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New SEC Executive Compensation Disclosure Rules. A presentation for DELVACCA January 23, 2007. Sponsored By. Overview. Named Executive Officers Compensation Discussion and Analysis (CD&A) Tables Summary Compensation Table Grants of Plan-Based Awards

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New sec executive compensation disclosure rules

New SEC Executive Compensation Disclosure Rules

A presentation for

DELVACCA

January 23, 2007

Sponsored By


Overview
Overview

  • Named Executive Officers

  • Compensation Discussion and Analysis (CD&A)

  • Tables

    • Summary Compensation Table

    • Grants of Plan-Based Awards

    • Outstanding Equity Awards at Fiscal Year-End

    • Option Exercises and Stock-Vested

    • Pension Benefits

    • Nonqualified Deferred Compensation

    • Director Compensation


Overview1
Overview

  • Potential Payments on Termination or Change in Control

  • Compensation Committee Report

  • Form 8-K Revisions

  • Beneficial Ownership Disclosure

  • Certain Relationships and Related Person Transactions

  • Corporate Governance


Overview2
Overview

  • Principles-Based Approach

    Under a principles-based approach, one starts with laying out the key objectives of good reporting in the subject area and then provides guidance explaining the objective and relating it to some common examples. While rules are sometimes unavoidable, the intent is not to try to provide specific guidance or rules for every possible situation. Rather, if in doubt, the reader is directed back to the principles


Overview3
Overview

  • Principles-Based Approach

    “ALL MEANS ALL”


Overview4
Overview

  • Katie Couric Proposal

    • Three highest compensated employees who are not executive officers but earn more than any of the named executive officers


Recent changes to disclosure of equity compensation awards
Recent Changes to Disclosure of Equity Compensation Awards

  • December 2006 Changes Affect

    • Summary Compensation Table

    • Grant of Plan-Based Awards Table

    • Director Compensation Table

    • Total Compensation

    • Determination of Named Executive Officers


Recent changes to disclosure of equity compensation awards1
Recent Changes to Disclosure of Equity Compensation Awards

  • August Revisions

    • Summary Compensation and Director Compensation Tables disclosure of full grant date fair value of awards under FAS 123R of grants during year

    • FAS 123R requires

      • Calculation of the fair value of stock options, restricted stock, and similar equity awards as of the date they are granted

      • Recognition of the cost of the award over the service period (generally the vesting period)


Recent changes to disclosure of equity compensation awards2
Recent Changes To Disclosure of Equity Compensation Awards

  • December Amendment

    • Disclose compensation cost recognized in financial statements under FAS 123R of awards made during year and prior years

    • Disclose full grant date fair value of awards under FAS 123R in new column in Grant of Plan-Based Awards Table and in footnote to Director Compensation Table, on award-by-award basis


Recent changes to disclosure of equity compensation awards3
Recent Changes To Disclosure of Equity Compensation Awards

  • Effects

    • Total compensation in Summary Compensation Table

    • Determination of Named Executive Officers

    • Disclosure in Summary Compensation Table more consistent with financial statement recognition

  • Some exceptions

    • Do not include the estimate of forfeiture used under FAS 123R in determining compensation cost

    • Must use modified prospective transition method and not the modified retrospective transition method available under FAS 123R


Recent changes to disclosure of equity compensation awards4
Recent Changes to Disclosure of Equity Compensation Awards

  • Treatment of election to forego salary or bonus in favor of non-cash compensation

    • Must still be reported in salary or bonus column of Summary Compensation Table

    • Footnote disclosure of receipt of the non-cash compensation referring to the Grants of Plan Based Awards Table


FAQs

  • Address early optional compliance

  • Transition rules

    • Form 8-Ks on or after November 7, 2006

    • Forms 10-K and 10-KSB for fiscal years ending on or after December 15, 2006

    • Proxy, information and registration statements filed on or after December 15, 2006 that include Item 402 and 404 disclosure for fiscal years ending on or after December 15, 2006


FAQs

  • Can comply with the rules earlier than required to

  • If elect early compliance, must comply with all of the new rules

  • If elect early compliance, the Summary Compensation Table for the next period would include the information disclosed

    • Form 10-K for fiscal year 2006

    • Registration statement for year ending December 31, 2005



Purpose
Purpose

  • To explain the material elements of a reporting company’s compensation objectives and policies for named executive officers

  • A “principles-based” rule that describes the required disclosure conceptually then provides illustrative examples


Location
Location

  • Item 402(b) of Regulation S-K, as amended

  • Required in proxy statements and in Part III of Form 10-K (incorporation by reference)

  • CD&A is “filed” (as opposed to furnished) and subject to CEO/CFO certifications


Required disclosures
Required Disclosures

  • Discuss the compensation awarded to, earned by, or paid to the named executive officers (NEOs).

