On Tuesday, January 17th, at an open meeting the SEC announced proposed rule changes regarding disclosure of executive and director compensation, disclosure of related party transactions, director independence and other corporate governance matters. The SEC press release is available at http://www.sec.gov/news/press/2006-10.htm. The text of the proposed rules will not be available until the SEC issues its release, which is expected to be posted on the SEC website shortly.
The proposal would reorganize executive compensation disclosure into three broad categories: compensation for the last three fiscal years; holdings of equity-related interests received as compensation and realized gains; and retirement and other post-employment, severance and change-in-control compensation and benefit arrangements.
SUMMARY COMPENSATION TABLE
The Summary Compensation Table will continue to be the principal vehicle for disclosing compensation in the last three fiscal years. The proposal would define "named executive officers" as the CEO, CFO and the three other highest paid executive officers, based on total compensation. The principal changes to the table covered by the proposal would include adding a new "total compensation" column; disclosing the grant-date fair value of equity awards, calculated in accordance with FAS 123R, rather than the number of shares covered by the awards; and expanded disclosure of any item that does not fall into another category in the table in the "all other compensation" column. All other compensation would include the aggregate increase in pension plan actuarial value, all company contributions, all earnings on deferred compensation and tax gross-ups, perquisites and personal benefits. The threshold for disclosure of perquisites and personal benefits would be reduced to $10,000.
COMPENSATION DISCUSSION AND ANALYSIS
The proposal adds a new compensation discussion and analysis section, which would be an overview explaining in one place the policies and decisions related to named executive officers compensation. This compensation discussion and analysis disclosure would replace the current compensation committee report and performance graph.
EQUITY AWARDS TABLES
The section regarding outstanding equity interests received as compensation would include an Outstanding Equity Awards Table showing fiscal year-end holdings and their value and an Option Exercise and Stock Vested table showing amounts realized during the year from these interests.
POST EMPLOYMENT COMPENSATION TABLES
The proposal would require post-employment compensation disclosure in a Potential Annual Payments and Benefits Table that shows amounts under defined benefit plans payable as of the last fiscal year-end for each named executive officer, and a new Non-Qualified Defined Contribution and Deferred Compensation Plans Table disclosing executive contributions, company contributions, aggregate earnings and withdrawals during the last fiscal year, and the total balance at the end of the last fiscal year. The required disclosure would include payments and benefits payable upon termination or a change in control, including estimates of potential payments and benefits.
The proposal would require that director compensation be disclosed in a tabular format similar to the Summary Compensation Table, but with information for only one year.
FORM 8-K REVISIONS
The proposal would also modify Form 8-K reporting of compensation events to limit disclosure to material compensation arrangements and amendments involving only named executive officers.
RELATED PARTY TRANSACTIONS
The proposal would require disclosure of a company’s policies and procedures for the review, approval or ratification of related person transactions and increase the disclosure threshold from $60,000 to $120,000.
CORPORATE GOVERNANCE DISCLOSURES
The proposal would create a new disclosure item that would consolidate, in most cases without substantive change, corporate governance disclosure requirements currently contained in other SEC rules and regulations. It would also facilitate electronic dissemination of information and conform director independence disclosure to listing organization standards.
While it is unclear when the proposed rules will become effective, it does not appear likely it will occur prior to the 2006 proxy season. We will provide a more detailed update after the text of the proposed rules is made available.