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

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

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

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

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

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

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

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.