  • The discussion shall explain all material elements of the reporting company’s compensation of the NEOs.


Required disclosures1
Required Disclosures

  • The discussion shall describe the following:

    • The objectives of the company’s compensation programs;

    • What the compensation program is designed to reward;

    • Each element of compensation;

    • Why the company chooses to pay each element;

    • How the company determines the amount (and, where applicable, the formula) for each element to pay; and

    • How each compensation element and the company’s decisions regarding that element fit into the company’s overall compensation objectives and affect decisions regarding other elements.


Suggested disclosures
“Suggested” Disclosures

  • Policies for allocating between long-term and current compensation

  • Policies for allocating between cash and non-cash compensation, and among different forms of non-cash compensation

  • Basis for allocating long-term compensation to each different form of award

    • Such as relationship of the award to the achievement of long-term goals, management’s exposure to downside equity performance risk, correlation between cost and expected benefit to company


Suggested disclosures1
“Suggested” Disclosures

  • How determination is made as to when awards are granted

  • What specific items of corporate performance are taken into account in setting compensation policies and making compensation decisions

  • How forms of compensation are structured to reflect these items, including

    • Whether discretion can be or has been exercised (either to award compensation absent attainment of performance goals or to reduce or increase size of any award or payout),

    • Identifying any particular exercise of discretion and whether it applied to NEOs or all compensation subject to the relevant performance goals


Suggested disclosures2
“Suggested” Disclosures

  • How specific forms of compensation are structured and implemented to reflect the NEO’s individual performance or contribution to these items of the company’s performance, describing the elements of individual performance

  • Company policies and decisions regarding the adjustment or recovery of awards or payments if the relevant performance goals are restated or otherwise adjusted in a manner that would reduce the size of an award or payout

  • Factors considered in decisions to increase or decrease compensation materially

  • How amounts realizable from prior awards are considered in setting other elements of compensation (e.g., how gains from prior stock options are considered in setting retirement benefits)

  • With respect to any arrangement that provides for payments related to a change-in-control, the basis for selecting particular events as triggering payment (e.g., rationale for single trigger)


Suggested disclosures3
“Suggested” Disclosures

  • Impact of the accounting and tax treatments of the particular form of compensation

  • Company’s equity ownership guidelines and any policies regarding hedging the economic risk of such ownership

  • Whether the company engaged in any benchmarking of total compensation, or any material element, identifying the benchmark and its components (including component companies)

  • The role of executive officers in determining executive compensation


Suggested disclosures4
“Suggested” Disclosures

  • How specific forms of compensation are structured and implemented to reflect the NEO’s individual performance or contribution to these items of the company’s performance, describing the elements of individual performance

  • Company policies and decisions regarding the adjustment or recovery of awards or payments if the relevant performance goals are restated or otherwise adjusted in a manner that would reduce the size of an award or payout

  • Factors considered in decisions to increase or decrease compensation materially

  • How amounts realizable from prior awards are considered in setting other elements of compensation

    • e.g., how gains from prior stock options are considered in setting retirement benefits

  • With respect to any arrangement that provides for payments related to a change-in-control, the basis for selecting particular events as triggering payment

    • e.g., rationale for single trigger


Cd a and other proxy disclosures
CD&A and Other Proxy Disclosures

  • CD&A should focus on the material principles underlying the company’s executive compensation policies and decisions – without using boilerplatelanguage or repeating the more detailed information set forth in the tables and related narrative disclosures that follow

  • CD&A should concern the information contained in the tables and other narratives

  • Cross references may be appropriate


Period covered
Period Covered

  • Must address compensation for the most recently completed fiscal year

  • May be necessary to address post-termination and on-going compensation arrangements and how they interplay with annual and long-term compensation

  • Should cover actions regarding executive compensation taken after fiscal year-end

  • It may be necessary to discuss prior years’ compensation in order to give context to the policies and decisions being analyzed


Confidential information
Confidential Information

  • Not required to disclose target levels with respect to specific quantitative or qualitative performance-related factors, or any other factors or criteria involving confidential trade secrets, commercial or financial information

  • Must disclose how difficult or likely it will be to achieve undisclosed targets

  • Same standard as applies to confidential treatment requests


Current issues with cd a
Current Issues with CD&A

  • Disclose or not disclose specific target levels of qualitative and quantitative performance criteria

