Proposed SEC Rule Changes for Compensation (Proxy Disclosure)
A few weeks ago, the Securities and Exchange Commission (SEC) released proposed rule changes for proxy disclosure that, if adopted, would take effect for proxy filings for a fiscal year end after December 15, 2009. The SEC is accepting comments on these rule changes until September 15, 2009.
My blog on this topic is: http://compconsultant.wordpress.com/2009/07/30/proposed-sec-rule-changes-for-compensation/
Here is an overview of the proposed changes:
Enhanced Compensation Disclosure
Broad-Based Pay Disclosure in CD&A
Companies will be required to provide information about their compensation policies beyond the Named Executive Officers (NEO) in the CD&A if "risks arising from those compensation policies or practices may have a material effect on the company." Disclosure should focus on the relationship between the general compensation policy and risk, but will not include compensation data for individuals outside of the NEOs. Specifics that may be disclosed include the general design philosophy of the compensation as it relates to risk, any risk assessments used in connection with structuring compensation policies, or changes in a company's risk profile and how that impacts compensation.
Equity Award Values in Summary Compensation Table
The Summary Compensation Table and the Director Compensation Table will include the grant-date fair value of equity awards made during the year as opposed to the expensed accounting value. The grant-date fair value will include the aggregate value of all stock or option awards, including performance awards, currently disclosed in the Grants of Plan-Based Awards Table and valued in accordance with FAS 123R.
This change will have several additional impacts:
• The calculation of the Named Executive Officers will be determined based upon total compensation using the grant-date fair value of equity awards made during the year rather than the expensed accounting value.
• The current SEC proposal eliminates the requirement to disclose the individual values for each award in the Grants of Plan-Based Awards Table.
• The salary and bonus columns of the Summary Compensation Table will no longer be required to include amounts elected to be received in equity as such amounts will be reported in the equity award column.
Enhanced Director and Nominee Disclosure
Board of Director Qualifications
Additional details will be required for individuals nominated for election or re-election to the board of directors. Specifically, the SEC is requesting more information regarding an individual's experience, qualifications, attributes, or skills that qualify them to serve on the board or specific committees of the board. In addition, the proposal requires disclosure of all other public company boards served on the by the director in the last 5 years (rather than only current board memberships) and disclosure of any legal proceedings from the last 10 years (rather than the last 5).
Company Leadership Structure & the Board's Role in the Risk Management Process
Company Leadership Structure
Companies will be required to discuss their current leadership structure and why this structure is best for the company. In particular, companies must discuss whether or not the CEO and Chairman roles are held by the same person and why this structure was chosen. If the CEO and Chair roles are not split, companies must disclose if they have a Lead Independent Director and the specific roles and responsibilities of that position.
Board's Role in Risk Management
Companies will be required to provide additional information about the board of director's role in the company's risk management. Disclosure should detail specific processes, roles, and responsibilities of the board in connection with monitoring and managing the company's risk.
New Disclosure Regarding Compensation Consultants
If a consulting firm provides additional services on top of executive compensation consulting, the company will be required to disclose the fees paid for the consultant's executive compensation services and the aggregate fees paid for all other services provided by the consultant. In addition to fees, companies must also disclose the nature of the other services provided by consultants and whether or not they were recommended or reviewed by management or approved by the board.
Reporting of Voting Results on Form 8-K
The requirement to report shareholder voting results is proposed to be changed from 10-Q and 10-K filings to 8-K filings. This will increase the timeliness of the delivery of voting results to within 4 business days of the vote. For contested elections where voting results are not finalized within 4 days, preliminary voting results may be disclosed in the 8-K filing.
Proxy Solicitation Process
Revisions to the rules governing the proxy solicitation process to provide clarity and address issues.
Comments regarding these proposed changes should be sent to rule-comments@sec.gov. Please include File Number S7-13-09 on the subject line go to their website: http://www.regulations.gov. The SEC is accepting comments on these rule changes until September 15, 2009.
