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1. Today's Speakers. . Mark BorgesPrincipal ? Mercer Human Resource ConsultingCathy CreechPartner ? Benefits Group of Davis 7 Harman LLPLynn DudleyVice President ? American Benefits CouncilJohn McGuinessPrincipal ? Groom Law Group. 2. Agenda . Overview Summary of Executive Compensatio
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1. The SEC’s Disclosure Proposals for Executive Compensation February 17, 2006
2. 1 Today’s Speakers
3. 2 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
4. 3 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
5. 4 Summary of Executive Compensation Proposals
6. 5 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
7. 6 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
8. 7 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
9. 8 Summary Compensation Table
10. 9 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
11. 10 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
12. 11 SCT Supplemental Table:Grants of Performance-Based Awards Table
13. 12 SCT Supplemental Tables:Grants of All Other Equity Awards Table
14. 13 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
15. 14 Outstanding Equity Awards at Fiscal Year-End Table
16. 15 Option Exercises and Stock Vested Table
17. 16 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
18. 17 Retirement Plan Potential Annual Payments and Benefits Table
19. 18 Nonqualified Defined Contribution and Other Deferred Compensation Plans Table
20. 19 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
21. 20 Director Compensation
22. 21 Preparing for Next Year’s Disclosure
23. 22 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
24. 23 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
25. 24 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
26. 25 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!
27. 26 Questions