Compensation Committee Reports Post-Sarbanes-Oxley: Unimproved Disclosure of Executive Compensation Policies and Practices

Abstract

In the wake of an avalanche of corporate scandals, a re-energized debate over executive compensation has ensued. Sound bites and headlines demanding “pay for performance” resonate among a scorned investing populace. The passage of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or the “Act”) has brought not just executive compensation, but all of corporate governance, out of classrooms and into living rooms around the country. In the light of these extraordinary events, this Article discusses and analyzes the improvements, if any, companies have made in the disclosure of their executive compensation policies and practices since the passage of Sarbanes-Oxley. Concurrently, this Article examines the guidance the SEC has provided in the area of compensation committee reports and argues that the SEC guidance is not clear and must be revisited. Specifically, this Article first discusses the history behind the passage of Sarbanes-Oxley and the advent of the “compensation committee report” through which companies communicate their executive compensation policies and practices. Second, this Article details the compensation committee report’s technical requirements. Third, this Article analyzes the guidance (and lack thereof) the SEC has provided with respect to the compensation committee report requirements. Finally, ten widely-held companies’ 2002, 2003, and 2004 compensation committee reports are analyzed utilizing the framework provided by the SEC’s rules. Systematic non-compliance with the SEC rules is apparent. A “Compensation Committee Report Guide” is appended to this Article in an attempt to provide companies with a roadmap to follow in complying with the compensation committee report requirements.