SEC Agrees to Propose New Rules for Disclosing Executive Compensation

By The ERISA and Employee Benefits Group

On January 17, 2006, the Securities and Exchange Commission (SEC) unanimously agreed to propose significant revisions to its executive compensation disclosure rules. The proposals, which will appear soon in the Federal Register, address executive and director compensation, related party transactions, director independence and other governance matters. The executive and director compensation proposals are briefly summarized below.

The new executive compensation disclosures would include three new sections—a reorganized summary compensation table, an equity compensation section, and a section addressing retirement plan and post-employment payments. Presumably, each section would also include narrative descriptions necessary for a complete understanding of the tables.

As described at the January 17 hearing, the summary compensation table would include the following five columns for the CEO, the CFO, the next three highest compensated executive officers and up to three other employees (showing only job description and total compensation, but not names) whose total compensation exceeds that of any named executive officer:

1. Total compensation.
2. Annual salary and bonus.
3. Equity awards. Companies would disclose the dollar value of any equity award during the year valued at the full grant date fair value, using the same valuation methodology used in the company’s financial statements as required by FAS 123.
4. Non-equity incentive compensation. Companies would disclose the dollar value of any non-equity incentive awards paid (not awarded) during the year.
5. All other compensation. In a significant change from the prior rules, companies would disclose in this column any amounts earned during the year and not shown in one of the other columns, including, for example, the annual increase in the value of pension benefits, annual contributions to deferred compensation plans and all earnings on such plans and perquisites, with itemization required for any perquisite valued over $10,000.

The equity compensation section would consist of two tables. The first table would show all outstanding equity awards held by the individual, with a narrative explaining the awards and describing material terms such as vesting conditions. The second table would show options exercised and other share awards satisfied during the year, and would show the full amount realized by the individual.

The final section would include a table and description of the individual’s pension benefits, a separate table and description of nonqualified defined contribution plans showing year-end account balances, employee contributions, company contributions, earnings and withdrawals for each plan. Finally, a third part of this section would quantify termination payments, apparently for all terminations, including following a change of control. Although golden parachute tax gross-ups were not specifically discussed at the hearing, we understand that they would also be included.

The proposal would require for directors a table similar to the summary compensation table described above, but showing only one year’s compensation.

A new Compensation Discussion and Analysis, similar to the current Management Discussion and Analysis, would replace the existing compensation committee report and the performance graph. According to the SEC press release, and presumably in accordance with detailed guidelines to be described in the published proposal, this section would address the objectives and implementation of executive compensation programs and would describe the most important factors underlying the company's compensation policies and decisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.