United States: Tabular Disclosure of Executive Compensation

Originally published October 9, 2006

This legal alert is intended to provide general information regarding the new executive compensation disclosure rules. This is the second part of a series of Question and Answers analyzing the various components of the new disclosure rules for executive compensation adopted by the Securities and Exchange Commission (the "SEC") on July 26, 2006. These new disclosure rules represent the most significant modification to the executive and director compensation disclosure rules since the last comprehensive revision of these rules in 1992. All reporting companies will have to comply with the new disclosure requirements for the upcoming proxy season. And, while that may seem a far time from now, all experts agree that all companies should begin preparing now due to the significant revisions and additional requirements contained in the new rules.

This legal alert specifically addresses general information regarding the revisions to the tabular disclosure rules for executive compensation. If you have any questions or would like additional information, please contact the Sutherland Asbill & Brennan LLP attorney with whom you work.

The new rules significantly revised Item 402 of Regulation S-K, Executive Compensation, regarding the compensation required to be disclosed for a company’s named executive officers ("NEOs") in the Summary Compensation Table. In addition, the new rules revised Item 402 to require six additional tables regarding executive and director compensation. Tabular disclosure must be presented for any person who served as the principal executive officer and principal financial officer at any time during the most recently completed fiscal year and the three most highly compensated executive officers. The following tabular disclosure is now required:

Summary Compensation Table and Supplemental Tables– The new rules require a revised and enhanced Summary Compensation Table that covers compensation paid to each of a company’s NEOs for the last three fiscal years. The most significant changes to this table are the requirement to include a total compensation column and disclose the dollar value of all grants of equity compensation.

Summary Compensation Table– This table has been revised and enhanced. It covers compensation paid to each of a company’s NEOs for the last three fiscal years.

Grants of Plan-Based Awards Table– This table complements the disclosure set forth in columns (e) (Stock Awards) and (f) (Option Awards) of the Summary Compensation Table.

Exercises and Holdings of Previously Awarded Equity– These two new tables were designed to provide investors with an understanding of equity compensation that has been previously awarded and remains outstanding, including amounts realized on this type of compensation during the last fiscal year as a result of the vesting or exercise of equity awards.

Outstanding Equity Awards at Fiscal Year-End Table– This table requires disclosure regarding outstanding awards under stock option plans, stock appreciation rights plans, restricted stock plans, incentive plans and similar plans, including the market-based values of the rights, shares or units in question as of a company’s most recent fiscal year-end.

Option Exercises and Stock Vested Table– This table requires disclosure of the amounts realized upon the exercise of options or the vesting of restricted stock or similar awards during the most recent fiscal year.

Post-Employment Compensation– These tables require disclosure regarding the retirement packages and other post-termination compensation for a company’s NEOs.

Pension Benefits Table– This table requires disclosure of the actuarial present value of a NEO’s accumulated benefit under the plan and the number of years of service credited to the NEO under such plan.

Nonqualified Deferred Compensation Table– This table requires disclosure regarding the full amount of nonqualified deferred compensation that a company is obligated to pay each of its NEOs.

Severance and Change in Control Arrangements– A company must quantify the amounts payable to each NEO under severance arrangements (whether or not in writing) in a number of termination of employment scenarios, including, among other scenarios, resignation, retirement and a change in control of the company.

Director Compensation Table– This table mirrors the disclosure required in the Summary Compensation Table.

Narrative Disclosure– Following each table, companies must also provide narrative descriptions that explain any material factors needed to understand the information disclosed in each of the tables.

Companies must comply with the new rules when they file their Annual Report on Form 10-K or proxy and information statement filed for the fiscal years ending on or after December 15, 2006. Therefore, most reporting companies with calendar year-end fiscal year-ends will need to comply with the new executive compensation disclosure rules when they file their Annual Report on Form 10-K for the fiscal year ended December 31, 2006 or their proxy materials for their 2007 annual shareholders meeting.

Companies filing a registration statement under the Securities Act of 1933 will need to comply with the new rules in their registration statement, including any pre-effective and post-effective amendments, filed on or after December 15, 2006. Initial registration statements and post-effective amendments that are annual updates to registration statements filed on Forms N-1, N-2 (except those filed by business development companies) or N-3 must comply with the new executive compensation disclosure rules if filed on or after December 15, 2006.

