COMPENSATION IN CONTEXT
December 23, 2009
A
Christmas Present from the SEC – The Adoption of Final Executive
Compensation Disclosure Requirements for the 2010 Proxy Season
On
December 16, 2009, the Securities and Exchange Commission voted 4-to-1
to adopt new proxy disclosure requirements beginning with the 2010
proxy season. The final requirements are substantially similar to the
proposed rules released in July 2009. Some of the major revisions are
as follows:
Value Threshold for Consultant Disclosure
Companies
will only be required to provide enhanced disclosure for executive
compensation consultants only if the engagement for “non-executive”
compensation services exceeds $120,000. If the board and management
have separate consultants, fee disclosure will only be required if the
board consultant provides non-executive compensation services beyond
the threshold. Disclosure of the nature and extent of additional
services will not be required.
Risk Disclosure Threshold Increased
Companies
will be required to address compensation policies if they create risks
that are likely to have a material adverse effect on the company. This
increases the disclosure threshold from the proposed rules which
required disclosure in cases where risks arising from compensation
policies may have a material effect on the company.
New Diversity Consideration Disclosure
Companies
will be required to disclose whether and how the nominating committee
considers diversity in identifying director nominees. Any policy with
regard to the consideration of diversity by the board or nominating
committee would also need to disclosed, along with how the policies is
evaluated for effectiveness. The full text of the final rules can be
found here. The key provisions of the final rules are outlined below.
Broad-Based Pay and Risk Disclosure
Companies
will be required to provide information about their compensation
policies for all employees if the policies “create risks that are
reasonably likely to have a material adverse effect on the company.”
Disclosure should focus on the relationship between the compensation
policies and risk, including a discussion of policies outside of the
Named Executive Officers, but will not require disclosure of
compensation values for other employees. Specifics that may be
disclosed include the general design philosophy of the compensation as
it relates to risk, any risk assessments used in connection with
structuring compensation policies, or changes in a company’s risk
profile and how that impacts compensation. The SEC emphasizes
disclosure should be specific to the particular situation at each
company and should not be generic or boilerplate.
Situations
that may trigger this additional disclosure requirement, include (but
are not limited to) cases where a business unit carries a significant
portion of the company’s risk profile, provides significantly more
profit than other business units, or compensates its employees with a
different compensation structure than other business units. In contrast
to the proposed rules, this disclosure will not be a part of the
CD&A, but will instead be moved into a separate paragraph. Small
firms not subject to the CD&A requirements will remain exempt from
these new disclosure requirements.
Equity Award Values in Summary Compensation Table
Altering
the standard implemented with the 2006 proxy disclosure regulations,
the Summary Compensation Table and the Director Compensation Table will
include the grant-date fair value of equity awards made during the year
as opposed to the expensed accounting value. The grant-date fair value
will include the aggregate value of all stock or option awards,
including performance awards, currently disclosed in the Grants of Plan
Based Awards Table and valued in accordance with FAS 123R. Performance
awards will also be included in those figures and will be calculated
based upon the probable outcome as of the date of the grant. Footnotes
mentioning the maximum value of a performance award will be required.
This
change will have additional impact. The calculation of the Named
Executive Officers will be determined based upon total compensation
using the grant-date fair value of equity awards made during the year
rather than the expensed accounting value. Due to the potential impact
of one-time awards, companies will be allowed to consider adding
executives that otherwise would have been excluded because of the
one-time award. Companies will also be required to recalculate the
stock and option awards column disclosure for previous years. However,
companies are not required to add different Named Executive Officers
for prior years based on re-computing total compensation pursuant to
this amendment.
Enhanced Director and Nominee Disclosure
Additional
annual disclosure will be required for all directors, including
director nominees and directors not up for reelection, regarding the
particular experience, qualifications, attributes, or skills, that led
the board to conclude that individual should serve as a director as of
the time of the filing. The final rules do not specify the particular
information that needs to be disclosed to meet these requirements,
giving companies flexibility in determining what disclosure is
necessary. The final rules do not require disclosure of qualifications
to serve as a committee member or the risk assessment skills of a
director, but if these qualifications or skills led the board to select
this director they should be disclosed. Companies will be required to
disclose whether and how the nominating committee considers diversity
in identifying director nominees. Any policy with regard to the
consideration of diversity by the board or nominating committee would
also need to be disclosed, along with how the policy is evaluated for
effectiveness. The final rules do not offer a definition for diversity,
recognizing that companies may define diversity in various ways and
should be allowed to define diversity in ways that they consider
appropriate for this disclosure. Additionally, the proposal requires
disclosure of all other public company boards served on the by the
director in the last 5 years (rather than only current board
memberships) and disclosure of any legal proceedings from the last 10
years (rather than the last 5).
Board Leadership Structure
Companies
will be required to discuss their current board leadership structure
and why this structure is best for the company. In particular,
companies must discuss whether or not the CEO and Chairman roles are
held by the same person and why this structure was chosen. If the CEO
and Chair roles are not split, companies must disclose if they have a
Lead Independent Director and the specific roles and responsibilities
of that position.
The Board’s Role in Risk Oversight
Companies
will be required to provide additional information about the board of
director’s role in the company’s risk oversight. Disclosure should
detail specific processes, roles, and responsibilities of the board in
connection with monitoring and managing company risk.
Compensation Consultant Fee Disclosure
Enhanced
disclosure will be required when a consulting firm, or its affiliate,
provides executive or director compensation advice and other consulting
services to the company, if fees for the “non-executive” compensation
services exceed $120,000. Input by company management must also be
disclosed in the decision to engage the executive compensation
consultant for non-executive compensation consulting services. However,
discussion of the nature and extent of the additional services will not
be required, even if the threshold value is met. Fees paid to a
consultant for additional services will not be required if the board
has its own consultant.
Shareholder Voting Results
The
requirement to report shareholder voting results is changed from
10-Q/10-K filings to 8-K filings. This will increase the timeliness of
the delivery of voting results to within 4 business days of the vote.
For contested elections where voting results are not finalized within 4
days, preliminary voting results must be disclosed in the 8-K filing.
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Veritas Executive Compensation Consultants, LLC. (“Veritas”) is a truly independent executive compensation consulting firm.
We
are independently owned, and have no entangling relationships that may
create potential conflict of interest scenarios, or may attract the
unwanted scrutiny of regulators, shareholders, the media, or create
public outcry.
Veritas also
believes that public company Boards of Directors and shareholders
deserve higher standards of disclosure that verify the independence of
the executive compensation advice that their companies receive from
their consulting firms. This disclosure will assist in curing the
terribly negative views that government regulators, shareholders,
employees, the media, and the American public have on executive pay.
Veritas goes
above and beyond to provide unbiased executive compensation counsel.
Since we are independently owned, we do our job with utmost objectivity
- without any entangling business relationships.
Following
stringent best practice guidelines, Veritas works directly with boards
and compensation committees, while maintaining outstanding levels of
appropriate communication with senior management.
Veritas promises no compromises in presenting the innovative solutions at your command in the complicated arena of executive compensation.
We deliver the advice that you need to hear, with unprecedented levels of responsive client service and attention.
An additional summary provided in my blog on December 17th.
http://comptalk.compwiser.com/2009/12/holiday-present-from-sec-new-proxy.htm
-William Parsons
Founder & Principal
CompWiser Consulting