february 17 2006
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The SEC’s Disclosure Proposals for Executive Compensation

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February 17, 2006. The SEC’s Disclosure Proposals for Executive Compensation . Today’s Speakers. Mark Borges Principal – Mercer Human Resource Consulting Cathy Creech Partner – Benefits Group of Davis 7 Harman LLP Lynn Dudley Vice President – American Benefits Council John McGuiness

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Presentation Transcript
today s speakers
Today’s Speakers

Mark Borges

Principal – Mercer Human Resource Consulting

Cathy Creech

Partner – Benefits Group of Davis 7 Harman LLP

Lynn Dudley

Vice President – American Benefits Council

John McGuiness

Principal – Groom Law Group

agenda
Agenda
  • Overview
  • Summary of Executive Compensation Proposals
    • Individuals Covered
    • Compensation Discussion and Analysis
    • Summary Compensation Table
    • Outstanding Equity Awards and Realized Gains
    • Post-Employment Payments and Benefits
    • Director Compensation
  • Preparing for Next Year’s Disclosure
  • Questions
overview
Overview
  • Proposals issued by SEC on January 27, 2006
    • First significant revision in 14 years
  • What happens next?
    • 60-day comment period – ends April 10, 2006
    • SEC staff will evaluate comments and formulate final recommendations
    • Commission will consider and adopt final rules later this year
  • Effective dates – new rules will apply to:
    • Proxy statements filed 90 days or more after publication of final rules
    • Annual reports for fiscal years ending 60 days or more after publication
    • Forms 8-K filed for triggering events occurring 60 days or more after publication
    • Registration statements that become effective 120 days or more after publication
individuals covered
Individuals Covered
  • Named executive officers
    • Any person who during the last fiscal year served (at any time) as
      • principal executive officer
      • principal financial officer, PLUS
    • Three most highly-compensated executive officers (other than the PEO and PFO) who were serving as executive officers at end of last fiscal year, PLUS
      • Based on total compensation
      • Disclosure not required if total compensation does not exceed $100,000
    • Up to two additional individuals who would have been among the top three most highly-compensated executive officers except they were no longer serving as executive officers at end of last fiscal year
compensation discussion and analysis
Compensation Discussion and Analysis
  • Replaces Board Compensation Committee Report and Performance Graph
  • Overview of executive compensation program
    • Summary of each program element
    • Provides context for tabular disclosure
  • Must discuss six specific items:
    • Program objectives
    • Behaviors that program is designed to reward and not reward
    • Elements of compensation
    • Rationale for each element
    • Methodology (including formula) used to determine amount for each element
    • How each element and decisions regarding that element fit into overall compensation objectives and affect decisions regarding other elements
compensation discussion and analysis1
Compensation Discussion and Analysis
  • Considered company, rather than compensation committee, disclosure
  • Will be considered “filed” with, rather than “furnished” to, the SEC
    • Subjects CD&A to full liability under the federal securities laws
    • Covered by SOX Section 302 CEO and CFO certifications to the extent incorporated into an Securities Exchange Act periodic report (for example, Form 10-K)
  • Need not disclose performance target levels, or factors/criteria involving confidential commercial or business information
summary compensation table all other compensation
Summary Compensation Table – All Other Compensation
  • Any compensation item that is not properly reported in any other column
    • Perquisites and other personal benefits
    • Earnings on NQDC arrangements (including defined contribution plans)
    • Tax “gross-ups” and reimbursements
    • Discount stock purchases (unless arrangement is broadly available)
    • Amounts paid or accrued under severance or change-in-control arrangements
    • Company contributions to qualified defined contribution plans
    • Aggregate increase in actuarial value of defined benefit pension plans
    • Value of insurance premiums paid by company for NEO life insurance
  • Item must be identified and quantified if amount exceeds $10,000
perquisites
Perquisites
  • While not defined, proposals provide analytical framework for determining:
    • An item:
      • Is not a perquisite if “integrally and directly related to the performance of the executive’s duties”
      • Is a perquisite if “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”
  • Proposed disclosure requirements
    • Must be disclosed if aggregate value perquisites is $10,000 or more
    • If disclosed, must be individually identified
    • Must be quantified only if individual item has value in excess of greater of:
      • $25,000 or
      • 10% of total perquisites
sct supplemental table grants of performance based awards table

