed, and
not to the retirees who have left the company. In other words,
the SEC requirements only require disclosing the executive's
retirement plan, his or her years of service, and the "present
value" of any accumulated benefits.
Thus unless one of the five most highly compensated executives
has already retired, there will be nothing to put in the fifth
column of the table that requires the amount of payments made
during the last fiscal year. This is clearly illustrated by
sample proxy statements provided to the Committee by the
opponents of this bill. These proxy statements do indeed show
that the proxy statements provide tables and useful narratives
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that explain the retirement packages that are given to
executives, and they include an estimate of the present value of
accumulated benefits. But in nine of the eleven sample proxy
statements, the amount listed in column five for each of the
five covered executives is, not surprisingly, $0, because this
table only applies to current executives who have not yet
retired. This bill seeks to fill that transparency gap. Of the
other two proxy statements provided the Committee, AT&T listed
an amount for just one of its five covered executives and
MetLife listed an amount for two of its nine listed executives.
Apparently, these companies have retirees who are still among
the mostly highly compensated executives even though they have
retired, and/or the executives have retired within the past
fiscal year.
Do SEC Disclosures Create Sufficient Transparency ? Both
supporters and opponents of this bill apparently agree that
corporations should disclose compensation information to
shareholders, potential investors, and the public generally.
Where they appear to disagree is as to whether the SEC
disclosure requirements described above are adequate.
Supporters of this bill contend that existing SEC rules do not
require disclosure of what a corporation actually pays out to
someone who has already retired, but instead leaves this to be
extrapolated, if this is possible, from information about the
nature of the pension plans provided to current executives.
Opponents of the bill do not appear to dispute this in all ways,
but instead argue that proxy statements provide enough
transparency to permit a shareholder or potential investor to
evaluate the company's pension policies and estimate the
company's ongoing obligations to its top level executives.
After all, the proxy statements list the name, the specific type
of plan, the years of service, and the accumulated benefit to
date. From this, opponents suggest, one could potentially make
a reasonable projection of what those five named executives will
receive once they retire. Opponents seem to suggest that it may
be even more valuable for shareholders and investors to have
this information "prior to any top executive's retirement" in
order to "provide full transparency and public awareness of a
company's intentions."
In a much cited work, Ellen Schultz's, Retirement Heist
(2011)(Schultz is a reporter for the Wall Street Journal)
published after the 2007 rules went into effect, Ms. Schultz
proclaims that much of the most "shocking" evidence for her
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expose is "detailed in the SEC filings." (Schultz, Retirement
Heist at 100.) However, Ms. Schultz contends that some forms of
compensation will not necessarily appear in the required
retirement compensation tables - such as "departing gifts" to
executives just before they retire (Id. at 109) and complex
schemes whereby a company takes out life insurance policies on
some employees (often low-level employees) and then uses the
death benefits (with the company as beneficiary) to fund
deferred compensation plans for other employees (often top level
executives.) (Id. at 132-133.) It is possible such forms of
compensation would be any more likely to be disclosed under the
provisions of this bill than they would be under the SEC rules.
Thus, it does appear this measure will make improvements to
existing transparency provisions in the SEC rules. First, it
will provide the actual amounts (rather than estimates) of
compensation paid to the most highly compensated retirees. It
will also require that the most highly compensated executives
will be named, as retirees, in state SOS filings even after they
have left the company, whereas SEC filings only require
information on the pension plans provided to current executives.
In short, the requirements of this bill appear consistent with
current SEC rules, and will give shareholders, investors, and
the public more useful information without imposing any undue
burden on corporations.
Privacy Issue : Some opponents of this bill claim that
disclosing a retiree's compensation would violate the retiree's
right to privacy, which is expressly guaranteed by the
California constitution and impliedly guaranteed by the U.S.
