Stealth compensation

The current media focus on backdated stock options obscures a broader and more enduring problem: top executives and compliant boards of directors continue to seek means of disguising executive compensation, that is, stealth compensation. In shareholder proxy statements, financial statements and other reports, many of these escape easy identification-in nature and amount-as forms of executive compensation. After introducing the parameters of the stealth compensation problem and the threat it represents to the corporate governance goal of financial reporting transparency in the first section, the second section of this paper outlines and illustrates some of the more common forms of stealth compensation of corporate executives. Examples include a panoply of company-paid perks, accelerated vesting of pensions, corporate payment of executives’ income taxes and imaginative contrivances in golden parachute plans. The third section analyses key parts of the new SEC rules that seek to address the stealth compensation problem with various new disclosure requirements. The fourth section questions whether the greater transparency constrained by the new SEC rules sufficiently addresses the underlying corporate governance issues that led to the pervasiveness of stealth compensation in particular and, more generally, to excessive executive compensation. It is unknown, for example, whether more rigorous transparency will inhibit excessive executive compensation or merely change its forms. Additional remedies are proffered to improve corporate governance via enhancements of: government regulation; board independence; judicial guidance; and shareholder influence.