As we ring in the New Year, one item undoubtedly at the top all of Corporate America’s list of resolutions is getting the proxy statements disclosures in order.
With the Securities and Exchange Commission’s recently amended rules on executive-compensation disclosure now in effect, public companies will have their hands full putting together disclosures that are vastly different, and far more detailed, than those they have reported before.
While companies have had plenty of time to digest the revised rules, which were formally adopted by the SEC last August, experts have stressed repeatedly that the most important step companies can take to smooth the process of putting their proxies together is to organize their disclosure early, to allow for the inevitable bumps along the way.
Here are some other tips to keep in mind as you draft this year’s proxy disclosures, courtesy of Christopher Bartoli and Carol Stubblefield, partners in the law firm Baker & McKenzie.
CD&A
Perhaps the most significant change is the addition of the new Compensation Discussion & Analysis section, intended to be the centerpiece of a company’s compensation disclosure. The CD&A not only requires discussion of the amounts paid to the company’s named executive officers, it also requires companies to analyze and discuss the rationale for how they arrived at their compensation decisions and details, such as how they determined the allocation between cash and non-cash compensation and long- and short-term compensation.
Bartoli
“It can’t be overstated: start the process early,” Bartoli said in a recent Webcast on the “Top 10 Things to Remember As You Draft Your 2007 Proxy Disclosures.”
Bartoli and Stubblefield say many companies have set up small “disclosure committees” to pull together the necessary information and assign tasks to help ease this year’s proxy preparation, the first area to tackle under the revamped rules.
Now that companies will have to include information in the CD&A about what role executive officers play in setting compensation, Bartoli says he has seen a trend away from the historic practice of the chief executive officer making recommendations to the compensation committee on the pay of other executive officers. Instead, more companies are giving the compensation committee that responsibility. To the extent that an executive officer is involved in setting or recommending compensation for other officers, Bartoli says companies should “think about how that disclosure will look.” And, if such policies changed, those changes also ought to be disclosed.
The rules allow companies to exclude the disclosure of certain performance target levels that were considered in the compensation process, if the disclosure would result in competitive harm—but if a company omits quantitative or qualitative factors, it still must discuss how difficult or likely it is that the executive or company will achieve those target levels. Bartoli recommends that companies should consider documenting their rationale for omitting information internally anyway, in case the SEC later questions why such information was excluded.
Since the CD&A will be incorporated by reference into the 10-K and therefore covered by the executive-officer certifications under Sarbanes-Oxley, companies should plan to have their CD&A completed around the time the company plans to file its 10-K, giving those officers time to see and understand what they’re certifying. In addition, companies should decide whether they want to obtain sub-certifications from their compensation-committee members as additional support for those certifications.
Options Disclosure
As a result of the mushrooming scandal of backdated stock options, the SEC is requiring enhanced disclosure about stock option grants in a new table and in the CD&A. The SEC requires additional disclosures if companies use an exercise price that differs from the closing price on the date of grant. While companies don’t have to amend their plans to conform, some companies are amending their plans to simplify disclosure. Bartoli notes that such an amendment isn’t material to the plan and consequently wouldn’t require shareholder approval.
Summary Compensation Table
Companies may want to allow extra time to gather the information required for the revamped summary compensation table, since a requirement to include increases in pension value most likely will require the assistance of actuaries who aren’t usually involved in the proxy statement process.
The determination of a company’s named executive officers is now based on total compensation for the last fiscal year (excluding any increase in pension values and non-qualified deferred compensation above-market), not just salary and bonus. The SEC has done away with an exclusion for the non-recurring event type of compensation.
If the company has many items under the “all other compensation” column, such as perks, tax gross-ups, and change-in-control payments, it also may want to consider creating a separate table listing the amounts of all other compensation so it is easier to read.
Perquisites
Companies need to pay particular attention to the SEC’s new interpretive guidance on perquisites; the lower threshold for disclosure also means that the disclosure may be lengthy. If the aggregate amount of perks is $10,000 or more, each perquisite must be identified in a footnote. If any single perk is valued at more than $25,000 or 10 percent of the total perquisites or other benefits, its individual value also must be disclosed.
Post-Employment Compensation
Stubblefield
Under the new rules, post-employment compensation takes on increased importance, with two new tables and greater narrative disclosure of all compensation. According to Stubblefield, companies should start work as soon as possible on this section, since it too will involve working with actuaries. She suggests creating a table for each NEO that lays out all possible circumstances (retirement at normal age, change-in-control, resignation, etc.) and what the plan provides for each.
Director Compensation
The rules require a new table, similar to the summary compensation table, that includes compensation for all directors. Disclosure of stock option timing or dating practices may be necessary if directors receive stock option grants. Stubblefield advises companies to involve the board early on so no surprises emerge with the disclosure.
Corporate Governance
Corporate governance requirements that previously were scattered throughout SEC rules all have been collected under a new Item 407 of Regulation S-K, which also requires new disclosure of a company’s processes and procedures for determining compensation. Bartoli and Stubblefield advise companies to consider the public perception created by compensation consultants who consult for the company and the compensation committee
Plain English
Even after companies have gone through the arduous task of compiling the information they need to put their proxy statements together, they must review their disclosure for “plain English” compliance, which could mean moving to tabular or bullet-point format for some information that was provided previously in narrative form.
Finally, Bartoli reminds companies to review their board-committee charters and corporate-governance guidelines and to consider whether they require revision in light of the new disclosure requirements. Stubblefield advises companies to review their disclosure controls and procedures to make sure they are adequately set up to collect the information they need to put together their proxies.
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