Companies do not need to restate compensation information for the two years prior to the most recent fiscal year. In fact, such information will not need to be presented at all. As a transition matter, companies are only required to provide compensation information for one fiscal year after the rules are in effect, two years during the second year after the rules are in effect, and three years thereafter.

Yes. The old disclosure threshold for NEOs is $100,000 in salary and bonus for a company’s chief executive officer and the four other most highly compensated executive officers. Under the new rules, the disclosure threshold for NEOs is $100,000 of total compensation for the most recently completed fiscal year for the three most highly compensated executive officers, in addition to the principal executive officer and the principal financial officer.

The disclosure threshold for NEOs is $100,000 of total compensation for the most recently completed fiscal year. The change in annual pension benefit and above-market earnings on nonqualified deferred compensation are excluded from the $100,000 threshold. Under the new rules, companies are no longer able to exclude an executive officer due to either: (1) an unusually large amount of cash compensation that was not part of a recurring arrangement and was unlikely to continue; or (2) cash compensation relating to overseas assignments attributed predominantly to such assignments.

Information regarding the compensation of any individual who served as the principal executive officer and principal financial officer must be disclosed even if he/she no longer serves in that capacity at the end of the most recently completed fiscal year. In addition, information regarding the compensation of any individual, who qualifies as a NEO for the fiscal year in question, but is no longer employed by the company at the end of the most recently completed fiscal year, or no longer serves as an executive officer of the company, must also be disclosed.

The proposed rules would have required narrative disclosure for up to three employees, who were not executive officers during the last fiscal year, and whose total compensation for the last fiscal year was greater than that of any one or more of the NEOs (the "Katie Couric Rule"). The disclosure would have included the amount of each employee’s total compensation for the most recently completed fiscal year and a description of his or her job position. The proposed rule did not require that such employees be named.

This provision was not part of the final rules adopted by the SEC on July 26, 2006. The SEC is still seeking comment on this proposal. In the new proposal, this disclosure would only be required of large accelerated filers and would only cover employees who have policy-making authority at a company or its significant subsidiaries or business units. See SEC Release No. 33-8735 for additional information.

Q. Do the new rules require tabular disclosure of director compensation?

Yes. The new rules require a Director Compensation Table. This table mirrors the disclosure required in the Summary Compensation Table, but information is only required to be disclosed for the most recently completed fiscal year. Narrative disclosure following the table is required to describe any material factors needed to understand the table. Disclosure regarding option timing or dating practices may be necessary in this narrative disclosure when directors receive stock option grants because there is no supplemental "Grants of Plan-Based Awards Table" for directors.

The new rules do not define the term perquisite; however, the new rules do provide guidance regarding what should be considered a perquisite. The new rules provide for a two-step analysis in order to determine if an item is a perquisite. First, a company must ask, "Is the item integrally and directly related to the performance of the executive’s duties?" If it is not, then the item is a perquisite. If it is, then a company must proceed to the second step of the analysis and ask, "Does the item confer a direct or indirect benefit on the executive?" In making this determination, a company should consider if the benefit has a personal aspect. If it does, then the item is a perquisite. If it does not, then a company must proceed to the last portion of the analysis and ask, "Is the benefit generally available on a non-discriminatory basis to all employees?" If it is, then it is not a perquisite. If it is not, then it is a perquisite.

In the new rules, the staff of the SEC noted that the concept of an item or a benefit that is "integrally and directly related" to job performance is narrow. The analysis draws a distinction between an item that a company provides because the executive needs it to do the job, and an item provided for some other reason, even where the other reason can involve both a company and personal benefit. Specifically, the staff noted that, "the fact that the company has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes." In addition, the staff noted that business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job. The staff provided the following example: A company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.

In the new rules, the staff noted that a company may reasonably conclude that an item is generally available on a non-discriminatory basis if it is available to those employees to whom it lawfully may be provided. Merely providing a benefit consistent with its availability to employees in the same job category or at the same pay scale does not establish that it is generally available on a non-discriminatory basis to all employees.

