Preparing Proxy Statements Under the SEC's New Rules Regarding Executive and Director Compensation Disclosures

Diane Fuchs
Jane Jones
Leigh Johnson
Vol. 7
November 2007
Page

Introduction

Last year, a number of public companies voluntarily expanded their proxy statement compensation disclosures.[1] This was largely a response to amendments proposed by the Securities and Exchange Commission (the “SEC”) in early 2006 to the disclosure requirements for executive and director compensation and security ownership of officers and directors (the “Proposals”).[2] After receiving over 20,000 comment letters from companies, regulators and shareholders addressing various aspects of the Proposals,[3] the SEC adopted the Proposals in August 2006 with a few modifications in response to issues raised by various commentators (the “Rules”).[4]

The Rules apply to disclosures beginning with the 2007 proxy season.[5] They are intended to provide investors with a more transparent and comprehensive picture of executive and director compensation[6] through extensive tabular presentations supplemented by improved narrative disclosures.[7] The Rules revise and streamline the current compensation tables and related narrative disclosure into three broad categories: (i) a Summary Compensation Table and related disclosures, (ii) holdings of equity–based interests that relate to compensation or are potential sources of future compensation and (iii) retirement and other post–employment compensation.[8] Disclosure requirements regarding director compensation and the issuer equity security beneficial ownership table also have been revised.[9]

A number of new disclosure issues arise related to executive and director compensation and security ownership under the Rules. Companies and practitioners that continue to grapple with these issues may want to review the 2006[10] and 2007[11] proxy season disclosures of certain companies for guidance and direction regarding certain aspects of the Rules. This article is meant to serve as a resource for companies attempting to comply with the new Rules, by (i) briefly describing the historical development of executive compensation and related disclosures and the impetus for the recent Rules, (ii) (x) outlining various aspects of the Rules which specifically relate to tabular and narrative disclosure of executive and director compensation and security ownership and (y) providing suggestions for compliance and examples from companies that have incorporated various aspects of the Rules into their proxy statements, and (iii) identifying potential consequences of future non–compliance.

I. History of Executive Compensation and Related Disclosure

A. Pre–1992 History

The SEC first promulgated rules regarding proxy statement disclosures of executive and director compensation nearly 70 years ago.[12] The initial executive and director compensation disclosure requirements were set forth in Schedule A to the Securities Act of 1933, as amended (the “Securities Act”),[13] and Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).[14] Item 14 of Schedule A to the Securities Act required disclosure of director compensation and officer compensation, requiring officers to be named when compensation exceeded $25,000.[15] Section 12(b) of the Exchange Act required disclosure of the compensation, equity interests and certain material contracts of the directors, officers, underwriters and 10% security holders of an issuer. [16] It also required disclosure of payments to parties other than directors and officers which exceeded $20,000 per annum.[17] Since that time, the SEC has imposed different disclosure requirements regarding executive and director compensation, including narrative, tabular and combinations of both narrative and tabular disclosures.[18]

B. 1992 Amendments and the Impetus for Change

In 1992, the SEC adopted rules that mandated formatted tabular disclosure of all compensation[19] and moved away from the mostly narrative disclosure required by rules adopted by the SEC in 1983.[20] The Rules are the first major amendments to the compensation rules since 1992.[21] Representatives from the SEC have indicated that compensation packages for top executives have changed dramatically over the last 14 years, and they do not view the former disclosure rules as taking into account these changes in compensation practices.[22] Further, the SEC has noted that the formatted nature of the previous tabular disclosure discouraged complete disclosure of all executive compensation,[23] since companies often omitted disclosure of certain compensation elements when the proxy rules did not specifically require “line item” disclosure of that compensation.[24]

Consequently, the SEC maintains that combining the strengths of the tabular disclosure (i.e., the ability to compare compensation elements from year to year and from company to company) with enhanced narrative disclosure is necessary to improve overall compensation disclosure.[25] As a result, under the Rules, companies are required to provide expanded (i) tabular disclosures that will include all elements of compensation and (ii) narrative disclosures that will include a general compensation discussion of each element of compensation and executive compensation as a whole, as well as specific information regarding material items provided in the tabular disclosures.[26]

II. New Standards For Tabular and Narrative Disclosure of Executive and Director Compensation

A. General

1. Plain English Disclosure

As a starting point, the Rules generally require companies to disclose executive and director compensation and beneficial ownership in plain English.[27] The following standards will help companies incorporate plain English principles: (i) use clear, concise sections, paragraphs and short sentences; (ii) use definite, everyday words and active voice; (iii) avoid multiple negatives, legal jargon, highly technical terminology, glossaries and defined terms; (iv) use descriptive headings and subheadings; (v) use tabular presentation or bullet lists for complex material.[28] Companies should avoid legalistic, overly complex and “boilerplate” disclosures.[29]

2. Officers Covered

The Rules require more extensive tabular presentations of executive compensation and improved narrative disclosure for certain officers.[30] These officers include the principal executive officer, the principal financial officer and the three other most highly compensated executive officers[31] if the individual's total compensation for the last fiscal year exceeded $100,000 (“Named Executive Officers”).[32] Companies also must disclose compensation for up to two additional individuals if they were serving as executive officers at the end of the last completed fiscal year but are no longer executive officers, and if disclosure would be required for them if they still held their former positions.[33] Furthermore, the SEC is considering a proposal (“Non–Executive Employees Proposal”) which would require companies to disclose compensation information for up to three other non–executive employees. Under the proposal, companies must report this compensation if these employees are paid more than any of the Named Executive Officers and have policy making responsibilities at the parent, significant subsidiary or division of such companies (the “Non–Executive Employees”). The SEC proposal would not require the company to name these individuals.[34] The SEC has sought comments on whether the Non–Executive Employees Proposal should apply only to large–accelerated filers.[35]

3. Suggestions for Compliance / Examples
a. Plain English

Companies may find it easier to draft the director and executive officer compensation sections “from scratch” because many companies may not have previously prepared these proxy disclosures in plain English.[36] Companies may want to consult the SEC's Plain English Handbook for additional ideas on how to start the process of preparing plain English disclosures.[37]

b. Officers Covered

Determining the individuals whose compensation the company must disclose in the proxy statement requires some internal legwork.[38] While the CEO and CFO are readily identifiable, the three other highest–paid executive officers and potential highly paid Non–Executive Employees are harder to determine.[39] Companies will need to calculate the total compensation for each executive officer who could be among the three highest–paid executive officers.[40] These calculations are more complex than those performed in the past because companies now need to quantify all elements of compensation.[41]

B. Compensation Discussion and Analysis

1. The Rules

Under the Rules, disclosure begins with a new narrative overview, entitled Compensation Discussion and Analysis (“CD&A”).[42] The CD&A is designed to explain the material factors underlying compensation policies and decisions according to data presented in the compensation tables. This discussion includes: (i) an examination of such items as the company's compensation objectives and what a compensation program is designed to reward, (ii) an identification of each element of compensation and (iii) an explanation of why the company chose to pay an element, how the company determined the amount for such element, and how the company's decisions regarding the element fit into the company's overall compensation objectives. [43]

