Press Release
Commission Staff Publishes Its Observations in the Review of Executive
Compensation Disclosure
FOR IMMEDIATE RELEASE
2007-214
Washington, D.C., Oct. 9, 2007 — The Securities and Exchange
Commission staff published a report discussing the principal themes that
emerged from its initial review of the disclosure of 350 public companies
for compliance with the Commission's new and enhanced rules for executive
compensation and related disclosure.
After completing the first stage of these reviews, the staff sent
individualized comments to the companies. Two principal themes emerged
from these reviews. First, companies should provide more focused
disclosure of how and why they made specific executive compensation
decisions. Second, the manner of presentation is important, and companies
can use it to provide more direct, specific, clear and understandable
executive compensation disclosure.
John White, Director of the Division of Corporation Finance, stated,
"Since the new principles-based rules became effective in late 2006,
public companies have provided their investors with the clearest and most
complete disclosure ever regarding how much they pay their executives and
directors. Our individualized comments and our observations should help
companies enhance their future executive compensation disclosure and
better explain their compensation policies and decisions." Several members
of the Commission's staff will provide further context to the staff report
in public appearances this week. Chairman Cox will present the keynote
address at the Center for Plain Language's Symposium on Plain Language:
Public Policy and Good Business on Oct. 12, 2007.
The staff's reviews of the 350 companies are ongoing. Not less than 45
days after it completes each review, the staff will post the
correspondence containing the comments and company responses to comments
on the SEC's EDGAR system.
The staff report is available at http://www.sec.gov/divisions/corpfin/guidance/execcompdisclosure.htm.
http://www.sec.gov/news/press/2007/2007-214.htm
Staff Report
Staff Observations in the Review of Executive Compensation
Disclosure
Division of Corporation Finance
Executive Summary
The Division of Corporation Finance has completed its initial review of
the executive compensation and related disclosure of 350 public companies
under the Securities and Exchange Commissionfs new and revised rules
relating to executive compensation disclosure. Two principal themes emerge
from our reviews and our individualized comments to these companies.
First, the Compensation Discussion and Analysis needs to be focused on
how and why a company arrives at specific executive
compensation decisions and policies. This does not mean that disclosure
needs to be longer or more technical; indeed shorter, crisper, and clearer
would often be better. The focus should be on helping the reader
understand the basis and the context for granting different types and
amounts of executive compensation.
Second, the manner of presentation matters — in particular, using plain
English and organizing tabular and graphical information in a way that
helps the reader understand a companyfs disclosure. The executive
compensation rules require companies to disclose a great deal of
information. Techniques such as providing an executive summary, or
creating tables or charts tailored to a companyfs particular executive
compensation program, can make the disclosure more useful and meaningful.
We encourage companies to continue thinking about how executive
compensation information — from the big picture to the details — can be
better organized and presented for both the lay reader and the
professional.
Introduction
The Securities and Exchange Commissionfs new and revised rules relating
to executive compensation disclosure became effective on November 7, 2006.
These rules have significantly changed the disclosure a public company
provides about how it compensates its most highly paid executive officers,
including its principal executive officer and its principal financial
officer, and its directors. On December 22, 2006, the Commission further
amended the disclosure requirements for executive and director
compensation with respect to how a public company discloses stock and
option award compensation. The revised rules also update and clarify the
related person transaction disclosure requirements and consolidate and add
corporate governance disclosure requirements.
In the Division of Corporation Financefs regular review of public
company current and periodic reports, we routinely provide comments to
companies in which we seek clarification of current disclosure or
additional information so we may better understand why a company made a
particular disclosure. In some instances, we may ask a company to revise
or enhance its disclosure by amending the document in which it has
provided it. In other instances, we may ask a company to revise or enhance
its disclosure in future filings.
In 2007, we undertook a project to review the executive compensation
and other related disclosure of 350 public companies to evaluate
compliance with the revised rules and provide guidance on how those
companies could improve their disclosure. In identifying 350 companies for
review, we sought to cover a broad range of industries. No one should
interpret our selection of any company for review as part of this project
as any indication of our views regarding the quality of that companyfs
disclosure.
We have provided comments to companies based on a companyfs individual
facts and circumstances and the nature and extent of its disclosure. Our
goal in providing comments to companies is to assist them in enhancing the
overall disclosure in their filings. These reviews are ongoing. Not less
than 45 days after we complete our review of a companyfs filing, we will
post the correspondence containing our comments and company responses to
our comments on the SECfs EDGAR system.
In this report, we discuss the principal comments we provided to
companies. Because our reviews are ongoing, our discussion is limited to
our initial comments and does not reflect how companies may propose to
revise their disclosure in response to them. We encourage companies to
review their disclosure and prepare future disclosure consistent with the
principles and themes of our comments. In our comments, we seek, where
applicable, more direct, specific, clear and understandable disclosure. We
believe this will foster enhanced and more informative executive
compensation disclosure.