  • Coordination of CD&A with other narrative sections of the proxy

  • Impact on disclosure controls and other company processes



Perquisites1
Perquisites

  • Disclosed in “All Other Compensation” column

  • Reduced threshold to $10,000 aggregate

  • If meet threshold

    • Must identify each perquisite

    • Must disclose value of each perquisite that has value of more than $25,000 or 10% of total perquisites


Perquisites2
Perquisites

  • Identification of perquisite must accurately identify the particular nature of the benefit received

  • Must report tax gross ups separately

  • Perquisites valued at the aggregate incremental cost to the company


Perquisites3
Perquisites

  • Interpretive guidance in proposed and final release identified two factors

    • An item is not a perquisite if it is integrally and directly related to the performance of duties

    • If not, an item is a perquisite if it confers a benefit that has a personal aspect (even if provided for a business reason) unless it is generally available to all employees on a non-discriminatory basis


Perquisites4
Perquisites

  • An item is integrally and directly related to performance of duties if it is something needed to do the job

  • Examples

    • Office space at a company location

    • Reserved parking space closer to business facilities

    • Additional secretarial services devoted to company matters

    • Blackberry or laptop


Perquisites5
Perquisites

  • Examples of items not integrally and directly related to performance of duties

    • Company provided aircraft or yachts

    • Commuter transportation services

    • Additional secretarial support for personal matters

    • Investment management services

    • Club memberships

    • Housing or relocation assistance


Perquisites6
Perquisites

  • Characterization as a necessary or ordinary expense for tax purposes irrelevant

  • Existence of company benefit not controlling

    • Use of company aircraft or vacation property for security purposes


Perquisites7
Perquisites

  • If an item is not integrally and directly related to job performance, must determine if it has a personal aspect

  • Following would not be perquisites

    • Travel to and from business meetings

    • Business entertainment

    • Security during business travel

    • Expense account limited to business purpose


Perquisites8
Perquisites

  • The following would be perquisites

    • Club memberships not used exclusively for business entertainment

    • Personal travel using company vehicles

    • Personal use of company property

    • Security at residence

    • Commuting expenses

    • Housing and other living expenses


Perquisites9
Perquisites

  • Spouse tag along on corporate aircraft when executive flying for business reasons (no incremental cost)

  • Director’s use of corporate aircraft to attend board meeting

  • Travel costs of spouse to attend board meeting where spouses are invited


Perquisites10
Perquisites

  • Relocation expenses for executive the company has required to relocate

  • Zero cost perquisites- executive reimburses full incremental cost


Related person transactions

Related Person Transactions

Lisa Axt Alexander

InterDigital Communications Corporation


Item 404 a broad principles based
Item 404(a)-Broad Principles-Based

  • Any transaction since the beginning of the company’s last fiscal year or any currently proposed transaction in which:

    • The company was or is to be a participant;

    • The amount involved exceeds $120,000; and

    • Any related person had or will have a direct or indirect material interest.


Material interest
“Material Interest”

  • “Materiality” under 404(a) – no definition

  • Materiality of any interest will be determined on basis of significance of information to investors in light of all the circumstances

  • Relationship, importance of interest, amount involved are among the factors to be considered


Related person
“Related Person”

  • Includes directors, executive officers and their immediate family members (and director nominees and their immediate family members-if disclosure were provided in proxy or information statement), > 5% shareholders

  • Don’t need to have been a related person at the time of the transaction (if an officer, director or immediate family member of such person)

  • “immediate family member” includes in-laws, step children, and any person sharing the household (other than a tenant)


Some exceptions to disclosure
Some Exceptions to Disclosure

  • Compensation of executive officers if reported under reported 402 of S-K or approved or recommended by the Compensation Committee

  • Certain types of indebtedness

  • No “indirect material interest” if interest arises only from person’s position as a director in the other entity which is a party to the transaction or ownership by such person and all other related person in the aggregate of <10% equity interest in other entity which is a party to the transaction or both


Some exceptions to disclosure1
Some Exceptions to Disclosure

  • No “indirect material interest” if interest arises only from person’s position as a limited partner in a partnership in which the person and all other related persons have an interest of <10% (can’t be GP/ hold another position in the partnership)

  • Transactions where charges are determined by competitive bids or fixed by law or government authority

  • Transactions involving services as a bank depositary, transfer agent, registrar, trustee or similar service

  • Interest arises solely from ownership of stock and all holders of the class receive same benefit on a pro rata basis


Additional considerations
Additional Considerations

  • Prepare a written policy for review and approval of related person transactions (to be described in your proxy statement).

  • Update your internal controls (and DOQ)

  • Watch independence of directors and “non-employee director” status under section 16


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