New Guidelines Promise Transparency in Executive Pay

The last couple of years has brought about a lot of anger about Wall St. bonuses and executive pay. The tension between “Wall St. vs. Main St.” reached a fever pitch during the height of the economic collapse. Investors also feel the frustration of executive compensation, and very few investors feel like they understand the business reasons for and exact structure of executive compensation. Executive pay might soon become much more transparent.

Corporations must disclose their compensation through their corporate proxy statements. This disclosure has been a requirement of publicly traded companies since 2006. The required disclosure was intended to make executive compensation transparent to investors and the public.

However, the problem with the disclosures is that they are mired in complexity and lack of standardized formatting. This may soon change, thanks to the CFA Institute and better use of technology.

The CFA Institute recently published guidelines for reporting corporate compensation. If companies adopt the guidelines, it would mean much greater transparency for investors. The guidelines focus on standardization of data and templating structure. Technology improvements that they suggest include hyperlinked section headers and tagging compensation data in XBRL (Extensible Business Reporting Language.) Tagging the data with XBRL would enhance the disclosures by making them machine-readable – which means investors could use the data in their decision making process.

Executive recruiters and staffing companies watching trends in executive compensation should take note of the new measures. As corporate compensation policies get more transparent, the disclosure reports may become a market data tool worthy of analysis. Without such standardization measures in place, the normal compensation disclosures are often so complex as to be rendered unreadable by the average professional. If companies adopt the new guidelines, the disclosures may become a tool for automated market research into executive pay and trends in corporate compensation.