The CD&A discussion covers all forms of compensation paid to Named Executive Officers.[44] Boilerplate disclosure will not suffice.[45] The CD&A must address both in–service and post–termination compensation arrangements. Where appropriate, it also must discuss (among other things) policies regarding long–term, cash and equity compensation, the effect of prior compensation on decisions regarding various elements of compensation, the use of benchmarking, and the role of executive officers in the compensation–decision process.[46] Further, in response to the recent controversies surrounding stock option backdating,[47] companies must address policies related to the timing of option grants and the determination of exercise prices in the CD&A.[48] The Rules consider the CD&A “filed” with the SEC. This makes the CD&A subject to the liability provisions of the Exchange Act and covered by the CEO and CFO certifications required under the Sarbanes–Oxley Act of 2002 (“SOX”).[49]

Additionally, the company does not have to disclose target levels with respect to specific quantitative or qualitative performance–related factors involving confidential trade secrets, confidential commercial information, or confidential financial information if such disclosure would result in competitive harm to the company.[50] When determining whether to withhold such information, companies must apply the same standard they use for confidential treatment requests.[51] If the company does not disclose this information then it must “discuss how difficult it will be for the executive or how likely it will be for the registrant to achieve the undisclosed target levels or other factors.”[52]

2. Suggestions for Compliance / Examples

When drafting the CD&A, companies may want to review the CD&As of companies who have already developed comprehensive disclosures of compensation practices under the Rules.[53] The 2007 annual proxy materials for Merck & Co., Inc.[54] and Eli Lilly and Company[55] are two of the earliest examples of comprehensive CD&A disclosure. The CD&As contained in the 2007 annual meeting proxy materials for Bristol–Myers Squib Company[56] and Pfizer[57] provide a detailed discussion of the objectives of the company's executive compensation program, the compensation elements of the program and how decisions were made regarding the compensation elements. The CD&A contained in the 2007 annual meeting proxy materials for Intel Corporation also provides an extensive discussion of various elements comprising its compensation program. These include its “performance–based compensation” and its “retirement plans,”[58] which may be helpful for companies that have not provided a detailed discussion of these compensation elements in the past. Wachovia Corporation's 2007 annual meeting proxy materials[59] also provide a lengthy discussion of its compensation committee's compensation objectives and responsibilities.

At least one commentator has noted companies may have the most difficulty disclosing the reasons why they decided to pay a certain compensation element.[60] On that front, companies may want to review Intel Corporation's 2007 proxy statement for an example of disclosure of the rationales behind incentive plan payments.[61]

Companies also must focus on preparing disclosures related to the timing of option grants and the determination of the exercise prices of such grants because there is currently increased scrutiny at the SEC[62] and in the investment community at–large[63] with respect to option grant practices.[64] Companies may want to review Marriott International, Inc.'s 2007 proxy statement for an example of disclosure of the policies and practices regarding stock option grant administration.[65] Companies also will need to evaluate their stock option grant and reporting practices to determine whether potential disclosure issues exist. In connection with this evaluation, companies may want to review publicly reported stock option grants for officers and directors, ensure that those dates are consistent with the board minutes and review the stock prices around the grant date for potential problems. In order to limit possible issues with future option disclosures, companies may want to take the following actions: (i) grant awards at specified intervals, (ii) grant awards at compensation committee meetings rather than by written consent[66] and (iii) reevaluate the advisability of delegating grant authority to certain executive officers.

C. Compensation Committee Report

The CD&A is designed to disclose company compensation policies and decisions, not the actual deliberations of the compensation committee.[67] Consequently, although the compensation committee certainly should be involved heavily in its preparation, the CD&A is not a report of the compensation committee. In response to concerns from commentators regarding the role of the compensation committee in the executive compensation disclosure process, however, the Rules require a brief Compensation Committee Report similar to the currently required Audit Committee Report.[68] The compensation committee must disclose in its report whether it has reviewed and discussed the CD&A with management, and, based on the review and discussions, whether the committee recommended to the entire board of directors that the company include the CD&A in the company's annual report and proxy statement.[69] The Compensation Committee Report is “furnished” rather than “filed” and must be incorporated by reference in the company's annual report, along with the CD&A.[70] The CD&A and the Compensation Committee Report replace the previously required Board Compensation Committee Report on Executive Compensation.

D. Performance Graph

Although the SEC originally proposed to eliminate the Performance Graph, the Rules retain the graph but move it to the annual report to shareholders required by Exchange Act Rule 14a–3 or Rule 14c–3.[71] The SEC notes the CD&A must include a broader discussion on performance than the relationship between executive compensation and a company's stock price.[72] Consequently, the Rules require companies to include the performance graph in the annual report to shareholders rather than in the proxy statement executive compensation disclosure.[73] The Rules consider the Performance Graph “furnished” rather than “filed.”[74]

E. Summary Compensation Table and Supplemental Table

1. The Summary Compensation Table

Under the Rules, the Summary Compensation Table continues to serve as the principal vehicle for disclosure of executive compensation and to include the Named Executive Officers' compensation for the last three fiscal years, whether or not actually paid out, but it has been modified to provide greater clarity (see Table 1 below).[75] The Summary Compensation Table also is accompanied by one supplemental table and a narrative discussion of the two tables.[76]

As requested by investor advocates,[77] the Summary Compensation Table includes a new figure representing total compensation, which aggregates the total dollar value of each form of compensation quantified in the table (see column (j) in Table 1 below).[78] The salary and bonus columns include current[79] and certain deferred[80] compensation (see columns (c) and (d) in Table 1 below). In addition, the compensation cost of stock awards and option awards over the requisite service period must be disclosed in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) (“FAS 123(R)”) (see columns (e) and (f) in Table 1 below).[81] The aggregate increase in the actuarial value to each Named Executive Officer under all defined benefit and actuarial plans (including supplemental plans) accrued during the year and above–market or preferential earnings on nonqualified deferred compensation must be reported in a new column (see column (h) below).[82] Finally, the “All Other Compensation” and “Other Annual Compensation” columns have been collapsed into one “All Other Compensation” column (see column (i) in Table 1 below), which requires disclosure of all compensation not included in the other columns. This includes perquisite disclosure and other personal benefits, amounts paid pursuant to a severance or change in control arrangement and company contributions to defined contribution plans.[83] Footnote disclosure is required for each item of compensation included in the “All Other Compensation” column (other than perquisites) that exceeds $10,000.[84]

The Rules also reduce the threshold for perquisite disclosure to $10,000.[85] Significantly, the Rules provide guidance regarding benefits that, in the SEC's view, should be categorized as perquisites or personal benefits.[86] An item is considered a perquisite or personal benefit “if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non–discriminatory basis to all employees.”[87] On the other hand, if an item is integrally and directly related to the performance of an executive's duties, it is not a perquisite.[88] Applying those guidelines, the SEC cites the following as examples of perquisites and personal benefits: club memberships used for reasons other than business entertainment, personal financial or tax advice, personal use of company vehicles, personal travel financed by the company and housing and other living expenses (including relocation assistance).[89]

The following is the format for the new Summary Compensation Table:

Table 1
Summary Compensation Table

Name &

Principal Position

Year

Salary ($)

Bonus ($)

Stock Awards ($)

Option Awards ($)

Non–Equity

Incentive Plan

Compensation

($)

Change in Pension

Value &

Nonqualified

Deferred Compensation Earnings ($)

 

All Other

Compensation ($)

Total ($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

PEO

 

___

 

 

 

 

 

 

 

 

PFO

 

___

 

 

 

 

 

 

 

 

A

 

___

 

 

 

 

 

 

 

 

B

 

___

 

 

 

 

 

 

 

 

C

 

___

 

 

 

 

 

 

 

 



