The rules bring to the fore changes in rules requiring disclosure of executive and director compensation, related person transactions, director independence and other corporate governance matters, and security ownership of officers and directors. These changes affect disclosure in proxy statements, annual reports and registration statements, as well as the current reporting of compensation arrangements – and require that most of this disclosure be provided in plain English (see SEC Unveils Proposed Exec. Comp. Disclosures Mandate ).
Executive compensation disclosure will be organized into three broad categories:
- compensation over the last three years;
- holdings of outstanding equity-related interests received as compensation that are the source of future gains; and
- retirement plans, deferred compensation and other post-employment payments and benefits.
The amendments will refine the previously required tabular disclosure and combine it with improved narrative disclosure to “elicit clearer and more complete disclosure of compensation of the principal executive officer, principal financial officer, the three other highest paid executive officers and the directors.”
The Summary Compensation Table will be the principal disclosure vehicle for executive compensation, showing compensation for each named executive officer over the last three years. The table will be accompanied by narrative disclosure and a Grants of Plan-Based Awards Table that will help explain the compensation information presented in the table, according to the SEC. In addition to columns for salary and bonus, the table should include:
- A dollar value for all equity-based awards, shown in separate columns for stock and stock options, measured at grant date fair value, computed pursuant to Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R”), to provide a more complete picture of compensation and facilitate reporting total compensation;
- A column reporting the amount of compensation under non-equity incentive plans;
- A column reporting the annual change in the actuarial present value of accumulated pension benefits and above-market or preferential earnings on nonqualified deferred compensation, so that these amounts can be deducted from total compensation for purposes of determining the named executive officers;
- A column showing the aggregate amount of all other compensation not reported in the other columns of the table, including perquisites. Perquisites will be included in the table unless the aggregate amount is less than $10,000, and interpretive guidance will be provided for determining what is a perquisite; and
- A column reporting total compensation.
Retirement plan and post-employment disclosure will include:
- The Pension Benefits Table, which will require disclosure of the actuarial present value of each named executive officer's accumulated benefit under each pension plan, computed using the same assumptions (except for the normal retirement age) and measurement period as used for financial reporting purposes under generally accepted accounting principles;
- The Nonqualified Deferred Compensation Table, which will require disclosure with respect to nonqualified deferred compensation plans of executive contributions, company contributions, withdrawals, all earnings for the year (not just the above-market or preferential portion) and the year-end balance; and
- A narrative description of any arrangement that provides for payments or benefits at, following, or in connection with any termination of a named executive officer, a change in responsibilities, or a change in control of the company, including quantification of these potential payments and benefits assuming that the triggering event took place on the last business day of the company's last fiscal year and the price per share was the closing market price on that date.
Disclosure Regarding Option Grants
Disclosure regarding outstanding equity interests will include an Outstanding Equity Awards at Fiscal-Year End Table, which will show outstanding awards representing potential amounts that may be received in the future, including such information as the amount of securities underlying exercisable and unexercisable options, the exercise prices and the expiration dates for each outstanding option (rather than on an aggregate basis); and an Option Exercises and Stock Vested Table, which will show amounts realized on equity compensation during the last fiscal year.
Required disclosure also includes "clear tabular presentations of option grants", including:
- The grant date fair value;
- The FAS 123R grant date;
- The closing market price on the grant date if it is greater than the exercise price of the award; and
- The date the compensation committee or full board of directors took action to grant the award if that date is different than the grant date.
Further, if the exercise price of an option grant is not the grant date closing market price per share, the rules will require a description of the methodology for determining the exercise price.
MORE on the new rules is available at http://www.sec.gov/news/press/2006/2006-123.htm