Link to SEC document: http://www.sec.gov/rules/proposed/2009/33-9052.pdf
Claudia Elmore
Elmore Consulting Group
PO Box 52252
Irvine CA 92619-2252
Phone: (949) 679-2350
Mobile: (310) 625-8711
Facsimile: (509) 479-9292
CompConsultant@aol.com
http://www.ElmoreConsultingGroup.com
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If a company grants a performance-based award in 2009, but does not set the performance criteria until 2010, is there a grant date fair value for the award in 2009? I understand that there would not be because the performance criteria is not set in 2009. Agree?
Claudia,
Thanks for this EXCELLENT overview. I am sure I am not the only member who finds this very useful.
Perhaps it is time for the ECE to help its members craft comments for the SEC. With the deadline for comments about a month away, I think that providing ECE members with cogent points (with pro and con arguments for each) would be very helpful.
I do not think the ECE should be a "lobbying" voice as much as it MUST be an informative, educational voice. Whether members agree or disagree with the details of the proposal is less relevant that that fact that we let people know that professionals who interact with equity compensation programs are deeply interested and engaged in this topic.
ECE members who would like to assist inputting together comments should contact me directly. If there is even ONE point that catches your interest, it is enough to provide a comment. We can consilidate all comments into a single discussion forum and provide information for members to select the comments they feel are important and send them in.
Dan
dwalter@performensation.com
Joshua,
Great question regarding Performance-based equity (one of my favorite topics). My understanding is in alignment with yours.
For the purposes of the Executive Compensation; Grants of Plan-Based Awards Table the grant date would be set once the performance criteria has been set. This means that in your example there would be no value on the 2009 table. The value would only be shown once the performance goals were set in 2010.
In a more detailed example, imagine that performance-based award was given with goals to be measured in threee separate years (let's say EBITDA). If the metric was set for Year 1, but not set for Year 2 or 3, then only year one would appear with a value on the table. Once the metrcis were set for Years 2 and 3 the grants date and values would be set and appear on this table.
This does not necessarily mean that the "Grant Date" for the above multi-year award would end up being three separate dates in your equity administration system. It does mean that the term "Grant Date" may now have even more definitions than ever before.
Perhaps a different term should be used for the Grants of Plan-Based Awards Table, so that there is some clarity when people communicate this new definition.
Dan,
Thank you for responding so quickly to Joshua's question. I think it is a great idea to consolidate comments to discussion forum. I will leave it to you to take the lead...
Claudia
Claudia;
Assuming your description of the SEC proposal is correct, I believe it will have just a small effect.
Requiring the "fair value" at grant day to be indicated on the financial statements instead of accounting expensed value will add some increase to the value of the grants indicated. However, the executives will arbitrarily understate those "fair value" amounts by manipulating expected volatility and expected time downward probably moreso than they have in the past.
On the idea of risk over-site by members of the Board of Directors hoping that this will reign in speculative abuses from excessive risk taking by top executives, it is clear that the SEC is merely pretending to do something and will have virtually no effect.
John Olagues
John,
Thanks for the feedback - I understand that some of the proposed regulations are a result of the media attention and politics. However, Compensation professionals seem to be on "high alert" these days when it comes to Executive Pay.
Claudia
Hi Claudia,
Thorough job. Well done.
To understand this moving, amorphous mass of change that is taking place, you need also to consider the legislation that is going through Congress, e.g., Barney Frank's and Chuck Schumer's bills on shareholder access to the proxy process and controls over regulated financial insitutions.
Mel Croner
Joshua,
Without performance measures defined at the time of the grant, you do not have a grant of performance-based stock.
John,
The Obama administration and the SEC and Congress are moving on the subject of executive compensation. The then Senator Obama introduced say-on-pay legislation in 1997. I don't think he is "pretending" either.
The largest part of our current problems with executive compensation are a direct results of the negligence of governance, i.e., boards of directors. The SEC often screws up things, but rarely are they "pretending" to do something.
I believe you will see bills passing Congress that assign liability to directors who fail to exercise the kind of risk management that the SEC's draft regulations are addressing.
Mel Croner