2. Grants of Plan–Based Awards Table

A supplemental table, the Grants of Plan–Based Awards Table, follows the Summary Compensation Table (see Table 2 below).[90] This table replaces the Long–Term Incentive Plan Awards Table and Option/SAR Grants in Last Fiscal Year Table required by the former SEC rules[91] and provides more disclosure regarding performance–based stock, option and similar awards.[92] Under the Rules, this table requires separate disclosure for each grant made during the current year under both equity and non–equity incentive plans, including estimated future payouts.[93] In addition, stock awards and option awards must be disclosed and valued at the full grant date fair value in accordance with FAS 123(R).[94] In connection with the recent controversies surrounding stock–option backdating practices,[95] the Rules require additional columns to be added to the table if: (i) the option exercise price is less than the closing market price of the underlying security on the date of grant, [96] or (ii) the date on which the company takes action to grant an option is different from the date of grant under FAS 123(R).[97]

The following is the format for the new Grants of Plan–Based Award Table:

Table 2

Grants of Plan–Based Awards

Name

 

Grant Date

 

Estimated Future

Payouts Under

Non–Equity Incentive Plan Awards

Estimated

Future

Payouts

Under

Equity Incentive

Plan Awards

All Other

Stock Awards:

Number

of

Shares of

Stock

or Units

(#)

All

Other

Option Awards: Number

of

Securities Underlying Options

(#)

Exercise or

Base Price

of

Option Awards ($/Sh)

 

Grant

Date

Fair

Value

of

Stock

&

Option Awards

Threshold ($)

 

Target ($)

 

Maximum ($)

 

Threshold (#)

 

Target (#)

 

Maximum (#)

 

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

(l)

PEO

 

 

 

 

 

 

PFO

 

 

 

 

 

 

A

 

 

 

 

 

 

B

 

 

 

 

 

 

C

 

 

 

 

 

 

3. Narrative Description of the Summary Compensation Table and Supplemental Table

Companies must provide a narrative description of any additional material factors necessary to an understanding of the information disclosed in the Summary Compensation Table and its supplemental table.[98] This disclosure is designed to put the quantitative tabular disclosures in context. It describes the material terms of employment agreements, option repricings, other material modifications of stock awards, performance factors applicable to performance–based awards and other matters.[99] This detailed disclosure differs from that in the CD&A, which focuses on broad topics regarding the objectives and implementation of executive compensation policies.[100] Like the CD&A, certain confidential trade secrets and confidential or financial information will not have to be disclosed if doing so would result in competitive harm to the company.[101]

4. Suggestions for Compliance / Examples
a. Summary Compensation Table – Total Compensation Column

Companies may want to review proxy statements filed under the Rules earlier this year for examples of the Summary Compensation Table, the Grants of Plan–Based Awards Table and narrative descriptions of these tables.[102] The 2007 annual proxy materials for Suntrust Banks Inc.[103] and General Electric Company[104] contain early examples of these disclosures.

Commentators and SEC representatives encourage compensation committees to use tally sheets to obtain a complete picture of total compensation for Named Executive Officers.[105] In light of the Rules, compensation committees should evaluate how cash and equity–based compensation, deferred compensation, retirement plan benefits, perquisites and other compensation paid to Executive Officers are calculated in the tally sheets. Commentators encourage disclosure of the compensation committees' use of a tally sheet in a company's proxy statement,[106] and Institutional Shareholder Services recommends tally sheet disclosure of CEO compensation as well.[107] Further, board members are encouraged to review tally sheets early in the proxy statement preparation process in order to avoid any surprises or embarrassment once they are disclosed, and to enable boards or compensation committees to modify compensation programs where appropriate to do so.

b. Summary Compensation Table – Perquisites

Companies must identify, value and prepare disclosure for current perquisites received by Named Executive Officers and Non–Executive Employees, some of which were not previously required to be disclosed. Humana Inc.'s 2007 proxy statement provides an example of tabular disclosure of perquisites,[108] while Sunoco Inc.'s 2007 proxy statement provides a thoughtful narrative description of a company's general perquisite practices.[109] One perquisite in particular that always receives a massive amount of attention is company airplane use.[110] The degree of past disclosure on this particular perquisite has varied.[111] Companies should note that, pursuant to the Rules, the appropriate measure of value for all perquisites, including airplane use, is the aggregate incremental cost to the company.[112]

c. Non–Executive Employees

If the Non–Executive Employees Proposal is adopted in its current form, individual compensation packages, typically kept private for employees other than the Named Executive Officers, will become public knowledge. Although Non–Executive Employees needn't be named, this additional disclosure requirement could cause certain companies consternation. Individuals familiar with the company, including other company employees, may be able to readily identify the Non–Executive Employees when their compensation is disclosed in the proxy statement, which may create internal discord. Large accelerated–filers in particular should prepare for the internal ramifications that may result from the disclosure of Non–Executive Employees' compensation packages. Additionally, compensation committees of these companies should also consider the impact that this disclosure may have on a company's compensation practices.[113]

F. Exercises and Holdings of Previously Awarded Equity

1. Outstanding Equity Awards at Fiscal Year–End Table

The next section of compensation disclosure provides investors with an understanding of outstanding equity compensation that remained unexercised or unvested at fiscal year–end through the use of two tables.[114] The Outstanding Equity Awards at Fiscal Year–End Table (see Table 3 below) discloses information regarding outstanding grants of awards under stock option or stock appreciation rights plans. This table also discloses awards granted under restricted stock plans, incentive plans and similar plans, along with the market–based values of such awards as of the company's most recent fiscal–year end.[115]

The following is the format for the new Outstanding Equity Awards at

Fiscal Year–End Table:

Table 3
Outstanding Equity Awards at Fiscal Year–End

 

 

Option Awards

 

Stock Awards

Name

Number of Securities Underlying Unexercised Options

(#) Exercisable

Number of Securities Underlying

Unexercised Options

(#) Unexercisable

Equity Incentive Plan

Awards: Number of

Securities Underlying

Unexercised Unearned Options

(#)

Option Exercise Price ($)

Option Expiration Date

Number of Share or Units of Stock That Have Not Vested (#)

Market Value of Shares or Units of Stock That Have Not Vested ($)

Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)

 

 

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

PEO

 

 

 

 

 

 

PFO

 

 

 

 

 

 

A

 

 

 

 

 

 

B

 

 

 

 

 

 

C

 

 

 

 

 

 

2. Option Exercises and Stock Vested Table

The Option Exercises and Stock Vested Table discloses the amounts received upon exercise of options (or similar awards) or the vesting of stock (or similar awards) during the most recent fiscal year (see Table 4 below).[116] Prior to the Rules, this information was only required for options and stock appreciation rights.[117]

The following is the format for the new Option Exercises and Stock Vested Table:

Table 4
Option Exercises and Stock Vested

Option Awards

Stock Awards

Name

Number of Shares Acquired on

Exercise

(#)

Value Realized on

Exercise

($)

 

Number of Shares

Acquired on Vesting

(#)

 

Value Realized on

Vesting

($)

 

(a)

(b)

(c)

(d)

(e)

PEO

 

 

 

 

PFO

 

 

 

 

A

 

 

 

 

B

 

 

 

 

C

 

 

 

 

3. Suggestions for Compliance / Examples

Companies should note that separate line item disclosure is required for each stock option grant in the Outstanding Equity Awards Table, while stock awards must be disclosed in the aggregate. Companies may want to consider additional footnote disclosure in connection with the stock award disclosure, including a description of each grant and the related vesting schedule.