Yes. The SEC provided the following examples of perquisites in the final rule: Club memberships not used exclusively for business entertainment purposes; personal financial or tax advice; personal travel using vehicles owned or leased by the company; personal travel otherwise financed by the company; personal use of other property owned or leased by the company; housing and other living expenses (including but not limited to relocation assistance); security provided at a personal residence or during personal travel; commuting expenses; discounts on the company’s products or services not generally available to employees on a non-discriminatory basis; and relocation plans.¹

If the value of all perquisites and personal benefits exceeds $10,000 or more for any NEO, then each perquisite or personal benefit must be identified by type. If perquisites exceed the greater of $25,000, or 10% of the total amount of perquisites and personal benefits for any NEO, then each such perquisite must be quantified and separately identified in a footnote.

Under the new rules, perquisites are valued based on the aggregate incremental cost to the company. A company must disclose in a footnote the methodology for computing this aggregate incremental cost.

The new rules require the following executive compensation tables: (1) Summary Compensation; (2) Grants of Plan-Based Awards; (3) Outstanding Equity Awards at Fiscal Year-End; (4) Option Exercises and Stock Vested; (5) Pension Benefits; (6) Nonqualified Deferred Compensation; and (7) Director Compensation.

A company may omit any columns that do not apply in any of the tables required by the new rules.

The following mock compensation tables provide an overview of the structure and content of each new table, including the manner in which companies will need to categorize and disclose various forms of compensation under the new rules.

1. Summary Compensation Table

This column includes all compensation that is earned during the year regardless of whether a portion of such compensation has been deferred. A company may elect to include a footnote in order to provide detail regarding the amount of deferred compensation.

This column includes all cash bonuses earned during the year. Compensation that is earned but for which payment will be deferred, must be included in the calculation of total salary and total bonus. A company may elect to include a footnote in order to provide detail regarding the amount of deferred compensation.

As discussed below, the new rules add a new column to the Summary Compensation Table in which "non-equity incentive plan compensation" is to be discussed. As a result, some payments previously disclosed in the "bonus" column will now be shown in the new column. See the "Practice Tips" following the discussion of column (g) below.

This column requires disclosure of the grant date fair value of the award as determined pursuant to FAS 123R. This column captures stock-related awards that derive their value from the company’s equity securities, or permit settlement by issuance of the company’s equity securities, and are thus within the scope of FAS 123R for financial reporting purposes.

Examples of stock-related awards are: (1) restricted stock; (2) phantom stock; (3) phantom stock units; (4) common stock equivalent units; or (5) other similar instruments that do not have option-like features. Stock awards granted pursuant to an equity incentive plan are also included in this column to ensure consistent reporting of stock awards and to ensure their inclusion in the Summary Compensation Table.

Please refer to the following tables for additional information regarding stock awards: (1) Grants of Plan-Based Awards; (2) Outstanding Equity Awards at Fiscal Year-End; and (3) Option Exercises and Stock Vested.

This column requires disclosure of the grant date fair value of the award as determined pursuant to FAS 123R. Awards of options, stock appreciation rights and similar equity-based compensation instruments that have option-like features that are within the scope of FAS 123R must be disclosed in this column. This is a change from previous disclosure which only required disclosure of the number of securities underlying the awards.

This is a new column. This column requires disclosure regarding the dollar value of all amounts earned during the fiscal year pursuant to non-equity incentive plans. If the relevant performance measure is satisfied during the fiscal year, then the earnings are reportable for that fiscal year, even if not payable until a later date, and are not reportable again in the fiscal year when the amounts are paid to the NEO.

This column includes all other incentive plan awards that are not based on the value of a company’s equity securities and may not be settled in the company’s equity securities which are included in the stock awards and option awards columns (columns (e) and (f)). An "incentive plan" is defined as "any plan providing compensation intended to serve as incentive for performance to occur over a specified period of time."

This is a new column. This column includes the sum of: (1) increase in the actuarial value of the benefits accrued during the year by the NEO under all defined benefit and actuarial plans whether tax-qualified or nonqualified; and (2) above-market or preferential earnings on compensation that is deferred under a nonqualified deferred compensation plan. Changes in pension value can result from additional years of service, compensation changes, plan amendments and changes in plan assumptions.

This amount is excluded from the total compensation calculation used to determine if an executive is an NEO for the most recently completed fiscal year.

