The federal securities laws require clear, concise and understandable disclosure about the amount and type of compensation paid to chief executive officers and other highly compensated executives of public companies. This brochure is designed to help you locate this compensation information in company reports. For tips on finding other information about a company, see Getting Information About Companies.
This guide is divided into the following sections:
This publication is intended for the benefit of investors. Issuers should not rely on this brochure. The rules governing issuer disclosure of information about executive compensation are contained in Item 402 of Regulation S-K.
Executive compensation takes many forms. It can include:
In 1992, the Commission adopted amendments to the executive officer and director compensation disclosure requirements applicable to proxy statements, periodic reports (such as annual reports on Forms 10-K), and registration statements. These amendments were designed to furnish a more understandable presentation of the nature and extent of compensation to executive officers and directors.
The linchpin of the Commission's executive compensation disclosure is the Summary Compensation Table. This tabular, three-year summary provides investors with a comprehensive, formatted presentation of compensation information regarding a company's chief executive officer and most highly-compensated executive officers. It provides an easily understood overview of executive compensation from which investors can review a company's executive compensation for the last three fiscal years, identify trends, and compare those trends with industry trends. The Summary Compensation Table is then followed by tables containing more specific data on the components of compensation for the last completed fiscal year. Additional information about a company's executive compensation policies can be found in the company's annual proxy statement.
The federal regulations governing disclosure of information about executive compensation are contained in Item 402 of Regulation S-K, a copy of which is available on the SEC's website at http://www.sec.gov/divisions/corpfin/forms/regsk.htm. Regulation S-K sets out disclosure requirements for proxy statements, registration statements, reports and other materials filed under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Several types of documents that a company files with the Commission include information about the company's executive compensation policies and practices. You can locate information about executive pay in:
The easiest place to look is probably the annual proxy statement. (This is because of the three types of documents ・annual proxy statements, annual reports on Form 10-K, and registration statements ・the annual proxy statement is generally the shortest and so the information about compensation is very easy to locate.) The information about executive compensation in the annual proxy statement is quite comprehensive. With some exceptions, much of the same disclosure is required in the annual report on Form 10-K and in registration statements, and will appear there or will refer you to the information in the annual proxy statement.
This guide begins by walking you through the compensation information generally available in a company's annual proxy statement. When companies propose the election of directors, which most companies do in their annual proxy statements, they are required to furnish information about the compensation of directors and highly-compensated executive officers.
If you are a shareholder of the company, the company is required to send you a copy of its annual proxy statement prior to its annual meeting of shareholders each year. Generally, the proxy statement is sent to shareholders between 10 ・60 days prior to the date of the meeting. If your shares are held in a brokerage account or in a similar capacity (see Holding Your Securities ・Get the Facts), the proxy statement first will be sent to your brokerage firm that will then forward the document to you. If you have agreed to receive corporate documents electronically, the proxy statement will either be transmitted to you or otherwise made available to you in the manner to which you have previously agreed.
A company also is required to file its annual proxy statement with the SEC no later than the date proxy materials are first sent or given to shareholders. The company files this document using the SEC's database known as EDGAR. You can access the EDGAR database through the SEC's website ・http://www.sec.gov/index.htm. Simply go to the section of the SEC's home page entitled "Filings and Forms (EDGAR)" and click on "Search for Company Filings." On the resulting screen entitled "Search EDGAR Database," click on "Companies and Other Filers." Enter the name of the company and then click "Find Companies." Select the appropriate company to view its SEC filings.
To view the annual proxy statement, select the most recent filing entitled "DEF 14A." It's called a "DEF 14A" because it's the "definitive," or final, proxy statement (as opposed to a preliminary proxy statement). "14A" refers to the fact that proxy statements are filed pursuant to Section 14(a) of the Securities Exchange Act of 1934.
You can also search the EDGAR database by Central Index Key (CIK) number. A CIK is the unique number that the SEC's computer system assigns to individuals and corporations who file disclosure documents with the SEC. All new electronic and paper filers, foreign and domestic, receive a CIK number. You don't need to know a company's CIK, but searching by that number will narrow your search to the exact company you want.