G. Post–Employment Compensation

The final section of executive compensation disclosure under the Rules includes tables and expanded narrative disclosures regarding defined benefit pension plan and non–qualified defined contribution plan compensation.[118] The tables also include enhanced disclosure regarding compensation arrangements triggered upon a termination of service or a change in control.[119] These disclosures are the result of shareholder complaints[120] and SEC concerns[121] that the sizes of many executives' retirement and change of control pay packages may represent a significant portion of executive compensation, which, under the former disclosure regime, often went largely undetected.[122]

1. Pension Benefits Table

The Pension Benefits Table discloses the actuarial present value of each Named Executive Officer's accumulated benefit under any defined benefit plan and the number of years of service credited to such officer under the plan (see Table 5 below), [123] expanding the disclosure formerly required in the Pension Plan Table and related disclosure.[124] Under the Rules, the accumulated benefit disclosure and years of service disclosure are both computed as of the same pension plan measurement date for financial statement reporting purposes with respect to the audited financial statements for the company's last completed fiscal year.[125] Disclosure of compensation under each plan in which a Named Executive Officer participates that provides for specified retirement benefits or benefits that would be paid primarily following retirement is required in a separate line of the table.[126] The table must also include the amount of pension benefits paid to each Named Executive Officer during the last completed fiscal year.[127] A narrative description of the material factors necessary to an understanding of each plan disclosed in the table must follow the table.[128]

The following is the format for the new Pension Benefits Table:

Table 5

Pension Benefits

Name

 

Plan Name

 

Number of Years

Credited Service

(#)

 

Present Value of

Accumulated Benefit

($)

 

Payments During

Last Fiscal Year

($)

 

(a)

(b)

(c)

(d)

(e)

PEO

 

 

 

 

 

PFO

 

 

 

 

 

A

 

 

 

 

 

B

 

 

 

 

 

C

 

 

 

 

 

2. Nonqualified Deferred Compensation Table

Next, a new table, called the Nonqualified Deferred Compensation Table, discloses employer and employee contributions, earnings and balances under all nonqualified defined contribution and other deferred compensation plans (see Table 6 below).[129] Prior to the Rules, companies were required to disclose only the above–market or preferential earnings on deferred compensation in the Summary Compensation Table when such compensation was paid during the fiscal year or payable during that period but deferred at the election of the Named Executive Officer. [130] No tabular disclosure was required regarding deferred compensation plans. A narrative description of the material factors necessary to an understanding of the disclosure in this table must also follow the table.[131]

The following is the format for the new Nonqualified Deferred Compensation Table:

Table 6

Nonqualified Deferred Compensation

Name

Executive Contributions in Last FY

($)

 

Registrant Contributions in Last FY

($)

 

Aggregate Earnings in Last FY

($)

 

Aggregate Withdrawals/
Distributions

($)

 

Aggregate Balance

at Last FYE

($)

 

(a)

(b)

(c)

(d)

(e)

(f)

PEO

 

 

 

 

 

PFO

 

 

 

 

 

A

 

 

 

 

 

B

 

 

 

 

 

C

 

 

 

 

 

3. Narrative Disclosure of Change in Control Provisions

Finally, the Rules require narrative disclosure of the terms of any written or unwritten arrangement that provides for payments in connection with the resignation, severance, retirement or other termination of a Named Executive Officer, a change in his or her responsibilities or a change in control of the company.[132] Under the Rules, one must disclose the following information regarding termination and change in control provisions: the specific circumstances triggering payments, the estimated payments and benefits that would be provided in each termination circumstance, specific factors used to determine payments or the provision of benefits, conditions and obligations applicable to the receipt of payments or benefits and any other material features.[133] The Rules require quantitative disclosure even when the amounts payable under the arrangements are uncertain.[134] This requirement, however, has been a source of criticism.[135]

4. Suggestions for Compliance / Examples

Arguably, complaints regarding inadequate disclosure of pension plans and deferred compensation benefits may have been one of the driving forces behind the Rules.[136] Prior to the Rules, one commentator specifically cited inadequate pension plan and deferred compensation disclosure as a key problem with executive compensation disclosure, noting that companies typically did not disclose pension plan values and deferred compensation in public filings.[137] As a result, many believe that significant amounts of compensation related to pension plans and deferred compensation often went undetected.[138]

Since this issue has received more attention than other areas related to executive compensation, companies should pay particular attention to their disclosures regarding pension plans and deferred compensation. Companies may want to review Bank of America Corporation's[139] and the Bank of New York's[140] 2007 proxy statements and MBNA Corporation's[141] 2005 proxy statement for sample narrative pension plan disclosures. Sunoco's 2007 proxy statement also includes a narrative disclosure of its pension plans and its deferred compensation plans.[142]

H. Director Compensation

1. The Rules

Under the Rules, a new Director Compensation Table presents information regarding director compensation similar to the information provided in the Summary Compensation Table. However, this table only presents data compiled from the company's last completed fiscal year.[143] Total compensation, fees earned or paid in cash, stock awards, option awards, non–stock incentive plan compensation, change in pension value, nonqualified deferred compensation earnings and all other compensation (such as consulting fees, charitable awards, etc.) must be disclosed for each director.[144] Companies also are required to disclose by footnote to the appropriate column (i) the aggregate numbers of stock awards and option awards outstanding at fiscal year end,[145] (ii) the fair value of each equity award determined in accordance with FAS 123(R) at the date of the grant and (iii) information regarding any re–priced or materially modified options, SARS or similar option–like instruments.[146] Narrative disclosure must follow the table and must include any material factors necessary to understand the table, such as a breakdown of the different types of fees.[147]

The following is the format for the new Director Compensation Table:

Table 7
Director Compensation

Name

Fees Earned or

Paid in

Cash

($)

Stock

Awards

($)

Option

Awards

($)

Non–Equity

Incentive Plan

Compensation

($)

Change

in Pension

Value and

Nonqualified

Deferred

Compensation

Earnings

All Other

Compensation

($)

Total

($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

A

 

 

 

B

 

 

 

C

 

 

 

D

 

 

 

E

 

 

 

2. Suggestions for Compliance / Examples

Disclosure items in the Director Compensation Table that are analogous to disclosure items in the Summary Compensation Table will be governed by the Summary Compensation Table instructions regarding those items.[148] Consequently, companies should consider issues raised in connection with the new Summary Compensation Table disclosure requirements[149] when preparing the Director Compensation Table. For examples of early 2007 proxy statements that include the new director compensation tables, see Bank of America Corporation's Proxy Statement[150] and Eli Lilly and Company's 2007 Proxy Statement.[151]

I. Beneficial Ownership Disclosure

In addition to the disclosures already required under current rules, the Rules amend Item 403(b) of Regulation S–K to require footnote disclosure in the beneficial ownership table of shares pledged as security by Named Executive Officers, directors and director nominees.[152] The Rules also specifically require disclosure of beneficial ownership of directors' qualifying shares.[153]

III. Consequences of Non–Compliance

A. “Filed” Status of Compensation Discussion and Analysis

As noted above, the CD&A is considered a part of the proxy statement or any other filing in which it is included and is deemed “filed” with the SEC.[154] Consequently, the CD&A is subject to Regulations 14A or 14C and the liabilities imposed under Section 18 of the Exchange Act.[155] This means that all directors, not just those who are members of the compensation committee, may be liable for false and misleading statements in the CD&A.[156] As a result, all board members need to review the CD&A and discuss it with the compensation committee.