This is a "catch all" column for compensation that is not reported in any other column in the table. Each item of compensation included in this column that exceeds $10,000 must be separately identified and quantified in a footnote. Items included in this column would include, but not be limited to:

• Perquisites and other personal benefits;

• "Gross-ups" or other amounts reimbursed for the payment of taxes;

• The compensation cost, computed in accordance with FAS 123R, of any discount from market price of any securities purchased from the company unless the discount is available to all security holders or all salaried employees;

• Amounts paid or accrued pursuant to an arrangement in connection with any termination of employment or change in control;

• Company contributions or allocations to defined contribution plans whether tax-qualified or nonqualified and regardless of whether the NEO's rights to these amounts are vested; and

• The value of insurance premiums paid by the company for life insurance for the benefit of the officer.

The dollar value from each column must be aggregated in this column.

A company must also provide a narrative description of any material factors needed to understand the information disclosed in this table. Examples of material factors include, but are not limited to, the following: (1) material terms of an NEO’s employment agreement or arrangement (whether written or unwritten); and (2) an explanation of the amount of salary and bonus in proportion to total compensation.

This table complements the disclosure set forth in columns (e) and (f) of the Summary Compensation Table. This table show the terms of grants made during the current year, including estimated future payouts for both equity incentive plans and non-equity incentive plans. Each grant must be presented on a separate line – aggregation is not permitted. If grants were made under more than one plan, each plan must also be identified.

In addition to this tabular disclosure, companies are also required to provide a summary of the material terms of each award included in the table, including a general description of the formula or performance criteria applicable to the award, as well as the vesting schedule.

The following three additional columns may be required to be added to this table:

• If the date the company’s compensation committee took action with respect to an award is different from the grant date (as determined in accordance with FAS 123R) reported in column (b), a separate column must be added between column (b) and (c) reporting the "action" date;

• If the exercise price reported in column (k) is less than the closing market price of the underlying security on the date of the grant, a separate column must be added after column (k) reporting the closing market price on the date of the grant, and narrative must be included describing the methodology used to determine the exercise price; and

• If non-equity incentive plan awards are denominated in units or other rights, a column should be added between columns (c) and (d) to report the dollar value of such units or rights.

A company is required to provide a narrative description of any additional material factors needed to understand the information disclosed in this table. Examples of material factors that should be described include: (1) a description of the material terms of employment agreements; (2) a description of repricing or material modifications of outstanding equity-based awards; (3) material terms of performance-based awards; and (4) the waiver or modification of any performance target, goal or condition to payout of an award. This disclosure differs from the disclosure set forth in the Compensation Discussion and Analysis because the Compensation Discussion and Analysis focuses on broader topics regarding the objective and implementation of executive compensation policies.

This table requires that a company disclose information regarding outstanding awards under stock option plans, stock appreciation rights plans, restricted stock plans, incentive plans and similar plans, including the market-based values of the rights, shares or units in question as of a company’s most recent fiscal year-end. This table does not contain a column that shows the aggregate unrealized appreciation of the in-the-money options that were outstanding at fiscal year-end; however, sufficient information is provided so that investors can run this calculation on their own.

Disclosure is required for each instrument on a grant-by-grant basis. Aggregation is not permitted except in the case where the expiration date and the exercise and/or base price of the instrument are identical.

Footnote disclosure is required for any award that has been transferred other than for value. Footnote disclosure is also required for the vesting dates of options, shares of stock and equity incentive plan awards held at fiscal year-end.

This table discloses the amounts realized upon the exercise of options or the vesting of restricted stock or similar awards during the most recently completed fiscal year.

This table requires disclosure of the actuarial present value of an NEO’s accumulated benefit under the plan, and the number of years of service credited to the NEO under such plan, each computed as of the same pension plan measurement date for financial statement reporting purposes with respect to the audited financial statements for a company’s last fiscal year. A separate row must be provided for each plan in which an NEO participates.

This table is designed to provide investors with an understanding of the cost of promised future benefits in present value terms. To calculate the present value of accumulated benefits, companies are instructed to use the same assumptions, such as interest rate assumptions, that they use to derive the amounts disclosed in conformity with generally accepted accounting principles. For purposes of the calculation, retirement age is normal retirement age as defined in the plan, or if not so defined, the earliest time at which a participant may retire under the plan without any benefit reduction due to age. The estimates are to be based on current compensation. The valuation methodology and all material assumptions applied must be described in the narrative section accompanying this table. A separate row must be provided for each plan in which a NEO participates.