Constitution. However, it is difficult to maintain that
retirees who have been top executives at a publicly traded
corporation have a reasonable expectation of privacy in the
amount of compensation that they receive, before or after
retirement. As described in detail above, both state and
federal law have long required that corporations disclose the
names and compensation levels of its directors and most highly
compensated executives. Both Congress and the California
legislature have thus made a determination that the amount of
compensation paid from the coffers of a publicly traded
corporation is a matter of public concern, not least of which
because shareholders and potential investors want to make
rational decisions based on information about the corporation's
financial obligations. That SEC requires disclosure of
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information on pension benefits and deferred compensation plans
suggests that Congress and the SEC have already long made a
determination that even compensation paid to employees who have
left the corporation are also a matter of public interest.
Nor is there any case law suggesting that these long-standing
requirements violate either the state or federal constitution.
It is difficult to see why a right to privacy would suddenly
materialize upon retirement, given that the reason for the
policy is to help shareholders and investors assess compensation
policies that affect the corporation's long-term obligations.
Nor are corporate executives the only employees who must accept
the fact that public disclosure of their financial compensation
comes with the territory. The salaries of legislative
employees, for example, are posted on a website accessible to
the public. And while it is true that retirees are not included
in that website, an employee's retirement compensation can be
easily calculated by a fixed and publicly available formula.
Compensation plans for corporate executives, on the other hand,
are highly varied and cannot be so easily determined by a
formula. This bill will help address that transparency gap.
ARGUMENTS IN SUPPORT : According to the sponsor, the Consumer
Federation of California (CFC), this bill "will allow the public
to know for the first time the total compensation that publicly
traded corporations operating in California are annually
providing their top five most highly compensated retired
executives." CFC contends that in recent years "pay for top
executives at corporations across America has grown
exponentially, while wages for average workers have remained
relatively stagnant. With that rise in executive pay has also
come a huge increase in what a company is obligated to pay its
executives once they retire." CFC notes that while existing law
usefully requires disclosing the compensation of the
corporation's most highly compensated executives, "that sunshine
ends when the executive retires," even though the financial
commitments made to the retiree "continue for a lifetime." CFC
believes that this bill will create a means of disclosing this
information in "a simple and clear way on the Secretary of
State's website." Several labor organizations, consumer groups,
and California Insurance Commissioner Dave Jones support this
bill for substantially the same reasons.
ARGUMENTS IN OPPOSITION : A broad coalition of business
associations - mostly in the banking, hi-tech, medical, and
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pharmaceutical industries -- oppose this bill largely on the
grounds that existing federal rules already provide sufficient
transparency. In particular, opponents point out that SEC
requires publicly traded corporations to disclose retirement
compensation information annually to their shareholders in proxy
statements and to post this information on company websites.
Opponents contend that these proxy statements already "provide
shareholders and potential investors with retirement
compensation information for all current top executives.
Therefore, the information is provided prior to any top
executive's retirement." In short, opponents contend that even
though SEC may not require the reporting of compensation that is
paid to retirees, it does require that the retirement benefits
of current employees be reported, which, opponents believe,
"provide full transparency and public awareness of a company's
intentions, thereby giving shareholders and potential
shareholders important information prior to any top executive
retirements."
In addition, opponents contend that, by "bringing California law
out of conformity with the SEC's reporting requirements," this
bill will lead to additional compliance and enforcement costs
for the state "in the form of hiring new enforcement staff to
ensure �both sets of] rules are followed." As an alternative,
opponents suggest that the author merely amend California
disclosure laws to mirror the reporting requirements of the SEC.
Finally, opponents claim that "adding new nonconformity to
federal reporting requirements exacerbates California's
job-killing reputation for excessively burdensome regulation of
business."
REGISTERED SUPPORT / OPPOSITION :
Support
Consumer Federation of California (sponsor)
Alliance of Californians for Community Empowerment
California Department of Insurance/ Insurance Commissioner Dave
Jones
California Federation of Labor
California Nurses Association
California Professional Firefighters
California School Employees Association
Congress of California Seniors
Service Employees International Union
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State Building and Construction Trades Council of California
Opposition
Association of California Life & Health Insurance Companies
BayBio
California Bankers Association
California Chamber of Commerce
California Grocers Association
California Healthcare Institute
California Manufacturers and Technology Association
California Retailers Association
California Taxpayers Association
Council on State Taxation
Pharmaceutical Research and Manufacturers of America
TechAmerica
TechNet
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334