Mr. Robert P. Cummins' days may finally be numbered as CEO of Cyberonics, Inc. (NDAQ:CYBX) as shareholders move in to control the Board. Some may wonder how he stayed in office this long; after all, he is the subject of an SEC investigation while his company's stock has lost more than 50% of its value this year alone. These same people would be shocked to learn that he is not only still in office, but he also received a new five year contract extension and a 50% pay raise!

So, just how much money is Mr. Cummins making? Well, he made the most money on June 15, 2004 when he and two other company officers netted a cool $2.5 million overnight – not bad for a day’s work! How is this possible, you ask? Well it turns out that the company just happened to receive a favorable FDA report with regards to their flagship product the day of their stock option grant. While trading was halted for the rest of us at $19.58 per share (the prior day’s closing price), they were issued 170,000 options at this price while the press release was circulated. The next day the stock opened at $34.81 per share – netting a whopping $2,589,100 overnight! Unfortunately for them, the SEC took issue and they are currently still under investigation.

However, in addition to that “bonus”, Mr. Cummins has also made an estimated $17 million in proceeds on the sale of shares received through stock option grants in addition to a substantial grant of restricted shares. This is not to mention his $800,000 per year regular salary. In fact, the executive compensation was in such excess that one board member actually resigned, saying that he “cannot support the direction of the governance practices of the Cyberonics board, in particular its practices regarding CEO compensation and succession.”

While this man is minting his own money, investors are losing millions. Even now, when the company is facing delisting from the NASDAQ and a possible default on its senior notes, this man remains in control of the company. Fortunately, an activist hedge fund is seeking control of the Board to turn things around. You can read their letter to shareholders here, which outlines many of the issues addressed in this article. Whether they are successful or not is contigent on several factors; however, this story goes to show just how corrupt Corporate America can be.

The SEC recently shed more light on its newly proposed rule, which now would require non-executives who make "significant policy decisions" to disclose their compensation. In a 436 page proposal posted on their website on August 11th, the SEC made the following comments regarding the new rule:

"We also solicit additional comments regarding the proposed disclosure requirement of the total compensation and job description of up to an additional three most highly compensated employees who are not executive officers or directors but who earn more than the named executive officers. In particular, we have specific requests for comment as to whether the proposal should be modified to apply only to large accelerated filers who would disclose the total compensation for the most recent fiscal year and a description of the job position for each of their three most highly compensated employees whose total compensation is greater than any of the named executive officers, whether or not such persons are executive officers. Under this approach, employees who have no responsibility for significant policy decisions within either the company, a significant subsidiary or a principal business unit, division, or function, would be excluded from the determination of the three most highly compensated employees and no disclosure regarding them would be required."

Why is this rule necessary? In the past, some companies have placed their top decision-makers in non-officer positions in order to conceal their compensation. This new rule would require mid to large cap companies to disclose the pay of their top employees, who would be identified by their salary and position rather than their name. These employees would have to make more than one of the top five executives in order to be listed. According to the SEC, these people could be "the director of a news division of a major television network, a portfolio manager in charge of equity funds at a money management firm, or the head of technological innovation unit". Meanwhile, the SEC insisted that "a salesperson, entertainment personality, actor, singer, or professional athlete who is highly compensated but who does not have responsibility for significant policy decisions would not be the type of employee about whom we would seek disclosure".

This article is the first in a series of articles regarding the SEC's newly proposed executive compensation rules. The proposal is currently in its final stages with a request for additional comment.