On October 21, 2008, John W. White, Director of the SEC’s Division of Corporation Finance, delivered a speech in which he gave his observations on executive compensation disclosure and related recent developments. Specifically, Mr. White discussed certain of the findings that resulted from the SEC’s review of the second year of company disclosures under the new executive compensation disclosure requirements. The primary areas of comment were:
• The need for more analysis - Filers need to concentrate their Compensation Disclosure and Analysis (CD&A) into an informative analytical discussion of the material elements of compensation, how they arrived at the varying levels of compensation, and why they believe their compensation practices and decisions fit within their overall objectives and philosophy. Often, the "how and the why" were missing in explaining the connection between the company's philosophies and processes and the numbers the company presents in its tabular disclosure. Companies are encouraged to eliminate boilerplate and unnecessary narrative disclosure.
• Disclosure of performance targets - In preparing its disclosure, a company must determine whether performance targets are a material element of its compensation policies and decisions and, if they are material, provide disclosure in accordance with Item 402 of Regulation S-K. Where companies omitted from their CD&A the performance objectives that are tied to a named executive officer's incentive compensation, they must justify the omission in light of the appropriate standard set forth in Instruction 4 to Item 402(b). In putting together their disclosure in this area, companies must remember to return to the underlying principles-based standard. Companies are encouraged to look to the SEC’s updated and revised Compliance and Disclosure Interpretations for more guidance in this area.
• Disclosure relating to benchmarking – Where a company benchmarks a material element of compensation, the SEC expects it to identify the companies that comprise the peer group used for benchmarking purposes. The SEC also expects meaningful disclosure that provides insight into the basis for selecting the peer group, and the relationship between actual compensation and the data utilized in benchmarking or peer-group studies. In many cases, the benchmarking methodologies that companies are using are not sufficiently clear nor have companies adequately explained how they are utilizing the data collected from their analyses of peer-group pay. The composition of the comparison groups and the extent to which companies are setting their compensation levels to remain competitive with a peer group is essential disclosure and critical for many companies when describing how their compensation programs work or how they arrived at specific compensation decisions.
Mr. White also noted that current market events are affecting many companies' compensation decisions and thus should be affecting the drafting of their upcoming CD&A. Management is encouraged to carefully consider if and how recent economic and financial events affect the company's compensation program.
Mr. White’s speech is available in full at http://www.sec.gov/news/speech/2008/spch102108jww.htm. |