Further, the CD&A and other compensation disclosures included in or incorporated by reference into a periodic report are covered by the CEO and CFO certifications required under SOX.[157] Under SOX, the CEO and CFO face fines of up to $5 million and prison terms of up to 20 years for false certification.[158] Consequently, the CEO and CFO need to review, understand and be satisfied with the new disclosures to avoid potential liability for certifying false statements.

B. SEC Enforcement Actions

The SEC has recently demonstrated an increased willingness to bring enforcement actions against companies that do not comply with the SEC's compensation disclosure requirements.[159] For instance, in 2004, the SEC charged General Electric Company (“GE”) with inadequate disclosure in its 1997–2002 proxy statements of the substantial retirement benefits to be received by GE's former Chairman and CEO, Jack Welch, under his employment agreement.[160] GE settled the charges with the SEC by consenting to the entry of an order to cease and desist from violating federal securities laws in its proxy statements and periodic reports.[161]

Likewise, in 2004, the SEC charged the Walt Disney Company (“Disney”) with failing to disclose certain compensation paid to directors and the employment of directors' family members by the company.[162] Like GE, Disney settled the charges with the SEC by consenting to the entry of an order to cease and desist from violating Sections 13(a) and 14(a) of the Exchange Act and related Rules 13a–1, 12b–20 and 14a–3(a).[163]

Further, in 2005, the SEC charged Tyson Foods Inc. (“Tyson”) with insufficient proxy disclosures and failure to maintain adequate internal controls regarding perquisites received by the company's former chairman, Don Tyson.[164] Specifically, the SEC alleged that Tyson failed to adequately disclose over $1 million in perquisites received by Mr. Tyson before and after his retirement.[165] The SEC also charged Mr. Tyson with causing, aiding and abetting Tyson's violations.[166] Tyson settled with the SEC by paying a $1.5 million civil fine, and Mr. Tyson paid an additional $700,000 in fines in connection with allegations that he caused and aided Tyson's disclosure violations.[167]

The foregoing examples, along with recent SEC backdating cases, illustrate the SEC's willingness to initiate actions based on compensation disclosures and emphasize that companies must comply with not only the letter, but also the spirit, of the new Rules.

Conclusion

In light of the new Rules, companies have been forced to overhaul not only their compensation disclosures, but also their compensation disclosure controls and procedures. Compliance with the Rules requires an effective use of time and resources. Directors and compensation committees should consider how to accurately and fully disclose compensation decisions and how investors and regulators will react to such disclosures. A review of 2007 proxy statements that incorporate the new disclosure principles should assist any company that is continuing to review the implications of its compensation policies on future proxy statement disclosure.

 

* This article updates and expands on a previous piece entitled “Preparing the New Disclosures Under the SEC's Proposals Regarding Executive and Director Compensation,” which appeared in the New York University Review of Employee Benefits and Executive Compensation–2006, copyright 2006 LexisNexis Matthew Bender.

Leigh Johnson is an Assistant Professor of Business Ethics and Law in the Accounting Department of Murray State University. Prior to joining Murray State, Ms. Johnson was a corporate and securities associate at Womble Carlyle Sandridge & Rice, PLLC in its Research Triangle Park, North Carolina office. While at Womble Carlyle, she concentrated her legal practice in corporate ethics, corporate governance matters, securities law, corporate finance, and mergers and acquisitions.

†† Jane Jeffries Jones is a member of Womble Carlyle Sandridge & Rice, PLLC, practicing in its Charlotte, North Carolina office. A member of the Firm's corporate and securities practice group, her practice focuses on equity compensation and other executive compensation matters, as well as related securities law regulatory matters, corporate governance matters, and director fiduciary duty matters.

††† Diane J. Fuchs is a member of Womble Carlyle Sandridge & Rice, PLLC, and heads its Washington, D.C. employee benefits practice group. Ms. Fuchs is a member of the Board of Directors of the American Bar Association Retirement Funds Corporation. She is a recent past President of the American College of Employee Benefits Counsel, a member of the Board of Governors of the College and a Charter Member. She is a Past-Chair of the American Bar Association, Tax Section, Employee Benefits Committee. Ms. Fuchs has been selected as one of the Best Lawyers in America (2005, 2006, 2007) and as one of the Washington, D.C. area superlawyers.

[1] See, e.g., The J.M. Smucker Company, Definitive Proxy Statement (Def 14A) (July 10, 2006); Intel Corp., Definitive Proxy Statement (Def 14A) (Mar. 28, 2006); Pfizer Inc., Definitive Proxy Statement (Def 14A) (Mar. 16, 2006); Wachovia Corp., Definitive Proxy Statement (Def 14A) (Mar. 13, 2006); Coca-Cola Co., Definitive Proxy Statement (Def 14A) (Mar. 10, 2006).

[2] Executive Compensation and Related Party Disclosure, Securities Act Release No. 8655, Exchange Act Release No. 53,185, Investment Company Act Release No. 27,218, 71 Fed. Reg. 6,542 (proposed Jan. 27, 2006) (to be codified at 17 C.F.R. pts. 228, 229, 232, 239, 240, 245, 249 and 274).

[3] Executive Compensation and Related Party Disclosure; Final Rule and Proposed Rule, Securities Act Release No. 8732A, Exchange Act Release No. 54302A, Investment Company Act Release No. 27,444A, 71 Fed. Reg. 53,158, 53,159 (Sept. 8, 2006) (to be codified at 17 C.F.R. pts. 228, 229, 232, 239, 240, 245, 249 and 274). See also Melissa Klein Aguilar, Comments Pile Up On Compensation Reform, Compliance Week, April 11, 2006, http://www.complianceweek.com/index.cfm?fuseaction=article.viewArticle&article_ID=2430

[4] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,159. The Rules also include changes to current reports, related party transactions, director independence and other corporate governance matters and address issues specifically related to small business issuers and registered investment companies. See id. This article focuses primarily on the narrative and tabular disclosure of executive and director compensation to be provided in proxy statements and does not address other areas covered by the Rules.

[5] Id. at 53,209-53,210. The Rules are effective: (i) for Forms 10-K and 10-KSB, for fiscal years ending on or after December 15, 2006; (ii) for Form 8-K, for triggering events that occur after November 7, 2006; (iii) for proxy and information statements for registrants other than registered investment companies filed on or after December 15, 2006 where Item 402 and 404 Regulation S-K disclosure is required; and (iv) for registration statements covering registrants other than registered investment companies that are filed on or after December 15, 2006. Companies will not be required to restate compensation or related person transaction disclosure for previous fiscal years in which the new Rules did not apply. This approach will result in phased-in implementation of certain items that require multi-year disclosure, such as the Summary Compensation Table. Id. at 53,210. See also SEC Division of Corporate Finance, Executive Compensation and Related Person Disclosure Transition Questions and Answers (Sept. 22, 2006), available at http://www.sec.gov/divisions/corpfin/faqs/execcompqa.pdf; SEC Division of Corporate Finance, Item 402 of Regulation S-K Interpretations (Feb. 12, 2007), available at http://www.sec.gov/divisions/corpfin/guidance/execcomp402interp.pdf.

[6] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,158. The SEC intends that the new approach will build on the strengths of existing disclosure requirements by (i) improving the tabular disclosure requirements, (ii) confirming that the tables must include all elements of compensation, (iii) requiring a total compensation figure and (iv) requiring narrative disclosure that includes a general discussion of compensation programs and policies and specific material information regarding tabular disclosures. Id. at 53,162.

[7] Id. at 53,160.

[8] Id.

[9] Id. at 53,161.

