the sec’s disclosure proposals for executive compensation february 17, 2006

The SEC’s Disclosure Proposals for Executive Compensation

February 17, 2006

Mercer Human Resource Consulting 2

Today’s Speakers

Mark BorgesPrincipal – Mercer Human Resource Consulting

Cathy CreechPartner – Benefits Group of Davis 7 Harman LLP

Lynn DudleyVice President – American Benefits Council

John McGuinessPrincipal – Groom Law Group


Agenda

Overview

Summary of Executive Compensation Proposals

– Individuals Covered

– Compensation Discussion and Analysis

– Summary Compensation Table

– Outstanding Equity Awards and Realized Gains

– Post-Employment Payments and Benefits

– Director Compensation

Preparing for Next Year’s Disclosure

Questions


Overview

Proposals issued by SEC on January 27, 2006– First significant revision in 14 years

What happens next? – 60-day comment period – ends April 10, 2006

– SEC staff will evaluate comments and formulate final recommendations

– Commission will consider and adopt final rules later this year

Effective dates – new rules will apply to:– Proxy statements filed 90 days or more after publication of final rules

– Annual reports for fiscal years ending 60 days or more after publication

– Forms 8-K filed for triggering events occurring 60 days or more after publication

– Registration statements that become effective 120 days or more after publication


Summary of Executive Compensation Proposals


Individuals Covered

Named executive officers– Any person who during the last fiscal year served (at any time) as

principal executive officer principal financial officer, PLUS

– Three most highly-compensated executive officers (other than the PEO and PFO) who were serving as executive officers at end of last fiscal year, PLUS Based on total compensation Disclosure not required if total compensation does not exceed $100,000

– Up to two additional individuals who would have been among the top three most highly-compensated executive officers except they were no longer serving as executive officers at end of last fiscal year


Compensation Discussion and Analysis

Replaces Board Compensation Committee Report and Performance Graph

Overview of executive compensation program– Summary of each program element

– Provides context for tabular disclosure

Must discuss six specific items:– Program objectives

– Behaviors that program is designed to reward and not reward

– Elements of compensation

– Rationale for each element

– Methodology (including formula) used to determine amount for each element

– How each element and decisions regarding that element fit into overall compensation objectives and affect decisions regarding other elements


Compensation Discussion and Analysis

Considered company, rather than compensation committee, disclosure

Will be considered “filed” with, rather than “furnished” to, the SEC

– Subjects CD&A to full liability under the federal securities laws

– Covered by SOX Section 302 CEO and CFO certifications to the extent incorporated into an Securities Exchange Act periodic report (for example, Form 10-K)

Need not disclose performance target levels, or factors/criteria involving confidential commercial or business information


Summary Compensation Table

Name and

PrincipalPosition

(a)

Year

(b)

Total($)

(c)

Salary($)

(d)

Bonus($)

(e)

Stock Awards($)

(f)

OptionAwards

($)

(g)

Non-tock

IncentivePlan

Compen-sation

($)(h)

All OtherCompen-

sation($)

(i)

PEO

PFO

A

B

C


Summary Compensation Table – All Other Compensation

Any compensation item that is not properly reported in any other column– Perquisites and other personal benefits

– Earnings on NQDC arrangements (including defined contribution plans)

– Tax “gross-ups” and reimbursements

– Discount stock purchases (unless arrangement is broadly available)

– Amounts paid or accrued under severance or change-in-control arrangements

– Company contributions to qualified defined contribution plans

– Aggregate increase in actuarial value of defined benefit pension plans

– Value of insurance premiums paid by company for NEO life insurance

Item must be identified and quantified if amount exceeds $10,000


Perquisites

While not defined, proposals provide analytical framework for determining:– An item:

Is not a perquisite if “integrally and directly related to the performance of the executive’s duties”

Is a perquisite if “confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company”

Proposed disclosure requirements– Must be disclosed if aggregate value perquisites is $10,000 or more

– If disclosed, must be individually identified

– Must be quantified only if individual item has value in excess of greater of: $25,000 or 10% of total perquisites


SCT Supplemental Table:Grants of Performance-Based Awards Table

C

B

A

PFO

PEO

(j)(i)(h)(g)(f)(e)(d)(c)(b)(a)

Maxi-mum($)or(#)

Target($)or(#)

Threshold($)or(#)

Estimatedfuture

payouts

Perform-ance or other

period until vesting or payout and

Option Expira-tion

Date

Grant Datefor Stock or Option

Awards

Dollar amount of

consid-eration paid for award, if any

($)

Non-Stock Incentive Plan Awards:

number of units

or other rights(#)

Perform-ance-Based

Options: number of securities

underlying Options

(#)

Perform-ance-Based Stock and

Stock-based Incentive

Plans: number of

shares, units or other rights

(#)

Name


SCT Supplemental Tables:Grants of All Other Equity Awards Table

Name

(a)

Number of Securities

Underlying Options Granted

(#)

(b)

Exercise or Base

Price($/Sh)

(c)

Expiration Date

(d)

Number ofShares of

Stock or UnitsGranted

(#)

(e)

Vesting Date

(f)

Grant Date

(g)

PEO

PFO

A

B

C


SCT Supplemental Narrative

Must discuss any “material factors” required to make presentation in SCT and supplemental tables understandable:– Materials terms of NEO employment agreements

