THE U.S. Securities and Exchange Commission (SEC) wants companies to focus on providing “more direct, specific, clear and understandable” executive pay disclosures after it found key gaps during a review of companies’ proxy statements.
The SEC review covered 350 companies, many of which have been receiving letters from the agency asking for more information. In a speech at the 2nd Annual Proxy Disclosure Conference in San Francisco, John White, director of the SEC division of Corporation Finance, said while companies’ efforts were generally “quite admirable” two areas require more work:
1. Pay reports need to provide more meaningful analysis; and,
2. More effort should be made to present information clearly, using information design techniques and plain English.
White said the SEC had taken into account that 2007 was the first year companies had to deal with the new pay disclosures. However, he signaled that the commission will take a stricter stand in the coming year.
“As we enter the second season, we will expect companies to have taken our guidance to heart, and I anticipate that you will see that heightened expectation reflected in the type and focus of our comments and reactions next year.”
In the spirit of trying to present the SEC’s guidance in a format that is easier to use, we offer you this incomplete summary of do’s and don’ts based on White’s speech and the SEC’s review report.
Less pablum, more zest
- DO focus more on how and why executives ended up being paid what they were, and shorten detailed information about the mechanics of compensation plans or the processes used.
- DO emphasize material information from the viewpoint of shareholders and investors and de-emphasize less important information.
- DO consider providing a separate section titled “Analysis” in the CD&A.
- DO discuss if and how amounts paid or awarded under each compensation element affects decisions made about amounts paid under other compensation elements.
- DO explain what “tally sheet” information is and discuss how it impacts the compensation committee’s decisions on compensation awards.
- DO provide a separate discussion of a principal executive officer’s compensation when it is based on policies and decisions that are materially different from those applicable to other officers.
- DON’T let this coming year’s disclosures be just a mark-up of the first year.
- DO step back next year and start with a clean slate, asking every key participant to write one page of bullet points on the key hows and whys of the company’s compensation practices.
Real CEOs have real targets
- DO provide clearer disclosure about performance goals or targets and explain how they are used to set executive pay. White said SEC staff were “disappointed” with the level of disclosure around targets and “often found it difficult to understand” how companies used targets and qualitative individual performance in their pay decisions.
- DO replace boilerplate discussions of individual performance with more specific analysis of how the compensation committee considered and used individual performance to determine executive compensation.
- DO provide more specific disclosure on how difficult it will be for the executive or how likely it will be for the company to achieve undisclosed target levels or other factors.
- DO disclose how non-GAAP financial figures used as performance targets are calculated and factored into pay amounts, including measures like total shareholder return.
- DO disclose prior year and current year targets when they are material to understanding an executive’s compensation for the last fiscal year.
- DO discuss and analyze decisions about change-in-control and termination arrangements and disclose why they are structured as they are and how they may influence other compensation elements.
- DO include a table that presents information about potential termination or change-in-control payments, including total amounts executives stand to earn.
Rubber benchmarks and pay consultants
- DO provide a more detailed explanation of how the company uses comparative compensation information and how that comparison affected compensation decisions.
- DO explain the extent to which the company gives itself leeway to either ignore benchmarks or use a different point or range, and whether it has done so.
- DO identify the specific companies and pay components used in comparisons.
- DO be more specific about the role of compensation consultants in pay decisions and provide details of a consultant’s assignment and material instructions the company gave it.
Make it pretty, clear
- DO use plain English principles.
- DO present your information in ways that build understanding, including presenting layered disclosure.
- DO use tables and charts to present complex information and illustrate the relationship between compensation objectives and different forms of pay.
- DO rewrite language from a compensation plan or employment agreement in a clear and understandable way.
- DO use legible font sizes in compensation tables and related footnotes.
- DO NOT place the CD&A after the required compensation tables.
- DO NOT include alternative summary compensation tables that are confusing, inconsistent with the revised rules, or made more prominent than, or included among the required tables. Differences between amounts in alternative tables and the required tables must be explained.
This is a summary of key points. For more, see Staff Observations in the Review of Executive Compensation Disclosure and John White’s speech — Where’s the Analysis? — on the SEC’s website. The CorporateCounsel.net says this Cleary Gottlieb memo on when performance targets are not material is being talked about.
Dominic (bio & disclosures) is IR Web Report‘s founder and an online investor relations consultant. He advises leading public companies and investor relations service providers worldwide on using the web for disclosure, engagement and profile building. You can contact him via the contacts page.
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