In the annual proxy statement, a company must disclose information concerning compensation paid to its chief executive officer and most highly-compensated executive officers during the last fiscal year. A company also must disclose the criteria used in reaching compensation decisions and the degree of the relationship between the company's compensation practices and corporate performance. This information can be found in several separate disclosure items. Those items, listed in the order they often appear in proxy statements, include:
The Summary Compensation Table is the cornerstone of the SEC's required disclosure on executive compensation. The Summary Compensation Table provides, in a single location, a comprehensive overview of a company's executive pay practices. The Summary Compensation Table sets forth the actual compensation paid by the company to each of the named executive officers during the last three completed fiscal years.
In two instances, the disclosure provided in the table may be reduced. First, if a company has not been subject to the reporting requirements of the Securities Exchange Act of 1934 for the prior three years, the table need only cover the shorter period that the company has been a reporting company, but must cover at least the last completed fiscal year. Second, if an individual who was a named executive officers during the last completed fiscal year was not an executive officer of the company at any time during one of the earlier years that is covered by the table, information about that individual's compensation for that year need not be disclosed.
The table divides the compensation of the named executive officers into two broad categories ・annual compensation and long-term compensation.
The disclosure about annual compensation includes:
Information about base salary and bonus must be identified and disclosed separately.
Other annual compensation may be aggregated and reported as a single amount.
Perquisites (or "perks") and other personal benefits are reportable only when the total incremental cost to the company of such perquisites or other personal benefits exceeds $50,000 or 10% of the executive officer's annual base salary and bonus. Additional disclosure is required when one of the perquisites has a value in excess of 25% of the total amount of perquisites reported. Then the type and amount is required to be disclosed.
The disclosure about long-term compensation covers:
A long-term incentive plan provides compensation that is intended to serve as an incentive for performance to occur over a period longer than one fiscal year. Payouts under these plans are reported in the Summary Compensation Table.
Any other compensation includes, but is not limited to, disclosure of compensation related to:
The Option/SAR Grants Table provides information about stock option and free-standing stock appreciation rights (SAR) grants made during the last fiscal year to each of the named executive officers. Unlike the Summary Compensation Table (which covers the past three years), this table covers only the last completed fiscal year, and each stock option and SAR grant must be identified and discussed separately (unless the grants have the same exercise price and expiration date and are not subject to different performance thresholds).
The table includes, for each grant to a named executive officer:
To aid shareholders in understanding the potential value of each stock option and SAR granted by the company, the table also includes either the "potential realizable value" or the "grant date value" of the grants.
The "potential realizable value" of a stock option or SAR is an estimate of what the shares of stock underlying the option or SAR would be worth assuming that the company's stock appreciated at rates of 5% and 10% annually, compounded over the term of the option or SAR. For a stock option or SAR with a 10-year term (which is customary), this translates into potential appreciation of 63% and 159% from the market price of the company's stock on the date of grant. A company that elects to disclose the "potential realizable value" of its stock option and SAR grants also may estimate the potential value of the option or SAR shares using other assumed rates of return (such as the company's historic rate of return), but must provide the estimates using the assumed 5% and 10% rates.
The "grant date value" of a stock option or SAR is an estimate of the value of the option or SAR computed under a valuation formula (such as the Black-Scholes option-pricing model) selected by the company. A company that elects to disclose the "grant date value" of its stock option and SAR grants also must describe the valuation method that it used to make the estimates and any related material information including the assumptions used in the applicable model.
A footnote to the table must set forth the material terms of each stock option and SAR grant, including the date they become exercisable, and describe any standard or formula that may cause the exercise price of an option or SAR to be adjusted (including indexing or premium pricing provisions), as well as any provision that could cause the exercise price to be reduced.
The Option/SAR Exercise and Year-End Value Table provides information about stock option exercises, as well as exercises of free-standing stock appreciation rights (SARs), that occurred during the last fiscal year for each of the named executive officers. Unlike the Summary Compensation Table (which covers the last three years), this table covers only the last completed fiscal year, and all exercises are aggregated and reported as a single amount.
The table includes:
If a named executive officer holds unexercised stock options or SARs, the table also includes:
The Long-Term Incentive Plan Awards Table provides information about any long-term incentive awards made during the last fiscal year to each of the named executive officers. A Long-Term Incentive Plan, or LTIP, provides compensation intended to serve as incentive for performance over a period longer than one fiscal year. Often awards are made in one year and paid out in future years if predetermined performance criteria for those years are met. These payouts are reported in the Summary Compensation Table.
