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White Reviews Problem Areas in Executive Compensation Disclosure

In a speech at the annual Ray Garrett Institute in Chicago, John White, the director of the SEC's Division of Corporation Finance, reviewed the early results of compliance with the new executive compensation disclosure rules. The new rules have made a difference and appear in the headlines almost every day, he said. The Division plans to publish a report in the fall on the staff reviews.

White reported criticisms about the lack of analysis in the new CD&A disclosure. He acknowledged that the disclosure may not be quite where it should be yet, but believes many companies have made a good faith effort to provide the analysis. He reminded his audience that the principles-based nature of the rules was a fairly dramatic shift from the disclosure in the past. The upcoming staff report may ask for a higher level of analysis, he said, and added that the staff's expectations in the second year will be greater.

White said that some people are asking the Commission to amend its rule on CD&A to force more analysis, but he has doubts about that approach. In time, it may be an option, but not yet, in his view.

Another area of frequent complaints is with the length of the new disclosure, according to White. Even Chairman Christopher Cox has expressed disappointment with the lack of plain English in some filings. White pointed to an initiative that is underway to provide examples of plain English disclosure under the new rules. He added that some public companies are providing good examples with their executive compensation reporting.

Some of the complaints go too far, in White's view. Executive compensation is very complicated, he explained, and varies significantly from company to company. The new rules also require considerably more information. White noted that the Commission sought a layered disclosure approach with the CD&A as the top layer. He believes the new disclosure is providing greater insight into executive compensation at public companies.

Another area that has received attention is the performance target disclosure. This disclosure requirement is unpopular among companies who do not wish to disclose the information. White said that, based on early reports, less than half of the reporting companies are disclosing specific performance targets used in awarding annual bonuses or long-term incentive pay.

Some companies may not use performance targets, he said. Others may be relying on the confidential treatment exclusion provided under the rules. Some may simply be failing to make the required disclosure, and investors have been complaining. Too many companies may be claiming the confidential information exclusion inappropriately, White said, and the staff will take a hard look at this issue.

White said he is not interested in loosening the confidential treatment standard, and urged companies to respect the rules. The staff will ask companies, where appropriate, to justify their use of the exclusion. Companies should be prepared to offer an open and full explanation of their decisions to rely on the exclusion, he said.

Another area of concern is the alternative disclosure that companies are providing when performance targets are excluded. If companies rely on the confidentiality exclusion, they are still required to provide a sense of how difficult the targets are to achieve. White said he is not impressed by language such as "the targets are difficult but possible to achieve," without providing any additional information. The identification of targets as "intended to encourage superior performance" also falls short, according to White. He said it is possible that the staff will consider whether the rules should be recalibrated in this area.

A number of parties have raised concerns about "negative numbers" that appear in the new tables. Negative numbers can occur from a decrease in actuarial value of pension plans or from various calculations that must be made with regard to compensation cost from equity-based awards, according to White. In some cases, a negative amount is reported in one of the columns. White said the staff will evaluate the practices under the rules and their impact.

White reported concerns that CEOs are not providing robust disclosure about their role in the company's compensation processes. He said he has some initial concerns as well.

The staff will consider whether additional changes to the rules are advisable. White said that during the review process, some of the staff's comments may be satisfied by future disclosure, but some companies may have to amend their Form 10-K. The staff is taking this disclosure requirement very seriously, he said. Executive compensation is likely to remain a hot topic, according to White. He believes the new disclosure rules have made a positive contribution to the public dialogue.