SFAS 123 establishes financial accounting and reporting standards for stock–based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer’s stock. Examples are stock purchase plans, stock options, restricted stock, and stock appreciation rights. As a general principle, those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
May 30, 2007 – Washington, DC, USA | Sources: PCAOB
On April, 2007 Senator Barack Obama (D-IL) sent a letter to the Chairman and Ranking Member of the Senate Banking Committee to request that they hold a hearing on the Shareholder Vote on Executive Compensation Act, a bill he sponsored that would give shareholders an advisory vote on executive compensation and spur both increased transparency and public debate over pay packages. The legislation passed the House by a wide margin in April.
Obama who is also candidate for the Democratic Party Nomination for the presidential candidacy argued that the proposed "Shareholder Vote on Executive Compensation Act of 2007 (S. 1181)" would require a non binding shareholder vote on executive compensation packages.
He indicated that public discussion and debate over executive compensation packages would force corporate boards to think twice before signing over millions of dollars to CEOs. He wrote in a letter to Chairman Dodd and Ranking Member Shelby, that "Certainly, many CEOs are ably steering their firms and deserve their paychecks. But the rate at which executive pay has grown, as compared to stagnating wages among American workers, is rightfully frustrating shareholders and employees alike, especially given the lackluster performance of many of the companies paying these high salaries".
He indicated that in 2005, the average CEO in the United States earned 262 times the pay of the average worker. In other words a CEO earned more in one workday than an average worker earned in a year. In 2005, the average CEO of a Standard & Poor’s 500 company received a 16% increase in CEO pay over 2004.
It is important to note that the proposed bill neither caps nor limits CEO pay but merely requires that firms discuss and debate pay packages for CEOs on a case–by–case basis with their shareholders. If a board of directors disagrees with the non binding vote of shareholders, the board can still go forward with the pay package. But at the very least, shareholders would have had the opportunity to voice their opinions about whether the pay package is appropriate.
The White House opposed the move by Obama arguing that Recent enhancements in corporate governance and disclosure have strengthened the executive compensation decision-making process of boards of directors.
However, on January 31, 2007, President George Bush challenged corporate America on the large salaries and bonuses paid to chief executives, by declaring that that "the salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders". He said as he delivered a statement on the US economy in the White House that "Shareholders should know what executive compensation packages look like".
This remark State of the Economy Speech came after a series of investigations by the SEC into the practice of backdating stock options by a number of US companies. Back in 2003 The New York Stock Exchange faced an uproar after paying former CEO Richard Grasso %187.5 million severance package. Former New York Attorney General Eliot Spitzer, now governor, sued NYSE board members over the package Grasso got when he quit as chairman in 2003. Much recently, Home Depot chief executive Bob Nardelli was the focus of attention. He was earning an average of %25.7 million a year – excluding stock options – before he was forced out in a furor over his compensation. There are attempts in many countries notably the UK to allow shareholders to have a say in the level of executive pay.