The table includes, for each award:
A footnote to the table must describe the material terms of each award, including a general description of the formula or criteria to be used in determining the amounts payable. In order to protect sensitive or confidential business information related to the performance goals, a company may use general statements when describing the performance aspects of the award.
Estimated post-retirement benefits for executives under pension and other defined benefit or actuarial plans are reported separately from the Summary Compensation Table. All prospective benefits to each of the named executive officers under all defined benefit plans are required either to be (i) included in the Pension Plan Table for the principal retirement plan, or in a separate table for the supplemental and excess benefit plans (if benefits are determined by final compensation and years of service), or (ii) described in narrative format (if benefits are determined by some other method). The disclosure should be presented in a manner so that all benefits to which the named executive officers will be entitled upon retirement under actuarial and defined benefit plans (funded and unfunded) can be determined.
A company must provide information, including specific amounts, about the standard arrangements under which members of its board of directors are compensated for the services that they provide to the company as directors. This disclosure must include the additional amounts, if any, that the directors receive for serving on board committees or that they receive for taking on special assignments. Other arrangements under which directors were compensated during the last completed fiscal year for any service provided as a director also must be disclosed, stating both the name of the director and the amount paid.
Companies must disclose information about the terms and conditions of employment contracts with named executive officers. These contracts typically are filed as exhibits to the company's annual report on Form 10-K. In addition, a company must describe the terms and conditions of any other compensatory plan or arrangement with any of the named executive officers if
If, during the previous fiscal year, a company reprices any stock option or stock appreciation right (SAR) held by a named executive officer, then, in the annual proxy statement, the company must provide information about the transaction, including a report explaining the repricing and an Option/SAR Repricing Table.
In the event of a repricing of any stock option or SAR held by a named executive officer, a company must include in its annual proxy statement a report from the compensation (or similar) committee of the company's board of directors explaining the terms and conditions of the repricing, as well as the basis for the repricing.
The report is to be made over the name of each member of the compensation (or similar) committee.
The Option/SAR Repricing Table provides information about each repricings of stock options and SARs held by any executive officer during the last 10 years, including:
The table does not need to include information about repricings that took place before the company became a reporting company under the Securities Exchange Act of 1934.
In the annual proxy statement, a company must identify each person who served as a member of the compensation (or similar) committee of the company's board of directors during the last completed fiscal year and disclose whether any committee member:
If the company has no compensation (or similar) committee, the company must identify each officer and employee of the company, and any former officer of the company, who, during the last completed fiscal year, participated in deliberations of the company's board of directors concerning executive officer compensation.
The company also must provide information about any "interlocking" relationships that existed during the last completed fiscal year. These are "interlocking" relationships:
In the annual proxy statement, a company must include a report from the compensation (or similar) committee of the company's board of directors on the company's executive compensation policies and practices. The report should discuss the compensation policies applicable to the company's executive officers (including the named executive officers), including the specific relationship of corporate performance to executive compensation. The report also should disclose the bases for the compensation paid for the last completed fiscal year to the company's chief executive officer, including the factors and criteria upon which the CEO's compensation was based. This should include a specific discussion of the relationship of the company's performance to the CEO's compensation for the last completed fiscal year, describing each measure of the company's performance, whether qualitative or quantitative, on which the CEO's compensation was based.
Each member of the compensation (or similar) committee must put his or her name to the report. If the board of directors has modified or rejected in any material way any action or recommendation of the compensation committee with respect to such decisions in the last completed fiscal year, the report must so indicate and explain the reasons for the board's actions and be made over the names of all the members of the board.
In order to protect proprietary and competitive information, a company is not required to disclose any factors or criteria involving confidential commercial or business information. For the same reasons, a company is not required to disclose target levels with respect to specific quantitative or qualitative performance-related factors considered by the compensation committee or the board of directors.
