Executive pay disclosure rules lead to obfuscation

The Wall Street Journal takes an amusing look at the results of SEC efforts to require more detailed and meaningful disclosure about executive pay. Referring to Applied Materials (NASDAQ: AMAT), the Journal reports that "this year, it expanded by 76% the word count of its proxy's compensation section. In all, the compensation section contains 16,245 words -- twice the length of the U.S. Constitution and its 27 Amendments -- along with 10 formulas, 10 tables and 155 percent signs."

The result is a document that's incredibly confusing, full of formulas like this one:

Weighted Score = (Performance Measure 1 x Weight as Percentage) + (Performance Measure 2 x Weight as Percentage).

But in a way, we shouldn't be surprised. Applied Materials has paid its executives millions in compensation, but its stock price is lower than it was in 2001!

The reason that such long pay disclosures are required is that there is no particularly reasonable way to explain why top executives were paid millions while shareholders lost money. To use the random walk analogy, it's like trying to ask a drunk staggering around in a field why he's walking in the path he's walking. He's drunk! It can't possibly make sense.

If a company needs 16,245 words to explain why it paid its executives the amount it paid them, they're most likely full of crap.