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Panelists Discuss Trends in Compensation Disclosure

At the Practising Law Institute's recent conference on hot issues in executive compensation, panelists reported an improvement in compliance with the SEC's demands for more analysis in their Compensation Disclosure & Analysis. John England, the managing principal and global practice leader at Towers Perrin, reported better use of plain English and more details about companies' benchmarking and peers. Performance targets were more generally discussed in the CD&A. England predicted that the pressure on executive pay will continue and that the drumbeat for shareholders' "say on pay" will get louder. If a company larger than Aflac voluntarily adopts say on pay, England believes that others may follow.

England said to keep an eye on the proxy disclosure rules and whether the SEC will continue to apply pressure with respect to performance targets. The elections on November 4 may determine the future of IRS section 162(m), in his view, which holds that annual compensation of over $1 million, other than performance-based compensation for public company CEOs and the other three most highly compensated officers, is not deductible.

Barry Summer, an associate director for the Division of Corporation's disclosure operations, advised that there is no executive compensation review project this year but that compensation will be looked at as part of the staff's normal review process. If a company received a comment letter during last year's review, it does not mean they will not get another one this year, according to Summer. The guidance and interpretations posted on the Division's Web site still represent the Division's current views, he said.

Summer reported that companies are doing an incrementally better job from an analytical standpoint in their compensation disclosure. He urged registrants to focus on materiality and to strive for brevity. Summer said he has seen a degree of "boilerplate creep," which should be avoided.

Summer reviewed three of the Division's recently updated compliance and disclosure interpretations relating to performance targets and benchmarking. He reminded registrants that if the targets are material, the only basis for omission is material harm. The threshold issues were often not very clear, he said, and a number of staff comment letters addressed that problem.

Summer noted that it may be perfectly okay to have a performance target and not disclose it if a company has a basis to omit the information. To the extent that a company relies on targets, it must provide the likelihood of meeting them. If a company is omitting the disclosure, it must do so for the right reason. Summer was asked whether a company that provides a bonus tied to achieving a number of targets could omit the targets because no individual target is material. He said the staff hears a version of that question a lot, and the answer is no because it creates a "loophole in perpetuity."

Summer was also asked about a change in the format of the comment letters. Some comment letters said the staff would have no further comment, while others said the staff could not agree or disagree with the disclosure but would have no further comment. Summer explained that the difference was intentional. He noted that the staff did not request a single amendment from the 350 companies that were subject to the CD&A review. The reason was that the rule was new and complex and the staff recognized that companies were trying to comply. The staff also recognized that companies were gearing up to draft the next year's proxies. Companies understood the staff position, he said, so the staff decided to move on.

Summer said there is a higher expectation for this year's disclosure. If the staff has significant concerns with a company's disclosure it may ask for an amendment to the Form 10-K. The staff is well aware of companies' dislike for amending their 10-K, he said.