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Corporate Secretaries See Problems with Redundancy and Complexity in Compensation Disclosure Rules

While generally supporting the SEC's efforts to increase the transparency of executive compensation, the Society of Corporate Secretaries and Governance Professionals said the complexity that will result from the proposed disclosures, including the many details resulting from multiple disclosures of the same compensation, may actually make it more difficult to understand total compensation. The Society believes the proposals, if adopted, would provide an overload of information without a clear focus. In its comment letter, the Society urged the SEC to eliminate some of the detail and redundancy in order to better achieve the goal of clear, thorough and understandable compensation disclosure. The Society also raised concerns with the SEC's interpretive position on perquisites.

In its proposal, the Commission indicates that an item is a perquisite if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company. The Society believes that this interpretive position ignores the fact that items may have both a business aspect that is integrally and directly related to the business as well as a personal aspect. In those cases, the Society said it is appropriate for the company to treat as a perquisite only the portion of the benefit that is personal. For example, with regard to club memberships used primarily for business, but also for incidental personal purposes, the incremental cost of the personal use should be disclosed as a perquisite.

The Society believes that the proposal actually worsens the current lack of distinction between compensation that has been paid or accrued in a definite amount, such as salaries and bonuses, and contingent compensation, the value of which cannot be known until some time in the future, such as stock options and performance-based awards. This is a meaningful distinction, according to the Society, and should be reflected in the disclosure rules. Even those forms of contingent compensation, such as options for which estimation models exist, are almost certain to produce different values when actually realized in the future, the Society wrote. The proposed presentation of these values will result in duplicative and misleading disclosure, in the Society's view.

The group also pointed out that multiple counting of the same compensation is inevitable under the proposals, citing as an example that deferred compensation will be disclosed in the year accrued in both the Summary Compensation Table and the Nonqualified Defined Contribution and Other Deferred Compensation Plans Table. The Aggregate Balance Column of that table will again reflect those amounts, as well as the previously-disclosed amounts from prior years. These aggregate amounts would include balances from years for which the named executive officer may not have even been an executive, the Society noted. The pension-related disclosures also contain redundancies. The Society emphasized that an approach less wedded to disclosing every point in the life cycle of an element of compensation would result in more meaningful disclosure.

The SEC proposes a new Compensation Discussion and Analysis, similar to the current MD&A, that would discuss and analyze the factors underlying the compensation policies and decisions. In the Society's view, requiring the CD&A to be filed as part of the Form 10-K would make the CD&A subject to the Sarbanes-Oxley Act CEO and CFO certifications. This would not be appropriate, the Society said, since good governance practices dictate that those officers are excluded from compensation committee deliberations about their own compensation. As a result, they would not have the first hand knowledge needed to provide the certification. Expecting them to perform diligence with the compensation committee about the committee's decisions regarding their pay is not reasonable, the Society advised.

Even if the CEO and CFO certifications were deemed not to cover the CD&A, the Society believes that the CD&A should not be treated as filed because of the increased litigation risk associated with doing so. Heightening the litigation risk associated with the CD&A disclosure will not yield better disclosure, according to the Society.

The Society urged the Commission not to adopt the proposal requiring the disclosure of the compensation of the three highest paid non-executive employees who make more than the five named executive officers. This disclosure would cause competitive harm to companies heavily reliant on human capital, the Society advised, such as the financial services, technology and entertainment companies. For example, entertainment companies may be forced to disclose information about the compensation to celebrities such as television hosts, which is not useful information to shareholders and could put the company at a disadvantage in future negotiations.

The governance group agreed with the SEC that the principal financial officer should be specifically included as a named executive officer subject to compensation disclosure. The principal executive officer and the principal financial officer together are responsible for establishing and maintaining disclosure controls and internal control over financial reporting. Given their key responsibilities, the Society said it is important for shareholders to know how these officers are compensated in order to gain a full understanding of their relationship with the company.