In the annual proxy statement, a company must include a graph showing the company's stock performance for the past five years alongside a broad-based market index (such as the S&P 500) and an index composed of peer companies or companies with similar market capitalization. This graph helps investors in assessing the company's performance vis a vis overall markets and the company's own industry. The purpose of the performance graph is to complement the discussion by the compensation committee (that appears in the Board Compensation Committee Report on Executive Compensation) of the relationship of executive compensation to corporate performance in a given fiscal year.
A company is required to file an annual report on Form 10-K with the SEC at the end of the company's fiscal year. The company files this document using the SEC's database known as EDGAR. You can access the EDGAR database through the SEC's website ・http://www.sec.gov/index.htm. Simply go to the section of the SEC's home page entitled "Filings and Forms (EDGAR)" and click on "Search for Company Filings." On the resulting screen entitled "Search EDGAR Database," click on "Companies and Other Filers." Enter the name of the company and then click "Find Companies." Select the appropriate company to view its SEC filings. To view the annual report on Form 10-K, select the most recent filing entitled "10-K" or "10-K 405."
You can also search the EDGAR database by Central Index Key (CIK) number. A CIK is the unique number that the SEC's computer system assigns to individuals and corporations who file disclosure documents with the SEC. All new electronic and paper filers, foreign and domestic, receive a CIK number. You don't need to know a company's CIK, but searching by that number will narrow your search to the exact company you want.
You also may request a copy of the annual report on Form 10-K by contacting the company's Investor Relations office or by visiting the company's website. Many companies post their annual report on Form 10-K on their website prior to the annual meeting of shareholders.
Under SEC rules, where a company distributes a proxy statement in connection with an annual meeting of shareholders at which directors are to be elected, the proxy statement must be accompanied by an annual report to shareholders. This annual report to shareholders is sometimes referred to as the "glossy" annual report because frequently companies use color photography, eye-catching graphics and high-quality materials to produce this document.
The annual report on Form 10-K requires the same kinds of disclosure about executive compensation as is required in the annual proxy statement EXCEPT that the annual report on Form 10-K does not need to include an Option/SAR Repricing Table or related information, a Board Compensation Committee Report on Executive Compensation, or a Performance Graph. The information that is required in the annual report on Form 10-K can be provided directly in the Form 10-K or can be incorporated into the Form 10-K by reference to the annual proxy statement.
A registration statement is a disclosure document filed with the SEC to register securities for sale to the public. The registration statement contains information about the business and financial condition of the company, including business risks, the company's management and board of directors and the terms of the offering. If you are a prospective investor in a securities offering, a company is required to deliver to you a copy of the prospectus for the offering. The prospectus is the primary component of a registration statement and contains most of the detailed information about the offering and the company, including audited financial statements.
If you are not a prospective investor, or if you are conducting historical research on a company, you can obtain a copy of a registration statement, including the prospectus, by using the SEC's database known as EDGAR. A company is required to file its registration statement and any subsequent amendments to the document with the SEC. You can access the EDGAR database through the SEC's website ・http://www.sec.gov/index.htm. Simply go to the section of the SEC's home page entitled "Filings and Forms (EDGAR)" and click on "Search for Company Filings." On the resulting screen entitled "Search EDGAR Database," click on "Companies and Other Filers." Enter the name of the company and then click "Find Companies." Select the appropriate company to view its SEC filings. Then select the type of registration statement you are seeking (for example, "S-1" or "S-3"). The SEC's website contains a Description of SEC Forms that describes the most widely used registration statement forms. Consult the Description of SEC Forms to identify the type of registration statement you wish to review.
You can also search the EDGAR database by Central Index Key (CIK) number. A CIK is the unique number that the SEC's computer system assigns to individuals and corporations who file disclosure documents with the SEC. All new electronic and paper filers, foreign and domestic, receive a CIK number. You don't need to know a company's CIK, but searching by that number will narrow your search to the exact company you want.
A registration statement requires the same kinds of disclosure about executive compensation as is required in the annual proxy statement EXCEPT that a registration statement does not need to include an Option/SAR Repricing Table or related information, a Board Compensation Committee Report on Executive Compensation, or a Performance Graph. The information that is required to be in a registration statement can be provided directly in the registration statement or can be incorporated into the registration statement by reference to the annual proxy statement.
