Corporate execs paid too much, public says in poll.

Regulators, Congress turn up the heat in controversy

"Corporate executives (are) being paid too much," say 75 percent of Americans in a recent national telephone poll conducted for the Milken Institute for Job and Capital Formation. Furthermore, they say, this results in job losses for American workers.

The Santa Monica-based think tank asked 1,000 adults 18 years of age and older to select the root of U.S. job losses among 65 possible causes. It is the second year that the survey has been conducted, and the second time that overly generous pay to corporate executives was cited among the top three causes for job losses.

Last year respondents ranked overcompensation as the No. 1 cause of job loss. This year two newly added reasons, "pork barrel projects" and cheaper foreign labor, were the only reasons ranked higher.

But when the institute's four resident economists filled out the survey this year, their reaction was quite different. "The economists ranked executive pay last out of 65 (choices)," said institute Director Lewis Solomon.

Controversy over executive pay has also made its way to Congress. The U.S. House of Representatives included a provision in its Omnibus Budget Reconciliation Act that would deny tax deductions to publicly traded companies that compensate each of their top five executives more than $1 million.

Other bills in Congress focus on how executive compensation affects shareholders. At the crux of this issue are stock option incentives, a factor that made Walt Disney Co. Chairman Michael Eisner the highest paid U.S. executive at a public firm in 1992.

Eisner exercised his option to buy 5.4 million shares of Disney stock at $3.49 a share, then sold them for $40. The $197.5 million payout was the largest single-day payout ever made to a corporate executive. Eisner said the transaction would save the company up to $100 million, assuming Congress boosts corporate profits taxes in 1993.

Sen. Carl Levin, D-Mich., has spearheaded a two-year campaign to change company disclosure and reporting practices regarding stock option incentives. His efforts resulted in new Securities and Exchange Commission regulations, effective since January, that require publicly traded companies to include the expected three-year compensation for CEOs and the next four most highly paid executives who earn more than $100,000 a year. An accompanying long-term compensation table lists the potential value of stock options and stock appreciation rights.

The SEC also made it easier for shareholders to have a say in a company's compensation policy.

In addition, Levin's campaign prompted the Financial Accounting Standards Board, a standards-setting organization of the accounting profession, on June 30 to go one step beyond the SEC disclosure requirements by requiring companies to report the cost of stock-based employee compensation in their annual reports' income statements rather than as an addendum.

This would directly affect the company's bottom line. Right now, companies are not required to expense the cost of stock option compensation even though they can deduct these costs on their tax returns.

The new FASB proposal caught the attention of Sen. Barbara Boxer, D-Calif., who says the proposal would adversely affect her constituents. "High tech companies grant five times as many stock options as other companies, so they would be disproportionately impacted by this," Boxer told the Business Journal.

On July 13, Boxer expressed her concerns to Arthur Levitt, during hearings to confirm him as SEC chairman (he took office July 27). At the hearings, Levitt acknowledged that he had used stock options to attract and retain top talent when building companies, and he has received stock options for services rendered.

But he has not committed himself on the FASB proposal except to say "the SEC is going to await further comments until the end of the year."

"The proposal has a six-month comment period," said FASB spokeswoman Deborah Harrington. "During that time, we will accept written comments. We are (also) going to conduct field tests -- going to actual companies and having them apply the proposals to their actual situations."

Public hearings are tentatively scheduled for February or March 1994.

Don Sagolla, principal at the downtown L.A. office of accounting firm KPMG Peat Marwick, said the SEC regulations have resulted in daily client calls regarding compliance and corporate responsibility. "There's really a new client out there," says Sagolla, "the compensation committee of the board of directors."

He applauded the SEC's regulations and has issued guidelines to make his corporate clients more cost effective in rewarding executives. Despite this, Sagolla is skeptical about the new FASB proposal. "There really isn't an accurate way of measuring the value of the stock option appreciation that's been proposed yet," he says.

The FASB proposal would require an estimate of the fair value of employee stock options using an option pricing model that takes into account the exercise price, expected term of the option, the current price of the underlying stock, and the risk-free interest rate during the expected term of the option.

Not willing to wait and see how the FASB proposal pans out, Sen. Boxer has co-sponsored the Equity Expansion Act to maintain current financial accounting standards and tax deductibility for all forms of stock options. Passage of this bill would, in effect, negate the proposed FASB requirements.

What's more, the act stipulates that employees granted stock options would not have to pay taxes when they exercise their options. They would have to pay only half of the gain made from selling stocks acquired from these options if they held the stock for two years or more.