Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Saturday, August 12, 2006

SEC's Final Rules on Executive Compensation

The long-awaited final rules from the SEC on executive compensation reform were released yesterday and are available here. The 436-page sure cure for insomnia contains both the final rules on most of the disclosure issues in the proposed rules and also requests additional comments on the so-called Katie Couric disclosure.

With respect to the requested additional comments, the SEC states: "We also solicit additional comments regarding the proposed disclosure requirement of the total compensation and job description of up to an additional three most highly compensated employees who are not executive officers or directors but who earn more than the named executive officers. In particular, we have specific request for comment as to whether the proposal should be modified to apply only to large accelerated filers who would disclose the total compensation for the most recent fiscal year and a dscription of the job position for each of their three most highly compensated employees whose total compensation is greater than any of the named executive officers, whether or not such persons are executive officers. Under this approach, employees who have no reponsibility for significant policy decisions within either the company, a significant subsidiary or a principal business unit, division, or funtion, would be excluded from the determination of the three most highly compensated employees and no disclosure regarding them would be required."

The effective date is for 10-Ks and proxy statements pertaining to fiscal years ending on or after December 15, 2006. The rules will also apply to Forms 8-K filed to report triggering events that occur 60 days or more after the rules are published in the Federal Register.

Under the revisions, compensation disclosure will start with a new Compensation Disclosure & Analysis section of the proxy statement. The types of questions that the CD&A should address are discussed in pages 28-34 of the Release. The CD& section of the proxy statement will be filed rather than furnished. As such, it is subject to the CEO and CFO certifications and to liability under Regulations 14A or 14C and Section 18 of the Exchange Act. As a companion to the CD&A, there will be a new, shorter compensation committee report that will be furnished rather than filed.

With respect to executive and director compensation, the SEC explains in the release that the 1992 revisions to executive and director compensation required disclosure in the form of tabular disclosure. The result was the items that did not fit squarely within the description of items required to be disclosed in tabular form often were not disclosed. The new rules keep the tables, but required additional information to be disclosed in those tables including a single "total compensation" figure. The rules also require "narrative disclosure comprising both a general discussion and analysis of compensation and specific material information regarding tabular items where necessary to an understanding of the tablular disclosure."

With respect to options grants -- which have been the subject of scrutiny recently due to backdating and springloading -- the SEC's new rules require issuers to provide investors with information about the option program, plans and practices pertaining to the grant date and strike price. For example, if the strike price does not equate to FMV on the date of grant, the company must disclose this. Similarly, if the issuer grants options at a time when the board or executives may be in possession of material non-public information, shareholders must be informed of this practice. A series of questions regarding options timing are included in the release to guide companies in making appropriate disclosures (see page 26 of the Release).

More to come later as I continue to slog my way through this tome.

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