Manner of Presentation
Item 402 of Regulation S-K requires a company to provide gclear,
concise, and understandable disclosure of all plan and non-plan
compensation awarded to, earned by, or paid to the named executive
officers . . . and directors . . . by any person for all services,
rendered in all capacities . . . .h
In a number of instances, we suggested ways we thought companies could
improve the manner in which they presented their executive compensation
disclosure. For example, in a significant percentage of the filings we
reviewed, we suggested that companies should consider making some items of
their disclosure more prominent. Throughout our long history of reviewing
company disclosure, we have often found that where a company emphasizes
material information and de-emphasizes less important information,
investor understanding of the companyfs disclosure is improved. As another
example of our comments in this area, we suggested that companies could
improve their presentation by emphasizing in their Compensation Discussion
and Analysis how and why they established compensation levels, and
de-emphasizing and shortening lengthy discussions of compensation program
mechanics.
Format
For the most part, we found the format of executive compensation and
other related disclosure to be relatively consistent across the 350
company filings. We commented on the format or manner of presentation
where we found it adversely affected the overall readability of the
companyfs disclosure. In adopting the revised rules, the Commission stated
that the Compensation Discussion and Analysis is meant to be a narrative
overview at the beginning of the compensation disclosure, putting into
perspective the numbers in the tables that follow it. Where a company
placed its required compensation tables before the Compensation Discussion
and Analysis, we asked it to relocate those tables so that they would
follow the Compensation Discussion and Analysis.
Approximately two-thirds of the companies we reviewed included charts,
tables and graphs not specifically required by the revised rules. In
almost every instance, we found these additional presentations to be
helpful. For example, we found that a number of companies voluntarily
included a table in which they presented information regarding potential
payments upon termination or change-in-control. To enhance investor
understanding of these tables, we suggested to some companies that they
disclose the total amounts they would be required to pay their named
executive officers upon termination or a change-in-control.
We encourage methods of presentation that are tailored to a particular
companyfs circumstances, which we believe can be useful to investor
understanding. Of the 350 companies we reviewed, a few companies included
alternative summary compensation tables. Where a company presented an
alternative summary compensation table that we found to be confusing or
one which included compensation amounts calculated in a manner
inconsistent with the revised rules, we asked the company to de-emphasize
the alternative table and ensure that it was not presented more
prominently than the required table. To the extent that a companyfs
discussion or presentation of an alternative summary compensation table
did not overshadow or detract from the required tables, we generally did
not comment. Where the title of an alternative summary compensation table
could lead a reader to assume that the alternative table was part of the
required compensation tables, we asked the company to change the title.
Where necessary, we asked companies to state that an alternative summary
compensation table is not a substitute for the information the revised
rules require. Finally, we asked those companies that presented
alternative summary compensation tables to explain differences between
compensation amounts presented in those tables and compensation amounts
presented in the required tables.
Clarity
When the Commission adopted the revised rules it affirmed its support
of plain English principles by stating that g[c]learer, more concise
presentation of executive and director compensation, related person
transactions, beneficial ownership and corporate governance matters can
facilitate more informed investing and voting decisions in the face of
complex information about these important areas.h Companies are required
to follow the drafting principles presented in Exchange Act Rules 13a-20
and 15d-20 when presenting their executive and director compensation,
related person transactions, beneficial ownership and corporate governance
disclosures in reports they are required to file under Exchange Act
Section 13(a) or 15(d). These rules contain the plain English
requirements.
It is important to recognize that disclosure can be clear and
understandable yet not meaningful or responsive to disclosure
requirements. Conversely, disclosure can be responsive in content, but not
clear and understandable. As we discuss below, we found that, in several
instances, companies made a good faith effort to provide clear and
understandable disclosure, but fell short of full compliance with the
underlying disclosure requirements. For example, we found that a
significant number of companies could improve their analyses of how and
why they made certain executive compensation decisions. Where we ask a
company to add analysis, or enhance its analysis, we do not necessarily
think that it should lengthen its disclosure. Rather, careful drafting
consistent with plain English principles could result in a shorter, more
concise and effective discussion that complies with our rules.
In adopting the revised rules, the Commission stated that g[t]he
purpose of the Compensation Discussion and Analysis disclosure is to
provide material information about the compensation objectives and
policies for named executive officers without resorting to boilerplate
disclosure.h Where we found that a company presented boilerplate
disclosure, we asked it to provide a clear and concise discussion of its
own facts and circumstances. For example, we asked a significant number of
companies to replace boilerplate discussions of individual
performance with more specific analysis of how the compensation committee
considered and used individual performance to determine executive
compensation. Where a company repeated information from the required
compensation tables, we asked it to replace that disclosure with a clear
and concise analysis of the information in the required compensation
tables or to relocate the discussion to the narrative following the
appropriate tables or the footnotes to those tables. Where a companyfs
disclosure appeared identical to language in a compensation plan or
employment agreement, we asked it to present the information in a clear
and understandable manner.
