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SEC Release Focuses on Compensation

In an effort to provide more informative disclosure to investors, the SEC has recently proposed a number of changes to rules governing the solicitation of proxies. In addition to the items outlined in our July 13, 2009 post, "SEC Publishes Proxy Disclosure and Solicitation Proposals," the release proposes a number of other changes focusing on compensation. For example, the proposal would change the summary compensation table for stock and option awards. Currently, the value reported in the table is the dollar amount of the award used for financial statement reporting purposes. The proposal would change the disclosure to require disclosure based on the aggregate grant date fair value. The release states that the change would "permit investors to better evaluate the amount of equity compensation awarded."

In addition, the proposed rules would require changes to the compensation discussion and analysis disclosure in order to provide more information about a company’s overall compensation policies. The new disclosure would require information about how compensation policies create incentives that could affect the company’s risk and risk management, based on a company’s particular circumstances. The rules "would require a company to discuss and analyze its broader compensation policies and overall actual compensation practices for employees generally, including non-executive officers, if risks arising from those compensation policies or practices may have a material effect on the company."

Under the proposal, the following situations could require additional disclosure about a company’s compensation policies:

  • At a business unit of the company that carries a significant portion of the company’s risk profile;
     
  • At a business unit with compensation structured significantly differently than other units within the company;
     
  • At business units that are significantly more profitable than others within the company;
     
  • At business units where the compensation expense is a significant percentage of the unit’s revenues; or
     
  • That vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from the task extend over a significantly longer period of time.

The proposal also contains examples of issues regarding compensation practices that may result in risks that could have a material effect on the company. Examples of such compensation practices are:

  • The general design philosophy of the company’s compensation policies for employees whose behavior would be most affected by the incentives established by the policies, as such policies relate to or affect risk taking by those employees on behalf of the company, and the manner of its implementation;
  • The company’s risk assessment or incentive considerations, if any, in structuring its compensation policies or in awarding and paying compensation;
     
  • How the company’s compensation policies relate to the realization of risks resulting from the actions of employees in both the short term and the long term, such as through policies requiring claw backs or imposing holding periods;
     
  • The company’s policies regarding adjustments to its compensation policies to address changes in its risk profile;
     
  • Material adjustments the company has made to its compensation policies or practices as a result of changes in its risk profile; and
     
  • The extent to which the company monitors its compensation policies to determine whether its risk management objectives are being met with respect to providing incentives to its employees.

Additionally, the proposed rules would require disclosure about fees paid to compensation consultants and their affiliates when they are involved in setting compensation for executives and directors while at the same time providing other services to a company. The disclosure would be required to include a description of additional services provided by the consultants.

The text of the proposal is available at: http://www.sec.gov/rules/proposed/2009/33-9052.pdf


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