- within Employment and HR topic(s)
- in European Union
The SEC's new rules regarding disclosure of executive and director compensation, related party transaction disclosures and other matters will have a significant impact on proxy statements (beginning with the 2007 season) and Form 8-K filings (effective 11/7/06). Although the rules have a variety of effective dates, in general they will apply to disclosure of compensation and other information beginning with 2006, but will not require restatement of disclosures for prior years.
Summary of New Disclosure Requirements
Under the new rules, compensation disclosure will begin with a narrative discussion and analysis of executive compensation policies and decisions, followed by detailed tables of total compensation in three broad categories:
- Compensation for the last fiscal year (and the two preceding fiscal years, as phased in over the next two years), including salary, bonus, perquisites and other benefits;
- Holdings of and recent realizations on equity-related interests that relate to compensation or are potential sources of future gains; and
- Retirement and other post-employment compensation arrangements, including those payable in the event of a change in control.
Compensation Discussion and Analysis
The new rules require presenting this information in a Compensation Discussion and Analysis (CD&A). This basically is a beefed-up version of the compensation committee report previously required in the annual proxy statement, but is a company disclosure covered by the CEO and CFO certifications required under the Sarbanes-Oxley Act. Companies will not be required to disclose targets for specific performance-related factors considered by the compensation committee, but must discuss how difficult it will be to achieve the undisclosed target. The CD&A must also address matters relating to executives' option compensation, with particular emphasis on the timing and pricing of stock option grants and the determination of the exercise price. Thomas W. Adkins is a partner in the Austin office of Bracewell & Giuliani LLP. He represents companies and other parties involved in business transactions, including acquisitions and dispositions of publicly and privately held businesses, and public and private securities offerings. He has assisted numerous public companies and boards of directors with Sarbanes-Oxley and other corporate governance issues as well as state and federal securities laws and regulatory compliance.
Other Key Disclosure Elements
- Disclosure must be for "named executive officers": the CEO, CFO, and three other most highly compensated corporate officers. Form 8-K disclosure may apply to other executives.
- Compensation for Board of Director members must be disclosed in detail similar to that used for the named executive officers.
- There are revised rules for disclosure of certain relationships and related party transactions (including indebtedness), with the disclosure threshold increased to $120,000.
- Compensation committee disclosures, similar to those for the audit and nominating committees, will now be required, including committee charter, authority, processes and procedures in considering and determining executive and director compensation.
December Amendments
On December 22, 2006, before the first proxy statements were prepared under the new rules, the SEC amended the new rules. These amendments made several changes to the rules, including a requirement that the dollar values shown in the Stock Awards and Option Awards columns of the Summary Compensation Table and the Director Compensation Table be amortized over the vesting period. The rules as adopted in July 2006 had required the full grant date fair value be included. This amount will now be required in a new column in the Grants of Plan-Based Awards Table. For some companies this amendment may change the identity of the "named executive officers" for whom compensation disclosures are required.
More Information
These are merely brief highlights of the complex new disclosure rules. For a detailed review and sample disclosure tables, please go to our web site, www.bgllp.com
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.
