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Chief executive pay: SEC hits eject button on spring-loaded bosses

Chief executives need little help when it comes to executive pay. That has not stopped board directors giving some bosses an extra boost through the practice of “spring-loading”.

Under this mechanism executives are granted stock or options just before good news being publicly disclosed. That juices pay irrespective of any performance criteria. In the most controversial recent example, Kodak last year granted awards to executives. Just days later came an announcement that the US government considered supporting the company’s pharmaceutical division, catapulting its stock price higher.

The SEC has taken a tougher stance on these effective giveaways. Earlier this week, it released new guidance recommending that companies be more rigorous in the way they value pay granted during the possession of material non-public information.

This is not the first sketchy pay practice to come under scrutiny. Scandal erupted about a decade ago over so-called “options backdating” where companies manipulated the timing of grants. That has since been tightened; some miscreants landed in prison over the practice. But the law around spring-loading has proven much looser, hence the SEC’s latest move.

An independent investigation commissioned by the Kodak board found no wrongdoing as it related to the conveniently timed executive pay grants. The report from lawyers noted that restrictions around pay were less an issue for federal securities law but fell under the purview of state fiduciary duty obligations of directors to shareholders. The report found that while the Kodak process for the grant was “flawed”, there were no violations of explicit laws or company policy on pay.

An influential academic study found that of 1,500 companies that granted options, a clear pattern indicated extensive spring-loading. These ploys added up to $100,000 of extra pay per chief. Still, they are not the only ones harvesting gains. Savvy hedge funds track share grants to snout out upcoming corporate transactions. For their part, bosses should earn any largesse that is handed out. These sort of nod-and-wink arrangements have persisted for too long.

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