Under the new rules, according to a Wall Street Journal report, companies must provide details on:
- executive salary,
- the dollar value of stock and stock option awards,
- annual changes in the value of pension benefits,
- any “above-market” earnings on deferred compensation, and
- all other compensation, including perks exceeding $10,000 a year.
The items must be shown separately and as a single, bottom-line total, the WSJ reports.
Detailed disclosure will be required for firms’ top five executives, including its chief executive and chief financial officer. The SEC dropped provisions from the rules that called for the same details for highly-paid non-executives.
Preventing Backdating of Stock Options
In an effort to deter abuses in awarding stock options, the final rules require companies to disclose option grants clearly in tables showing the fair value of the grant. A company must show closing market price of the stock on the grant date if it is higher than the option’s exercise price, according to the news report, along with the date the company’s directors awarded the options if it is different than the grant date of the options. If the prices are different, the company must also describe its method for determining the exercise price.
Additionally, a new compensation discussion and analysis report requires companies to explain methods used in granting stock options, including why a particular grant date was chosen. Firms must also address other timing questions in the report, such as whether options are granted to executives before the firm issues important information or whether the company times the release of market-moving information to affect the value of executive stock options.
The new report must be filed and certified by the firm’s CEO and CFO. The SEC added a provision to the final rules, requiring a statement from the compensation committee on whether it had reviewed the report with management and recommended its inclusion in the firm’s annual report. The final rules also call for a performance graph to be provided, but it will not be coupled with the executive compensation disclosure.
Companies that deliberately mischaracterize their options practices “will face enforcement action,” said SEC Commissioner Paul Atkins, according to the WSJ.
Additional Reporting Requirements
The updated disclosure rules also require companies to detail “golden parachutes” and other benefits payable to executives who are let go.
Rules for related-party transactions were updated under the new rules by increasing the dollar threshold to $120,000. According to the news report, the SEC said that for the first three years the new rule is in effect, companies will not have to restate related-party transactions reported under old rules.