SEC's Positively Foolish Option Accounting Rules

Editor's note: In an earlier version of this article, we incorrectly included Macrovision as part of a wave of stock option scandals. The Fool regrets the error.

With a resounding 5-0 vote, the commissioners of the SEC have approved a long-awaited addition to disclosure rules about executive compensation. The new rules look poised to expose dodgy policies, discourage their use, and give us greater insight into a previously murky corner of corporate America, all in one fell swoop. Here's how.

After Dec. 15, 2006, companies will be required to provide a table detailing the base salary, stock grants, stock options, and any corporate perks (if they add up to at least $10,000 in value) for the CEO, CFO, and the next three highest-paid executive officers. The total compensation amount will be there in black and white, and options should be listed in full detail, too -- grant value and effective date, the date the options were actually granted, the whole shebang.

There's more to the new ruleset, such as tables outlining payments to directors and retirement benefits apportioned to the top five executives. A proposed "Katie Couric" clause, asking for data on the highest-paid regular employees, was nixed in favor of compensation information about the three next-highest paid policy-making employees. Assuming that Katie doesn't gain decision-making power over new employer CBS (NYSE: CBS  ) right away, she should be able to keep her salary secret under those rules.

Not only will we all have greater insight into executive pay and option grant practices, but the reporting itself could easily become quite cumbersome for companies that like to hand out options like lollipops. Some boards may feel the need to simplify or eliminate their options-grant policies, and a few boards have already made such changes to their executive pay policies.

The worst of this year's backdating scandals would likely never have happened at all if public oversight had been this open to begin with. Here's hoping that the era of backdating scandals begins and ends with the Brocade (Nasdaq: BRCD  ) and UnitedHealth (NYSE: UNH  ) wave of scandals. Maybe now we can go back to the wholesome motivating tools that stock options were always meant to be.

Further Foolishness:

• Anders and Rick Munarriz have done battle over stock options.
• The stock exchanges add their own rules, too.

UnitedHealth is a recommendation of both Motley Fool Inside Value and Stock Advisor . Take the newsletters for a 30-day free trial.

Fool contributor Anders Bylund owns none of the stocks discussed here. The Fool's disclosure rules are also designed for maximum transparency -- you can check out Anders' holdings right now, for example.