The Securities and Exchange Commission (SEC) has adopted amendments to the rules requiring disclosure of executive and director compensation and related matters. Published in the September 8, 2006, Federal Register, these amendments also apply to disclosures in proxy and information statements, as well as periodic and current reports of related party transactions, director independence, and board committee functions.
Another part of this final rule (the proposed rule was published January 27, 2006), requires companies to provide compensation information in plain English, thereby making proxy and information statements, reports, and registration statements easier to understand. The changes, the SEC says, will provide investors with a clearer picture of the salary earned by principal executive officers, principal financial officers, and other highest paid officers and board members.
Although the rule is directed at publicly owned companies, many of these requirements tend to become the standard against which not-for-profit organizations are measured. (Federal Register page 53158.)
The changes preserve and build upon the strengths of disclosure requirements adopted in 1992, while adding a broader-based tabular presentation with improved narrative disclosure supplementing the tables.
Executive and Director Compensation Disclosure
Under the final rule, disclosure begins with an overview narrative in the Compensation Discussion and Analysis that puts into context more detailed compensation disclosure provided elsewhere. A revised Compensation Discussion and Analysis section:
- Will provide material information about the compensation objectives and policies for named executive officers without resorting to boilerplate disclosure, and
- May require discussion of post-termination compensation arrangements, on-going compensation arrangements, and policies that the company will apply in the future. (Federal Register, pages 53164 -53166.)
Narrative Disclosure to Tables
The narrative disclosure following the Summary Compensation and other tables focus on, and provide specific context to, the quantitative disclosure in the tables. The narrative disclosure:
- Covers written or unwritten agreements or arrangements,
- Is intended to make the tabular disclosure more meaningful, and
- Will describe, to the extent material and necessary to understand the tabular disclosure, such information as extension of exercise periods, change of vesting or forfeiture conditions, and change or elimination of applicable performance criteria. (Federal Register, pages 53180 - 53181.)
Significant revisions were made to disclosure requirements for post-employment compensation to provide a clearer picture of this type of compensation. Those revisions include:
- The addition of a table and narrative disclosure providing information about non-qualified defined contribution plans and other deferred compensation.
- Requirements regarding disclosure of compensation arrangements triggered upon termination and on changes in control. (Federal Register, page 53185.)
Compensation of Directors
These changes include:
- Adoption of a Director Compensation table, which resembles the revised Summary Compensation table, but presents information only with respect to the company's last completed fiscal year.
- A requirement that the formatted tabular disclosure for director compensation be accompanied by narrative disclosure of additional material information.
- The reporting of director compensation separately from fees paid in stock. As with the Summary Compensation table, the new rule makes clear that all compensation must be included in the table. (Federal Register, pages 53191- 53192.)
Transactions with CEOs, Directors, and Related Persons
The SEC believes that in addition to executive compensation disclosure, a materially complete picture of financial relationships with a company involve disclosure regarding related party transactions. Consequently,
- The instructions for Item 404 clarify which compensatory transactions with executive officers and directors do not need to be disclosed. (Federal Register, page 53190.)
- Amendments to Item 404 of Regulation S-K, previously titled "Certain Relationships and Related Transactions," are intended to make relationships and related transactions disclosure requirements clearer and easier to follow. (Federal Register, pages 53197-53198.)
Corporate Disclosure Governance
The rule consolidates director independence and related corporate governance disclosure requirements under a single disclosure item and updates the requirements regarding director independence to reflect its current requirements and current listing standards.
Also, the requirement that the company must describe the processes and procedures for the consideration and determination of executive and director compensation, including:
- The scope of authority of the compensation committee (or persons performing the equivalent functions);
- The extent to which the compensation committee (or persons performing the equivalent functions) may delegate any authority to other persons, specifying what authority may be so delegated and to whom;
- Any role of executive officers in determining or recommending the amount or form of executive and director compensation; and,
- Any role of compensation consultants in determining or recommending the amount or form of executive and director compensation, identifying such consultants, stating whether such consultants are engaged directly by the compensation committee (or persons performing the equivalent functions) or any other person describing the nature and scope of their assignment, and the material elements of the instructions or directions given to the consultants with respect to the performance of their duties under the engagement. (Federal Register, page 53203 - 53205.)
Plain English Disclosure
The rule requires that most of the disclosures be provided in plain English to achieve clearer and more concise presentation of executive and director compensation, beneficial ownership, and corporate governance matters, and to facilitate more informed investing and voting decisions. Principles to be applied, as well as practices to be avoided, are described. (Federal Register, page 53208-53209.)
The SEC believes that it has adopted the new rules and amendments in sufficient time for compliance in the 2007 proxy season. During a phase-in period, companies will not be required to present prior years' compensation disclosure or Item 404(a) disclosure under the former rules. (Federal Register, pages 53209 - 53210.)
The rule went into effect November 7, 2006.
For More Information
Effective Compensation and Related Person Disclosure; Final Rule and Proposed Rule. September 8, 2006, Federal Register.
Publication Date: Saturday, October 07, 2006