This table must be accompanied by a narrative description of material factors needed to understand each plan disclosed in the table. Examples of material factors are as follows:

• The material terms and conditions of benefits available under the plan, including the plan’s retirement benefit formula and eligibility standards, and early retirement arrangements;

• The specific elements of compensation, such as salary and various forms of bonus, included in applying the benefit formula;

• With respect to a NEO’s participation in multiple plans, the different purposes for each plan; and

• Company policies with regard to matters such as granting extra years of credited service.

As noted above, the new rules require disclosure in the Summary Compensation Table only of the above-market or preferential portion of earnings on compensation that is deferred on a basis that is not tax-qualified. This table provides investors with disclosure regarding the full amount of nonqualified deferred compensation that the company is obligated to pay each of its NEOs and, therefore, must reflect all earnings on amounts deferred under nonqualified defined contribution plans.

This table provides information regarding contributions, earnings and balances under nonqualified deferred compensation and other deferred compensation plans. Footnotes should be used to indicate amounts in the Contribution or Earnings columns (columns (b) and (c) or column (d)) that are reported as compensation for the year in question, and other amounts in the Aggregate Balance column (column (f)) that were reported in the Summary Compensation Table for prior years.

The table must be accompanied by narrative disclosure of material factors needed to understand the disclosure in the table, such as:

• The types of compensation permitted to be deferred, and any limitations on the extent to which deferral is permitted;

• The measures of calculating interest or other plan earnings (including whether such measures are selected by the named executive officer or the company and the frequency and manner in which such selections may be changed), quantifying interest rates and other earnings measures applicable during the company’s last fiscal year; and

• Material terms with respect to payouts, withdrawals and other distributions.

A company must quantify the amounts payable to each NEO under severance arrangements (whether or not in writing) in a number of termination of employment scenarios, including, among other scenarios, resignation, retirement and a change in control of the company. Companies are required to disclose the following for each NEO:

• The specific circumstances that would trigger payments or the provision of other benefits (references to benefits include perquisites and health care benefits);

• The estimated payments and benefits that would be provided in each covered circumstance, and whether they would or could be lump sum or annual, disclosing the duration and by whom they would be provided;

• How the appropriate payment and benefit levels are determined under the various circumstances that would trigger payments or provision of benefits;

• Any material conditions or obligations applicable to the receipt of payments or benefits, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality covenants; and

• Any other material factors regarding each such contract, agreement, plan or arrangement.

This new Director Compensation Table tracks the disclosure required for NEOs in the new Summary Compensation Table; however, this table only presents information for the past fiscal year. Companies are permitted to group directors into a single row if such directors have identical compensation; however, if the components of a director’s compensation differ from that of other directors, then the director’s compensation must be disclosed in a separate row. Director fees earned or paid in cash would be reported separately from fees paid in stock.

The "All Other Compensation" column of this table includes, but is not limited to:

• All perquisites and other personal benefits if the total is $10,000 or greater;

• All tax reimbursements;

• For any security of the company or its subsidiaries purchased from the company or its subsidiaries (through deferral of fees or otherwise) at a discount from the market price of such security at the date of purchase, unless the discount is generally available to all security holders or to all salaried employees of the company, the compensation cost, if any, computed in accordance with FAS123R;

• Amounts paid or accrued to any director pursuant to a plan or arrangement in connection with the resignation, retirement or any other termination of such director or a change in control of the company;

• Annual company contributions to vested and unvested defined contribution plans;

• All consulting fees;

• Awards under director legacy or charitable awards programs; and

• The dollar value of any insurance premiums paid by, or on behalf of, the company for life insurance for the director’s benefit.

If a NEO is also a director who receives compensation for his or her services as a director, that compensation does not need to be included in this table. The compensation should be disclosed and footnoted in the Summary Compensation Table.

Narrative disclosure will describe any material factors needed to understand the table. Disclosure regarding option timing or dating practices may be necessary in this narrative disclosure when directors receive stock option grants because there is no supplemental Grants of Plan-Based Awards Table for directors.

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This article is for informational purposes and is not intended to constitute legal advice.