[10] See supra note 1. In 2006, Pfizer was touted as leading the pack of companies that were providing comprehensive disclosure and beginning to implement various aspects of the amendments into their proxy statements. See The Compensation Disclosure Blog, http://www.compensationstandards.com/member/blogs/CompensationDisclosure/ (Feb. 27, 2006, 10:49 EST). While Mark Borges indicated, in the “interests of full disclosure,” that he “reviewed and provided comments to Pfizer in the preparation of the executive compensation disclosure portion of the proxy statement,” other sources also pointed to Pfizer as one of the companies setting the standard for disclosure under the new SEC amendments. Id. See also Melissa Klein Aguilar, Some Companies Embracing SEC Pay Proposals Now, Compliance Week, Mar. 7, 2006, http://www.complianceweek.com/index.cfm?fuseaction=article.viewArticle&article_ID=2348; Joann S. Lublin and Kara Scannel, They Say Jump, SEC Plan Tougher Pay Rules, Wall St. J., Jan. 11, 2006, at C1.

[11] See, e.g., United Bancorp, Inc., Definitive Proxy Statement (Def 14A) (Mar. 16, 2007); Merck & Co., Inc., Definitive Proxy Statement (Def 14A) (Mar. 12, 2007); Eli Lilly and Company, Definitive Proxy Statement (Def 14A) (Mar. 5, 2007); Whole Foods Market, Inc., Definitive Proxy Statement (Def 14A) (Jan. 22, 2007).

[12] Exchange Act Release No. 1823 (Aug. 11, 1938), 1938 WL 33169.

[13] Securities Act of 1933, Pub. L. No. 22, 48 Stat. 74, 88 (1933).

[14] Securities Exchange Act of 1934, Pub. L. No. 291, 48 Stat. 881, 892 (1934).

[15] Securities Act of 1933, Pub. L. No. 22, 48 Stat. 74, 89 (1933). The threshold under the Rules is $100,000. See Part III.A.2.

[16] Securities Exchange Act of 1934, Pub. L. No. 291, 48 Stat. 881, 893 (codified as amended in 15 U.S.C. §§ 78a to 78nn).

[17] Id.

[18] See, e.g., Disclosure of Executive Compensation, Release No. 6486, 48 Fed. Reg. 44,467 (Sept. 23, 1983) (limiting tabular disclosure to cash remuneration); Uniform and Integrated Reporting Requirements: Management Remuneration, Securities Act Release No. 6003, 43 Fed. Reg. 5,851 (Dec. 4, 1978) (requiring tabular disclosure for all forms of compensation); Exchange Act Release No. 4775, 17 Fed. Reg. 11,431 (Dec. 11, 1952) (introducing tabular disclosure for pensions and deferred remuneration); Exchange Act Release No. 3347, 7 Fed. Reg. 10,653 (Dec. 18, 1942) (introducing first tabular disclosure).

[19] Executive Compensation Disclosure, Securities Act Release No. 6962, 57 Fed. Reg. 48,125 (Oct. 16, 1992); see also Executive Compensation Disclosure; Securityholder Lists and Mailing Requests, Securities Act Release No. 7032, 58 Fed. Reg. 63,010 (Nov. 22, 1993).

[20] See Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,160; Disclosure of Executive Compensation, Securities Act Release No. 6486, 48 Fed. Reg. 44,467 (Sept. 23, 1983).

[21] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,160; see also Christopher Cox, Chairman, Sec. and Exch. Comm'n, Speech by SEC Chairman: Remarks Before the Council of Institutional Investors (Mar. 30, 2006), http://www.sec.gov/news/speech/spch033006cc.htm.

[22] See Christopher Cox, Chairman, Sec. and Exch. Comm'n, Chairman's Opening Statement: Proposed Revisions to the Executive Compensation and Related Party Disclosure Rules (Jan. 17, 2006), http://www.sec.gov/news/speech/spch011706cc.htm; see also Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,160.

[23] See Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,160.

[24] See Cox, supra note 22. But cf. Alan Beller, then-Director, Div. of Corp. Fin., Sec. and Exch. Comm'n, Speech by SEC Staff: Remarks Before Conference of the NASPP, The Corporate Counsel and the Corporate Executive (Oct. 20, 2004), http://www.sec.gov/news/speech/spch102004alb.htm (noting that “all compensation must be disclosed.”)

[25] See Cox, supra note 22. Note, however, that there is some concern that enhanced disclosure will have the unintended effect of actually increasing executive compensation, as each company tries to outdo its competitors. See Paul S. Atkins, Commissioner, Sec. and Exch. Comm'n, Opening Meeting Statement: Proposed Revisions to the Executive Compensation and Related Party Disclosure Rules (Jan. 17, 2006), http://www.sec.gov/news/speech/spch011706psa.htm; Joseph Nocera, Disclosure Won't Tame C.E.O. Pay, N.Y. Times, Jan. 14, 2006, at C1.

[26] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,160.

[27] Id. at 53,208-53,209.

[28] Id. at 53,209.

[29] Id.

[30] See id. at 53,160.

[31] An “executive officer” includes the registrant's “president, any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant.” 17 C.F.R. § 240.3b-7 (2006); 17 C.F.R. § 230.405 (2006). When executive officers of subsidiaries of the registrant perform policy making functions for the registrant they also may be executive officers of the registrant. 17 C.F.R. § 240.3b-7 (2006); 17 C.F.R. § 230.405 (2006).

[32] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,189-53,190. Specific disclosure regarding the principal financial officer, regardless of his level of compensation, is a change from previous requirements. See 17 C.F.R. §229.402(a)(3) (2006). The $100,000 threshold is not a change from previous requirements; however, this threshold was primarily based on an executive's salary and bonus prior to the adoption of the Rules and now is based on total executive compensation reduced by the sum of the increase in pension values and nonqualified deferred compensation above-market or preferential earnings. See 17 C.F.R. § 229.402(a)(3)(2006); Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,190. This change in calculation may make it harder to identify the Named Executive Officers due to severance payments or other benefits that may make a person a Named Executive Officer even if such executive's salary and bonus would not put the executive in the top five compensated executives.

[33] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,189.

[34] Id. at 53,160-53,161, 53,181-53,183. Comments on the Non-Executive Employees Proposal were due by October 23, 2006. Id. at 53,160.

[35] Id. at 53,182.

[36] See generally Office of Investor Education and Assistance, U.S. Sec. and Exch. Comm'n, A Plain English Handbook, How to Create Clear SEC Disclosure Documents 7 (1998).

[37] See generally id.

[38] See SEC to Revamp Disclosure of Executive Compensation, (CCA Strategies, LLC), Feb. 16, 2006, http://insight.ccastrategies.com/Insight/Documents/SECDisclosure.aspx.

[39] Id.

[40] Id.

[41] Id.

[42] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,160. This is similar in format to the MD&A disclosure currently required by Item 303 of Regulation S-K. Id. See also 17 C.F.R. § 229.303 (2006).

[43] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,164. These factors provide guidance regarding the CD&A, but the factors are not an exhaustive list. Companies should view this list only as a starting point for disclosure. See Your Upcoming Proxy Disclosures – What You Need to Do Now (CompensationStandards.com webcast Jan. 31, 2006). In support of the new requirement, the SEC notes that certain commentators argue that a CD&A should provide a “bottom line assessment” of all the compensation elements for senior executives. See Jeffrey N. Gordon, Executive Compensation: What's the Problem, What's the Remedy? The Case for “Compensation Discussion and Analysis,” 30 J. Corp. L. 695 (2005). Mr. Gordon also notes that “the CD&A should…explain why the compensation committee believes that the compensation is warranted, in light of the demands of the job, the industry, the executive's performance, and other factors deemed relevant.” Id. at 677.

