TWO years ago, when the Securities and Exchange
Commission began requiring companies to explain performance targets
used to calculate incentive pay for executives, shareholders hoped that
the rule would discourage fat compensation awards for thin results.

With two years of data in hand, how is the new rule working? In some cases, well — but in most, not at all.

Under
the rule, companies were supposed to divulge performance benchmarks —
growth in earnings per share, for example — and why they were chosen.
Companies were also supposed to detail the range of performance under
which incentive payouts would be made, and the corresponding payout
percentages.

But many companies are simply not bothering to
comply. At least that’s the conclusion of a study by James F. Reda
& Associates, a compensation consulting firm in New York that
analyzed a representative sample of the medium-size companies in the
Standard & Poor’s MidCap 400-stock index.

According to the
most recent proxy filings, which covered 2007 results, only 47 percent
of the companies made the required disclosures concerning short-term
incentive pay, like cash bonuses. While this figure is substantially
higher than the 23 percent that complied with the rule in 2006, it is
nonetheless distressing.

On long-term incentive pay, which
typically includes grants of stock options or restricted shares, the
compliance was a more robust 62 percent last year. In 2006, only 41
percent of companies adhered to the rule, the Reda study showed.

When
it devised its disclosure rule, the S.E.C. gave companies a sizable
loophole, excusing them from detailed disclosure of targets if they
believed that publishing such figures would put them at a disadvantage
in their industry. Many companies — no surprise — make this claim.

Some
say, for example, that if they publicize their targets, competitors
could hire away their executives during years that performance
benchmarks were not met and bonuses were not dispensed.

James
F. Reda, founder of the firm that conducted the study, doesn’t buy that
view. “This argument of competitive harm is a pretty weak one,” he
said. “I think they don’t want the bright light to be shone on their
situation because it gives them the flexibility to give a bonus when it
isn’t earned.”

Companies may also be choosing not to disclose
specific benchmarks because those figures may be significantly
different from financial targets that executives at these corporations
have promised Wall Street analysts and investors — indicating that the
boards in question are setting their bars too low and generating
bonuses too easily.

“The goals companies are using for bonus
plans may be a lot lower than what they are telling analysts they
reasonably expect to meet,” Mr. Reda said. “If all companies in an
industry published their goals, I don’t see where the competitive
disadvantage would be.”

THE most common benchmarks companies use
today are earnings per share and total shareholder return, usually
measured against the performance of a group of industry peers. Other
targets are growth in income, sales or cash flow.

Regardless of
the type of benchmark used, Mr. Reda says his firm’s study supports his
thesis that too many companies use performance benchmarks that are a
breeze to exceed. In proxies from both 2006 and 2007, some 60 percent
of companies met or beat their targets, generating short-term payouts.

“If
the goal is set fairly, if it is a true incentive, the likelihood of
companies achieving it would be 50-50,” Mr. Reda said. “This says they
are not really earning the bonuses because the goals are being set too
low.”

Compliance problems aren’t limited to midsize companies,
Mr. Reda said. Based on a preliminary review of large, blue-chip
concerns, less than 30 percent appeared to be fully complying with the
disclosure rules in their most recent proxies.

There were bright
spots in the study. A greater number of companies, 24 percent, withheld
short-term incentive pay in 2007 compared with the previous year, when
11 percent didn’t make such awards.

While some investors might
assume this improvement has to do with a tough economy, Mr. Reda says
he thinks it shows instead that the disclosure rule is starting to have
the desired effect, even if most companies aren’t yet complying.

“Now
that they have to disclose a goal, the bonus is harder to fudge,” he
said. “We’re talking about short-term plans, after all, where goals are
set within the first three months of the year when it is pretty clear
what’s going on.”

As summer turns to fall, corporate boards are
in the throes of discussing disclosure plans for their 2008 proxy
filings. Companies are likely to continue fighting disclosure, Mr. Reda
said, especially those that have no real performance thresholds — or
very reachable ones.

And if the S.E.C. does not enforce its rule,
companies will be all the more emboldened to flout it. The commission
said it would not pursue nonfilers immediately after the rule change so
that companies could become accustomed to the new requirement. It is
unclear how aggressive regulators will be now that we are in Year 2 of
the regulation — or when the commission will decide that it’s time to
enforce its own rules.

Shareholders both large and small may
have to take up this matter themselves. If companies keep circumventing
the disclosure rule, even as they pretend that pay is linked to
performance, stockholders should demand the disclosures they are
supposed to make.

Directors who say they represent company
owners may ignore these pleas, of course. That wouldn’t be surprising.
Because it has been clear for some time now that pay for performance
across corporate America will never become the norm without a fight.