WorldatWork Comment to SEC

Beware of unintended consequences, WorldatWork warned in a letter to the U.S. Securities and Exchange Commission (SEC) filed on Monday, Oct. 23. WorldatWork responded to a request for comment from the SEC on a proposed amendment that would require the disclosure of compensation for three additional non-executive most highly compensated employees.

Speaking on behalf of its members, WorldatWork takes exception to the proposal for two primary reasons:

1. The new disclosures will cause unintended consequences for companies competing to attract, motivate and retain employees ó including a potential further ratcheting up of compensation levels, and

2. The burden ñ as much as $38 million per year over the three-year period ñ imposed by the new disclosures does not seem to add commensurate and meaningful shareholder and investor informational value.

ìIt is doubtful that new disclosures will provide any actionable information for investors, said Ryan Johnson, director of Public Affairs for WorldatWork. The substantial burden on companies to comply in addition to other recently-added requirements by the SEC and Sarbanes-Oxley, is not offset by any tangible benefit to investors.

WorldatWork comments are based on the input of its membership, the vast majority of whom are long-term practicing professionals in the compensation field, as well as results of a recent survey on this issue.

Respondents to the October 2006 survey conducted by Professor Robert L. Clark of North Carolina State University, College of Management, for WorldatWork and HR Policy Association indicated that disclosure of the total compensation of their best and highest paid employees would make it easier for competing firms to target these employees and attempt to lure them away. A 61 per cent majority of the surveyís respondents said employee ìpoachingî would be made either ìeasierî or ìmuch easierî by the implementation of this new rule.

A number of respondents said that knowledge about these compensation packages would allow competitors to quickly develop compensation packages that either match or exceed the current compensation of the ìstarî employee. Thus, when companies begin to use this new data as competitive intelligence, an escalation in the competition for certain employees could ensue, potentially triggering a compensation response. In the end, the luring company and the retaining company might end up having to pay these ìstarî employees even more to ensure they either remain, or are sufficiently attracted to the new opportunity.

WorldatWork members also expressed concern about other internal equity pressure and morale problems this proposal could raise. On one hand, some noted, there is the potential of a further ratcheting up of compensation levels inside the organization due to pressure by employees who believe they are worth what their disclosed counterpart is being paid. Other compensation professionals feared that, in addition to the pressure for this further ratcheting, disclosure might degrade the morale and job satisfaction of some workers.

The detrimental effect on morale may not be limited only to those who are not on the list of those disclosed. The proposed rule would almost certainly raise privacy concerns by certain individuals ó and especially if the names of the ìthree additional employeesî are required to be disclosed. This could necessitate security protection for these employees, especially for those in certain foreign jurisdictions where kidnappings are known to occur.

ìIn general, WorldatWork supports the SECís goal for better and more understandable executive compensation information to benefit investors,î stated Johnson. ìAt the same time, we hope the SEC realizes how burdensome the new compliance requirements have been on compensation professionals and compensation committees ó notably, the Sarbanes Oxley Act of 2002.î