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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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February 17 2006

February 17, 2006

The SEC’s Disclosure Proposals for Executive Compensation


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 tables grants of all other equity awards table
SCT Supplemental Tables:Grants of All Other Equity 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 Compensation Plans Table

  • 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


Director compensation
Director Compensation Compensation Plans Table


Preparing for next year s disclosure
Preparing for Compensation Plans TableNext Year’s Disclosure


Implications for next year s disclosure
Implications for Next Year’s Disclosure Compensation Plans Table

  • 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 Compensation Plans Table

  • 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 Compensation Plans Table

  • 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 Compensation Plans Table

  • 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!


Questions
Questions Compensation Plans Table


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