Bob Schneider is a Partner in 
Wilson So is the Director of Hitachi America, Ltd. XBRL and Transparency in Executive Compensation
Written by Bob Schneider Posted April 5, 2007
As reported in the Chicago Sun-Times, new SEC rules compel companies to disclose much more information about executive compensation. The highly detailed executive compensation data disclosed in annual proxy statements will include a consolidated table that shows total annual compensation for top managers. For the interactive data community, the notable element of the new rules is that data for hundreds of the largest firms will be available online in XBRL. SEC Chairman Christopher Cox commented on the subject in his recent address to the Corporate Counsel Institute:
” Even before interactive data becomes the norm for all reporting companies, we’re going to tag the executive compensation data for you using XBRL. And we’re going to put an interactive data web tool on the SEC’s website, to let users slice and dice the executive compensation data any way they like or do industry comparisons, or even do analyses of particular forms of compensation, such as stock options. We’re going to do this for at least several hundred of the largest public companies in America and we expect to have it available in June. The truth is, investors and their representatives on the compensation committees of boards of directors have a right to this information. And they have a right get it in a form they can really use.”
I don’t want to get into a debate about executive compensation levels, fascinating as that would be, or the SEC’s new disclosure rules themselves. (For those interested, SEC Commissioner Roel Campos’s recent speech at the Summit for Executive Compensation highlights important issues of the argument.)
I think it’s uncontroversial to say that the enormous rise in executive compensation relative to employee earnings which according to one (perhaps overstated but indicative) estimate rose from 42:1 in 1982 to over 400:1 in 2004 — has to give even the most vigorous free-market advocate pause. I also think it merely betrays a flair for the obvious to suggest that the new rules should be given a chance to see if they have a benign effect on executive compensation levels. And putting executive compensation data online in XBRL format indisputably represents another step forward in interactive data adoption that XBRL advocates can celebrate.
But I have to admit to some reservations. I find it disconcerting that investors will have easy access via XBRL to fairly arcane data on executive compensation before they have the same privilege for items like sales and profits. Moreover, I’m not sure how smaller investors will use this information to make better investment decisions.
As a citizen, I want executive compensation to be reasonable. As an investor, I want the greatest return on my capital. I much prefer a very richly compensated CEO who delivers strong earnings and stock price appreciation that exceeds market and sector averages to a fairly compensated executive who produces poor results and below-average returns.
I recognize that no one is telling investors to use executive compensation to the exclusion of all other factors in making investment decisions. But comparing compensation to company and stock performance under a particular management team is a complicated and difficult task, given the trade-offs between achieving long-term company objectives and short-term stock price movements. Institutions and other sophisticated investors have the smarts to use (or ignore) compensation data as they see fit; but I fear some small investors could be lured into making simplistic judgments based on executives’ total compensation levels.
Another concern I have is that XBRL will become associated in CEO minds as simply a way to browbeat them about how much money they make. This is the second time in recent months that Chairman Cox has celebrated XBRL for its use in gaining greater transparency in executive compensation, the other being disclosures about the backdating of stock options.
There can be no dispute that bringing such malfeasance to light is welcome. Still, it is another instance where XBRL is being used to disclose data that may have greater implications for corporate governance than stock performance. Interactive data needs the support of company managements to be a success. If it’s seen primarily as a useful vehicle for those with a political agenda against CEOs in particular and large companies in general, I fear the business community will be less likely to offer its support.
More broadly, I recognize that reporters have a limited amount of real estate for their stories, and that those articles reflect the news of the day. Still, it would be nice if there was more mention in the press that XBRL is a truly international standard that many countries besides the US are adopting for financial reporting, and that its uses extend well beyond those of corporate policeman. Indeed, XBRL provides outstanding advantages for the exchange and integration of both financial and nonfinancial data for everyday business activities, both within and outside the organization.
Despite these misgivings and objections, the implementation of XBRL for executive compensation disclosure represents a significant step forward. I continue to be pleasantly surprised at the extent of Chairman’s Cox’s commitment to XBRL adoption. As he champions interactive data in his speeches and looks to new avenues to adopt XBRL, I hope he’ll focus on the advantages that interactive data can provide to all investors as well as the broader business community, as opposed to those greeted most warmly by corporate watchdogs.