Name

Perform-ance-Based Stock and Stock-based Incentive Plans: number of shares, units or other rights(#)

Perform-ance-Based Options: number of securities underlying Options(#)

Non-Stock Incentive Plan Awards: number of unitsor other rights(#)

Dollar amount of consid-eration paid for award, if any($)

Grant Datefor Stock or Option Awards

Perform-ance or other period until vesting or payout and Option Expira-tion Date

Estimatedfuturepayouts

Threshold($)or(#)

Target($)or(#)

Maxi-mum($)or(#)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

PEO

PFO

A

B

C

SCT Supplemental Table:Grants of Performance-Based Awards Table
sct supplemental narrative
SCT Supplemental Narrative
  • Must discuss any “material factors” required to make presentation in SCT and supplemental tables understandable:
    • Materials terms of NEO employment agreements
    • Description of any option repricing or material modification of outstanding equity award
    • Material terms of performance-based awards
    • Assumptions underlying calculation of defined benefit pension plans actuarial value
  • Narrative must also include total compensation and job description for up to three non-executive employees whose total compensation exceeded that of any NEO
post employment payments and benefits
Post-Employment Payments and Benefits
  • Proposals would require individualized disclosure for each NEO
    • Retirement Plan Potential Annual Payments and Benefits Table
    • Nonqualified Defined Contribution and Other Deferred Compensation Plans Table
    • Potential payments upon termination or change-in-control
      • Narrative, rather than tabular, disclosure
      • Must quantify amount payable to each NEO
      • Must disclose assumptions
potential payments upon termination or change in control
Potential Payments Upon termination or Change-in-Control
  • Covers any contract, agreement, plan, or arrangement (whether or not in writing) providing for payments at, following, or in connection with any termination of employment, including:
    • Resignation
    • Retirement
    • Termination without cause (including a constructive termination)
    • Termination with cause
    • Change-in-control
  • Covers any payments and other benefits (including perquisites) payable upon the occurrence of any of these events
implications for next year s disclosure
Implications for Next Year’s Disclosure
  • Although probably not effective until 2007, current compensation decisions are affected
  • Should assess current disclosure practices under proposals
    • Are improvements needed?
    • Are shareholders requesting disclosure not covered in proposals?
  • Consider how current program will be described under proposals
    • What more is needed to “explain the numbers?”
    • Can compensation philosophy be explained thoroughly and succinctly?
    • Consider presentation formats that are easy to understand
    • Look for potential “double counting” pitfalls
implications for 2007 disclosure
Implications for 2007 Disclosure
  • CD&A will require significantly more detailed disclosure
    • Provides a broad framework, but companies must “tell their own story”
    • Proposals emphasize the “how” and “why” as much as the “how much”
    • Requires greater demonstration of pay-for-performance relationship
    • Putting policies and decisions in writing may be a daunting task
    • Can you tell a compelling story?
  • Identify compensation elements that will comprise “Total Compensation” figure
    • Develop internal “tally” sheets
    • Review benchmark data and process and validate what is “competitive pay”
    • Decide whether certain program elements should be revised or eliminated
  • Will need to monitor all executive officers to identify NEOs
implications for 2007 disclosure1
Implications for 2007 Disclosure
  • Determine appropriate and consistent valuation methods
    • Equity valuation
    • Nonqualified deferred compensation earnings
    • Defined benefit pension plan actuarial values
    • Perquisites
  • Examine impact of new disclosure values and calculations
    • Post-employment payments and benefits arrangements may generate numbers that may never be realized
    • Defined benefit pension plan calculation likely to be complex and confusing
    • Disclosure of NQDC arrangements will duplicate aspects of the SCT
  • Severance and change-in-control disclosure to be continued hot button
    • Model various termination scenarios to select appropriate disclosure
    • Select reasonable assumptions
implications for 2007 disclosure2
Implications for 2007 Disclosure
  • Items to remember
    • Quality – not quantity, is key
    • Use “plain English” in narrative discussions
      • Consider using charts and bullets
    • The Performance Graph (which charts TSR), not the discussion of TSR, is being eliminated
    • Disclosure is not limited to the proxy statement
      • Consider using websites and other venues

Bottom line: Begin planning now!

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