[44] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,164.

[45] Id. The SEC has complained about the use of boilerplate in Compensation Committee reports in prior years. See Alan L. Beller, Director, Div. of Corp. Fin., Sec. and Exch. Comm'n, Speech by SEC Staff: Remarks at the 58th National Conference of the American Society of Corporate Secretaries (July 10, 2004), http://www.sec.gov/news/speech/spch071004alb.htm. The items required to be discussed in the CD&A under the Rules are designed to force companies to provide original disclosure. See Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,165.

[46] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,165-53,166.

[47] See generally WSJ.com, Perfect Payday–Options Scorecard, http://online.wsj.com/public/resources/documents/info-optionsscore06-full.html (last visited Mar. 20, 2007) (tracking the recent status of companies that have come under scrutiny for past stock option grants). The SEC brought its latest two enforcement actions against executives in February 2007 in connection with alleged stock option backdating abuses. See SEC Settles Options Backdating Case Against Ryan Ashley Brant, Former Chief Executive Officer and Chairman of the Board of Take-Two Interactive Software, Inc.; Relief Includes Injunction, Officer-and-Director Bar and Over $6 Million in Civil Penalties, Disgorgement, and Prejudgment Interest, Litigation Release No. 20003, Accounting and Auditing Enforcement Release No. 2557 (Feb. 14, 2007), available at http://www.sec.gov/litigation/litreleases/2007/lr20003.htm.; SEC Files Actions Against Former CFO and Former Controller of Engineered Support Systems, Inc. Relating to Options Backdating Scheme; Former Controller Consents to Permanent Injunction, Officer-and-Director Bar, and Payment of $886,557, Litigation Release No. 19990, Accounting and Auditing Release No. 2551 (Feb. 6, 2007), available at http://www.sec.gov/litigation/litreleases/2007/lr19990.htm.

[48] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,163-53,164. With respect to the timing of options, companies should disclose (i) policies related to grants made in connection with the release of material, non-public information and (ii) the role of the compensation committee and executives in the oversight of option programs or practices. Id. Similar disclosures are required when a company sets the exercise price for an option based on a date other than the grant date. Id. at 53,164.

[49] Id. at 53,167.

[50] Id. at 53,166.

[51] Id. at 53,166-53,167. However, confidential treatment requests need not be submitted. Id. at 53,167.

[52] Id at 53,167.

[53] See supra note 11.

[54] See Merck & Co., Inc., Definitive Proxy Statement (Def 14A), at 20-32 (Mar. 9, 2007).

[55] See Eli Lilly and Company, Definitive Proxy Statement (Def 14A), at 22-30 (Mar. 5, 2007).

[56] See Bristol-Meyers Squibb Co., Definitive Proxy Statement (Def 14A), at 17-28 (Mar. 22, 2007).

[57] See Pfizer Inc., Definitive Proxy Statement (Def 14A), at 42-58 (Mar. 15, 2007).

[58] See Intel Corp., Definitive Proxy Statement (Def 14A), at 18-27 (Mar. 27, 2007).

[59] See Wachovia Corp., Definitive Proxy Statement (Def 14A), at 55-71 (Mar. 9, 2007).

[60] See The Compensation Disclosure Blog, http://www.compensationstandards.com/member/blogs/CompensationDisclosure/ (Mar. 22, 2006, 16:13 EST).

[61] See supra note 58.

[62] See Christopher Cox, Chairman, Sec. and Exch. Comm'n, Speech by SEC Chairman: Remarks at Press Conference on Actions Against Brocade Communications Systems (July 20, 2006), http://www.sec.gov/news/speech/2006/spch072006cc.htm. The SEC currently is investigating the option grant practices of more than one hundred and thirty companies to date. See also Michael D. Gunter and Jane Jeffries Jones, Option Grant Practices Come Under Even Greater Scrutiny As SEC Acts To Address Option Backdating Issue, Womble Carlyle Sandridge & Rice, (2006), http://www.wcsr.com/resources/pdfs/cs072706.pdf.

[63] See Beth Young, Stock Option Backdating – What Investors Need to Know, 11 Alert: Council Research Service 24 (2006), available at http://www.issproxy.com/pdf/CIIAlert2006.pdf.

[64] See supra note 47. The SEC's Office of the Chief Accountant has provided guidance on the effect of stock option backdating on financial disclosures under Accounting Principles Board Opinion No. 25. See Letter from Conrad Hewitt, SEC Chief Accountant, to Mr. Lawrence Salva, Chairman Committee on Corporate Reporting (Sept. 19, 2006) (on file with author), available at http://www.sec.gov/info/accountants/staffletters/fei_aicpa091906.htm.

[65] See Marriott Int'l, Inc., Definitive Proxy Statement (Def 14A), at 23 (Mar. 13, 2007).

[66] The use of written consents and the delegation of authority to executive officers to make grants may in certain cases create ambiguity regarding the actual grant date and subject a company to scrutiny with respect to its internal practices regarding grants of stock awards.

[67] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,168.

[68] Id.

[69] Id. The name of each member of the company's compensation committee must appear below the compensation committee report. The names of the persons performing equivalent functions or the entire board of directors must appear below the report if the company does not have a compensation committee. See id.

[70] Id.

[71] Id. Many commentators noted that the performance graph provided easily accessible information to a company's performance in comparison to its peers and the market in a standardized format. Id.

[72] Id.

[73] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 153,169.

[74] Id.

[75] Id.

[76] Id.

[77] See e.g., Kara Scannel, SEC to Propose Overhaul of Rules on Executive Pay, Wall St. J., Jan. 10, 2006, at A1.

[78] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,169-53,171.

[79] Id. at 53,171.

[80] Executive Compensation Disclosure, Securities Act Release No. 8765, Exchange Act Release No. 55,009, 71 Fed. Reg. 78,338 (proposed Dec. 22, 2006) (to be codified at 17 C.F.R. pts. 228 and 229). Salary or bonus payments converted at the election of a Named Executive Officer into non-cash compensation must be reported by footnote to the appropriate column. Id. at 78,341.

[81] Id. Under the Rules, the valuation of stock awards and option awards was based on the aggregate grant date fair value of the awards computed in accordance with FAS 123(R). In December 2006, the SEC amended this disclosure requirement in order to provide investors with information that is more consistent with a company's financial statements. These amendments became effective on December 29, 2006, but the SEC is considering any comments on these amendments received prior to January 29, 2007 and may revise these amendments if necessary. Id. at 78,338-78,339. The current stock award and option award disclosure represents a departure from previous requirements with respect to options and stock appreciation rights. The number of options and stock appreciation rights, not their compensation cost over the requisite service period, was required to be disclosed under the prior rules pursuant to Item 402(b) of Regulation S-K. See 17 C.F.R. § 229.402(b) (2006).

[82] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,174. The Proposals would have required disclosure of all earnings on deferred compensation, but the Rules only require disclosure of above-market or preferential earnings. Id.

[83] Id. at 53,175-53,178.

[84] Id. at 53,176.

[85] Id. Under the Rules, any perquisite or personal benefit that is valued at the greater of $25,000 or 10% of total perquisites and personal benefits must be specifically identified and quantified, unless the aggregate value of the perquisites is less than $10,000. Id. Prior to the Rules, disclosure of perquisites was required unless the aggregate amount of such compensation was the lesser of either $50,000 or 10% of the total annual salary and bonus. See 17 C.F.R. § 229.402(b).