A mathematical formula used for valuing employee stock options that considers such factors as the volatility of returns on the underlying securities, the risk-free interest rate, the expected dividend rate, the relationship of the option price to the price of the underlying securities and the expected option life.
A transaction that alters the ownership of a company. Mergers and consolidations, stock sales and asset sales are types of transactions that may result in a change in control.
Compensation earned by an individual, the receipt of which is postponed until a later date, usually upon termination of employment or retirement. Typically, the deferred amounts are invested on the recipient's behalf and may be supplemented by contributions by the company. If the compensation arrangement meets certain requirements, an individual may not pay income taxes on the compensation until he or she receives a distribution of some or all of the deferred amounts.
An automated computer database maintained by the SEC for the filing of registration statements, periodic reports and other filings mandated under the federal securities laws.
A term used to describe a stock option or stock appreciation right where the value of the shares of stock underlying the option or SAR is greater than the instrument's exercise price.
Any plan that provides compensation intended to serve as an incentive for performance to occur over a period longer than one year (where performance is measured by reference to financial performance of the company, the company's stock price or some other measure), but not including restricted stock, stock option or stock appreciation rights plans.
A company's chief executive officer and four most highly compensated executive officers (other than the chief executive officer) who were serving as executive officers at the end of the last completed fiscal year. Additionally, if a company had more than one chief executive officer during the last completed fiscal year, all individuals who served in that capacity during the last completed fiscal year are considered to be "named executive officers." "Named executive officers" can also include up to two additional executive officers who would have been among the most highly compensated executive officers at the end of the fiscal year if they still had been serving as executive officers at the end of the fiscal year. Generally, however, executive officers whose total annual salary and bonus for the last fiscal year did not exceed $100,000 are not deemed "named executive officers."
An adjustment or amendment to the exercise price of an outstanding, but unexercised, stock option or stock appreciation right, whether through amendment, cancellation, replacement grant or any other means, that changes the price at which the underlying shares of stock may be purchased.
A restricted stock award is an outright grant of shares of stock by a company to an individual, usually an employee, without any payment by the recipient or for only a nominal payment.
Generally, the shares of stock are subject to a contractual provision under which the granting company has the right (but not the obligation) to repurchase or reacquire the shares from the recipient upon the occurrence of a specified event (such as termination of employment). This right of repurchase or reacquisition expires after a specified period of time, either all at once or in increments. The expiration of this right is referred to as "vesting." During the period that the shares of stock may be repurchased or reacquired, the recipient is prohibited from selling or otherwise transferring the shares. This is why the shares are called "restricted" stock. (Note that "restricted stock" is different from "restricted securities" under Rule 144. See Rule 144: Selling Restricted and Control Securities.)
A stock appreciation right ("SAR") is a contractual arrangement between a company and an individual, usually an employee, in which the recipient has the right to receive an amount equal to the appreciation on a specified number of shares of stock over a specified period of time. A SAR differs from a stock option in the following ways:
Generally, a recipient's ability to exercise a SAR is subject to a contractual "vesting" provision that expires after a specified period of time, either all at once or in increments.
A stock option is a contractual arrangement between a company and an individual, usually an employee, where the company offers the recipient the opportunity to purchase a specified number of shares of stock of the company at a specified, pre-determined price (typically, the market price of the company's stock on the date of grant) for a specified period of time. The recipient is under no obligation to purchase the stock being offered by the company. Typically, the recipient of a stock option is referred to as an "optionee."
Generally, an option is subject to a contractual provision under which the granting company has the right (but not the obligation) to repurchase or reacquire the option from the optionee upon the occurrence of a specified event (such as termination of employment). This right expires after a specified period of time, either all at once or in increments. The expiration of this right is referred to as "vesting."
Currently, there are two different types of stock options: (1) incentive stock options ・options that meets the requirements of Section 422(b) of the Internal Revenue Code and, therefore, enable the optionee to qualify for preferential tax treatment under the federal income tax laws, and (2) non-qualified (or "non-statutory") stock options ・options that do not satisfy the requirements of a statutory stock option under the Internal Revenue Code and, therefore, do not qualify for any special tax treatment. The federal securities laws do not distinguish between incentive stock options and non-qualified stock options; that is, both types of options are subject to the same disclosure requirements.
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