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NEW EXECUTIVE COMPENSATION DISCLOSURE RULES
The SEC recently issued Release
No. 33-8732, in which it significantly
revised the compensation disclosure rules set forth in Item 402 of Regulation
S K and related requirements of Form 8 K. In its adopting release and other
public statements, the SEC has emphasized that companies need to take a “principles-based
approach,” with a view to providing investors with a complete picture
of their compensation programs rather than disclosing only what would be
required under a literal reading of the rules. The new rules also revise
the requirements regarding related party transactions (now referred to as “related
person transactions”), set forth in Item 404, and update various corporate
governance-related disclosure requirements, consolidating them into a new
Item 407 of Regulation S K.
Most companies will need to implement the new rules during the 2007 proxy
season. Preparation of the new disclosures will require substantial time
and energy, and we urge you to begin the process as soon as possible. This
Alert is intended to highlight the basic issues you will face under the new
rules.
Significant Changes Reflected in the Revised Rules:
- A new Compensation Discussion and Analysis (CD&A) must provide a narrative
discussion regarding all material elements of compensation of Named
Executive Officers (NEOs). The CD&A will be subject to the CEO/CFO
certifications.
- The revised rules permit companies to omit confidential performance targets
in their disclosures; however, if they do so, they must explain how difficult
or likely it would be for the company or executive to reach those targets.
- The CFO, like the CEO, is always included as an NEO, regardless of compensation.
Other NEOs are determined based on total compensation (excluding certain
items), not just salary and bonus.
- Companies are required to disclose full FAS 123R grant-date fair values
of stock and option awards.
- The Summary Compensation Table includes a new “total compensation” column.
- The threshold for perks disclosure has been reduced to $10,000.
- Certain option grant practices may trigger additional disclosure.· Director
compensation must be disclosed in a table similar to the Summary
Compensation Table.
- The threshold for disclosure of related party transactions has been increased
to $120,000.
- Companies must provide narrative disclosure describing policies and procedures
for approving compensation and related person transactions.
- Companies must disclose, by category or type, relationships considered
in assessing director independence.
Actions to Take Before Fiscal Year-End:
- Re-evaluate your disclosure controls and procedures in light of the
amended disclosure requirements. In particular, be sure that
the disclosure process involves persons who are also sufficiently involved
in the compensation
process that they can guide the drafting of the CD&A. Your
disclosure committee should include a representative of HR and,
if possible,
a lawyer who is well versed in the compensation disclosure rules.
- Involve the compensation committee in the disclosure process, including
the drafting of the CD&A. Make sure the members of the committee
understand what disclosures are likely to flow from the committee’s
decisions and the processes it follows.
- Consider whether you have sufficient staffing on the team that is responsible
for collecting and analyzing executive and director compensation
and assisting with the drafting of new disclosures.
- Carefully review payroll and other relevant records as well as compensation
plans and employment agreements to get complete and accurate data
on all compensation paid to executives and directors.
- Get a head start in preparing the new compensation disclosures, particularly
those regarding potential benefits upon retirement, termination or
change in control, which will require coordination with several functional
areas,
including HR and accounting.
- Conduct a run-through on all compensation tables and related calculations
to identify additional information that may be needed to prepare
your proxy statement, as well as any interpretive questions that may arise,
as early as possible.
- Start early in drafting your CD&A. Do not wait until the compensation
tables are completed.
- Remember that the new rules will apply retroactively to most companies.
You should review all matters relating to compensation or related
party transactions – particularly actions and deliberations of the compensation
committee – that occurred before the new rules were adopted
but may be subject to disclosure in your 2007 proxy statement.
Review and
document the processes and procedures followed by the compensation
committee to the extent you have not already done so.
Provided By:
Doug Rein
DLA Piper
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