– Description of any option repricing or material modification of outstanding equity award

– Material terms of performance-based awards

– Assumptions underlying calculation of defined benefit pension plans actuarial value

Narrative must also include total compensation and job description for up to three non-executive employees whose total compensation exceeded that of any NEO


Outstanding Equity Awards at Fiscal Year-End Table

Name

(a)

Number of securities

underlyingunexercised Options

(#)Exercisable/

Unexercisable

(b)

In-the-money amountof unexercised

Options($)

Exercisable/Unexercisable

(c)

Number of shares or units of Stock heldthat have not

vested(#)

(d)

Marketvalue of

shares or units ofStock

held thathave notvested

($)

(e)

IncentivePlans:

Numberof

nonvestedshares, units orother rightsheld(#)

(f)

IncentivePlans:

Market orpayout value

ofnonvested

shares,units orotherrightsheld ($)

(g)

PEO

PFO

A

B

C


Option Exercises and Stock Vested Table

Name ofExecutive

Officer

(a)

Number of Shares

Acquired onExercise

OrVesting

(#)

(b)

ValueRealized

UponExercise

OrVesting

($)

(c)

Grant DateFair ValuePreviouslyReported inSummary

CompensationTable

($)

(d)

PEO - Options

Stock

PFO - Options

Stock

A - Options

Stock

B - Options

Stock

C - Options

Stock


Post-Employment Payments and Benefits

Proposals would require individualized disclosure for each NEO– Retirement Plan Potential Annual Payments and Benefits Table

– Nonqualified Defined Contribution and Other Deferred Compensation Plans Table

– Potential payments upon termination or change-in-control Narrative, rather than tabular, disclosure Must quantify amount payable to each NEO Must disclose assumptions


Retirement Plan Potential Annual Payments and Benefits Table

Name

(a)

Plan name

(b)

Numberof yearscreditedservice

(#)

(c)

Normalretirement

age(#)

(d)

Estimatednormal

retirementannualbenefit

($)

(e)

Earlyretirement

age(#)

(f)

Estimatedearly

retirementannual benefit

($)

(g)

PEO

PFO

A

B

C


Nonqualified Defined Contribution and Other Deferred Compensation Plans Table

Name

(a)

Executive contributions

in last FY($)

(b)

Registrantcontributions

in last FY($)

(c)

Aggregateearnings

in last FY($)

(d)

Aggregatewithdrawals/distributions

($)

(e)

Aggregatebalance at last FYE

($)

(f)

PEO

PFO

A

B

C


Potential Payments Upon termination or Change-in-Control

Covers any contract, agreement, plan, or arrangement (whether or not in writing) providing for payments at, following, or in connection with any termination of employment, including:– Resignation

– Retirement

– Termination without cause (including a constructive termination)

– Termination with cause

– Change-in-control

Covers any payments and other benefits (including perquisites) payable upon the occurrence of any of these events


Director Compensation

Name

(a)

Total($)

(b)

Feesearned

orpaidin

cash($)

(c)

StockAwards

($)

(d)

OptionAwards

($)

(e)

Non-StockIncentive PlanCompensation

($)

(f)

All Other Compensation

($)

(g)

A

B

C

D

E


Preparing for Next Year’s Disclosure


Implications for Next Year’s Disclosure

Although probably not effective until 2007, current compensation decisions are affected

Should assess current disclosure practices under proposals

– Are improvements needed?

– Are shareholders requesting disclosure not covered in proposals?

Consider how current program will be described under proposals– What more is needed to “explain the numbers?”

– Can compensation philosophy be explained thoroughly and succinctly?

– Consider presentation formats that are easy to understand

– Look for potential “double counting” pitfalls


Implications for 2007 Disclosure

CD&A will require significantly more detailed disclosure– Provides a broad framework, but companies must “tell their own story”

– Proposals emphasize the “how” and “why” as much as the “how much”

– Requires greater demonstration of pay-for-performance relationship

– Putting policies and decisions in writing may be a daunting task

– Can you tell a compelling story?

Identify compensation elements that will comprise “Total Compensation” figure – Develop internal “tally” sheets

– Review benchmark data and process and validate what is “competitive pay”

– Decide whether certain program elements should be revised or eliminated

Will need to monitor all executive officers to identify NEOs



Determine appropriate and consistent valuation methods

– Equity valuation

– Nonqualified deferred compensation earnings

– Defined benefit pension plan actuarial values

– Perquisites

Examine impact of new disclosure values and calculations– Post-employment payments and benefits arrangements may generate numbers

that may never be realized

– Defined benefit pension plan calculation likely to be complex and confusing

– Disclosure of NQDC arrangements will duplicate aspects of the SCT

Severance and change-in-control disclosure to be continued hot button– Model various termination scenarios to select appropriate disclosure

– Select reasonable assumptions



Items to remember– Quality – not quantity, is key

– Use “plain English” in narrative discussions Consider using charts and bullets

– The Performance Graph (which charts TSR), not the discussion of TSR, is being eliminated

– Disclosure is not limited to the proxy statement Consider using websites and other venues

Bottom line: Begin planning now!


Questions

the sec’s disclosure proposals for executive compensation february 17, 2006

Documents

benefitsdirector compensation

compensated executive

fiscal years

program element

program objectives behaviors

sec staff

sec subjects cda

total compensationdisclosure