[86] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,176-53,178.

[87] Id. at 53,176.

[88] Id.

[89] Id. at 53,177.

[90] Id. at 53,179.

[91] See 17 C.F.R. § 229.402(e) (2006).

[92] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,179-53,180.

[93] Id. at 53,179.

[94] Executive Compensation Disclosure, 71 Fed. Reg. at 78,338. Awards that are repriced or materially modified must also be disclosed. Specifically, companies must disclose the incremental fair value of such awards, computed as of the repricing or modification date as determined in accordance with FAS 123R. Id. at 78,343.

[95] See WSJ.com, supra note 47.

[96] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,180. Footnote or narrative disclosure of the pricing methodology is required when this column is included in the table. Id.

[97] Id.

[98] Id. at 53,180.

[99] Id. at 53,180-53,181.

[100] Id. at 53,180.

[101] Id. at 53,181.

[102] See supra note 11.

[103] See Suntrust Banks Inc., Definitive Proxy Statement (Def 14A), at 24-28 (Mar. 2, 2007).

[104] See General Electric Company, Definitive Proxy Statement (Def 14A), at 21-24 (Feb. 27, 2007).

[105] See John White, Dir., Div. of Corp. Fin., Sec. and Exch. Comm'n, Speech by SEC Staff: The Need to Know (Apr. 3, 2006), http://www.sec.gov/news/speech/2006/spch040306jww.htm.

[106] Your Upcoming Proxy Disclosures – What You Need to Do Now (CompensationStandards.com webcast Jan. 31, 2006).

[107] Institutional Shareholder Services, U.S. Corporate Governance Policy 2006 Updates 17 (2006), available at http://www.issproxy.com/pdf/2006USPolicyUpdate.pdf.

[108] Humana Inc., Definitive Proxy Statement (Def 14A), at 38-39 (Mar. 16, 2007).

[109] Sunoco, Inc., Definitive Proxy Statement (Def 14A), at 46-47 (Mar. 9, 2007).

[110] See Christina Cheddar Berk, A Perk Takes Off, Wall St. J., Apr. 11, 2005, at R6; Terence O'Hara, Inquiry Into Riggs Plane Expands, Wash. Post, Jan. 19, 2005, at A1.

[111] See e.g., Johnson & Johnson, Definitive Proxy Statement (Def 14A), at 25-26 (Mar. 15, 2006); Coca Cola Co., Definitive Proxy Statement (Def 14A), at 30, 32 (Mar. 10, 2006); Guitar Center, Inc., Definitive Proxy Statement (Def 14A), at 21 (Mar. 2, 2006).

[112] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. 53,177.

[113] See generally Melissa Klein Aguilar, Comments Pile Up On Compensation Reform, Compliance Week, Apr. 11, 2006, http://www.complianceweek.com/index.cfm?fuseaction=article.viewArticle&article_ID=2430.

[114] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,183-53,185.

[115] Id. at 53,183. Prior to the Rules, this disclosure was required only for holdings of outstanding stock options and stock appreciation rights in the Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values Table. See 17 C.F.R. § 229.402(c)-(d) (2006).

[116] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,185.

[117] 17 C.F.R. § 229.402(c)-(d) (2006).

[118] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,185-53,189.

[119] Id.

[120] See Philip Zemen et al., Another “Holy Cow!” for Investors, Governance Weekly, http://www.issproxy.com/governance/publications/2005archived/081.jsp.

[121] See Roel C. Campos, Comm'r, Sec. and Exch. Comm'n, Speech by SEC Comm'r: Remarks before ASIC Summer School (Feb. 13, 2006), http://www.sec.gov/news/speech/spch021306rcc.htm.

[122] See Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,185.

[123] Id. at 53,186.

[124] See 17 C.F.R. § 229.402(f) (2006).

[125] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,186.

[126] Id.

[127] Id. at 53,187. This disclosure was originally included in the Summary Compensation Table under the Proposals, but the SEC decided to move it to the Pension Benefits Table under the Rules so that pension benefits would be disclosed only once in the Summary Compensation Table. Id.

[128] Id. Examples of such factors include, but are not limited to, the material terms and conditions of benefits available under a plan, the elements included in applying a benefit formula and policies regarding credited service. Id.

[129] Id. at 53,187-53,188.

[130] See 17 C.F.R. § 230.402(b)(2)(iii)(C) (2006).

[131] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,188. Examples of such factors include, but are not limited to, types of compensation permitted to be deferred, measures of calculating interest or other plan earnings and material terms with respect to payouts, withdrawals and other distributions. Id.

[132] Id.

[133] Id. at 53,188-53,189.

[134] Id. at 53,189. The Rules do provide certain assumptions on which companies may rely when making these calculations. Id.

[135] Public Comment Letter from Christopher D. Ivery, Attorney, Stradling Yocca Carlson & Rauth, to Nancy M. Morris, Secretary, Sec. and Exch. Comm'n 4 (Mar. 31, 2006), available at http://www.sec.gov/rules/proposed/s70306/cdivey033106.pdf.

[136] See Lucian Bebchuck, How Much Does the Boss Make?, Wall St. J., Jan. 18, 2006, at A6.

[137] Id.

[138] See Gretchen Morgensen, A ‘Holy Cow' Moment in Payland, N.Y. Times, Feb. 19, 2006, at Section 3 Page 1.

[139] Bank of America Corp., Definitive Proxy Statement (Def 14A) (Mar. 19, 2007).

[140] Bank of New York Co. Inc., Definitive Proxy Statement (Def 14A) (Mar. 14, 2007).

[141] MBNA Corp., Definitive Proxy Statement (Def 14A) (Mar. 15, 2005).

[142] Sunoco, Inc., Definitive Proxy Statement (Def 14A) (Mar. 9, 2007).

[143] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. 53,191 (Sept. 8, 2006).

[144] Id.

[145] Id. at 53,192.

[146] Executive Compensation Disclosure, 71 Fed. Reg. 78,343 (Dec. 22, 2006).

[147] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,192.

[148] Id. at 53,191.

[149] See supra Part III.E.1. and Part III.E.4.

[150] Bank of America Corp., Definitive Proxy Statement (Def 14A), at 11 (Mar. 19, 2007).

[151] Eli Lilly and Company, Definitive Proxy Statement (Def 14A), at 17-19 (Mar. 5, 2007).

[152] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,197.

[153] Id.

[154] See supra Part III.B.1.

[155] See 15 U.S.C. § 78r (2007).

[156] See generally id.

[157] Executive Compensation and Related Party Disclosure, 71 Fed. Reg. at 53,167.

[158] See 18 U.S.C. § 1350 (2007).

[159] See infra notes 160-67.

[160] In re General Electric Co., Exchange Act Release No. 50,426 (September 23, 2004), available at http://www.sec.gov/litigation/admin/34-50426.htm.

[161] Id.

[162] In re Walt Disney Co., Exchange Act Release No. 50,882 (December 20, 2004), available at http://www.sec.gov/litigation/admin/34-50882.htm.

[163] Id.

[164] In re Tyson Foods, Inc. and Donald Tyson, Exchange Act Release No. 51,625 (April 28, 2005), available at http://www.sec.gov/litigation/admin/34-51625.pdf.

[165] Id.

[166] Id.

[167] Id.

Citation
7 U.C. Davis Bus. L.J. 373 (2007)