Although we recognize that several of the required tables require
companies to present a number of columns, we asked some companies to be
mindful of font size in their tables and related footnote presentations
and to increase, where practicable, font size to enhance readability.
Compensation Discussion and Analysis
When the Commission adopted the revised rules, it stated that they gare
intended to provide investors with a clearer and more complete picture of
compensation to principal executive officers, principal financial
officers, the other highest paid executive officers and directors.h To
bring this picture into focus, the Commission adopted a new
principles-based requirement for a company to provide material information
about compensation objectives and policies for its named executive
officers, the Compensation Discussion and Analysis.
In adopting the Compensation Discussion and Analysis, the Commission
presented a disclosure concept and provided both principles and examples
to help companies identify disclosure applicable to their own facts and
circumstances. The Commission expressly stated that the Compensation
Discussion and Analysis gstrikes an appropriate balance that will
effectively elicit meaningful disclosure, even as new compensation
vehicles develop over time.h The principles-based disclosure concept
allows each company to assess its own facts and circumstances and
determine what elements of the companyfs compensation policies and
decisions are material and warrant disclosure.
The Commission explained that the primary focus of the Compensation
Discussion and Analysis should be g[m]uch like the overview that we have
encouraged companies to provide with their Managementfs Discussion and
Analysis of Financial Condition and Results of Operations. . . .h The
Commission stated that gthe new Compensation Discussion and Analysis calls
for a discussion and analysis of the material factors underlying
compensation policies and decisions reflected in the data presented in the
tables.h Further, the Commission advised companies that gthe Compensation
Discussion and Analysis requirement is principles-based, in that it
identifies the disclosure concept and provides several illustrative
examples.h The Commission also made clear that, in addition to discussing
its compensation policies and decisions, a company responding to the
principles-based disclosure requirement must analyze the material factors
underlying those policies and decisions.
In many of our comment letters, we asked companies to enhance their
analyses of compensation policies and discussions, including how they
determined the amounts of specific compensation elements. In providing
these comments to companies, our goal is to help companies enhance their
discussions of how they arrived at the particular levels and forms
of compensation that they chose to award to their named executive officers
and why they pay that compensation, giving investors an
analysis of the results of their compensation decisions. We discuss
a number of these comment areas below.
Compensation philosophies and decision mechanics
We found that a number of companies discussed their compensation
philosophies and decision mechanics in great detail. We asked a
substantial number of companies to refocus their Compensation Discussion
and Analysis presentations on the substance of their compensation
decisions and to disclose how they analyzed information and why their
analyses resulted in the compensation they paid. For example, where a
company provided a lengthy discussion about its compensation philosophies,
we suggested that it improve its Compensation Discussion and Analysis by
explaining how and why those philosophies resulted in the numbers they
presented in the required tables. Similarly, where a company provided a
lengthy discussion about its decision-making process, we suggested that,
rather than explaining the process, it explain how its analysis of
relevant information resulted in the decisions it made.
We asked a significant number of companies to discuss the extent to
which the amounts paid or awarded under each compensation element affected
the decisions they made regarding amounts they paid or awarded under other
compensation elements. Consistent with Item 402(b)(1)(vi), we asked these
companies to place in context how and why the determinations they made
with regard to one compensation element may or may not have influenced
decisions they made with respect to other compensation elements they
contemplated or awarded. Where a company disclosed that its compensation
committee analyzed gtally sheeth information, for example, we asked the
company to explain what gtally sheeth information was and discuss how it
impacted the committeefs decision on compensation awards.
Differences in compensation policies and decisions
Item 402(b) requires companies to discuss their compensation policies
and their decisions regarding compensation of their named executive
officers. When adopting this requirement, the Commission stated that
g[t]he Compensation Discussion and Analysis should be sufficiently precise
to identify material differences in compensation policies and decisions
for individual named executive officers where appropriate. Where policies
or decisions are materially similar, officers can be grouped together.
Where, however, the policy or decisions for a named executive officer are
materially different, for example in the case of a principal executive
officer, his or her compensation should be discussed separately.h Where a
companyfs disclosure, including that in the Summary Compensation Table,
led us to believe that its policies and decisions for individual named
executive officers may be materially different, we reminded the company of
the Commissionfs statement.
Performance targets
Item 402(b)(2) provides fifteen examples of items that may be material
elements of a companyfs compensation policies and decisions. Among the
elements of a companyfs compensation policies and decisions that may be
material and warrant disclosure is the companyfs use of corporate and
individual performance targets. Evaluating whether corporate and
individual performance targets warrant disclosure is not a new concept for
public companies in preparing their executive compensation disclosure.
Prior to 2006, the Commissionfs executive compensation disclosure rules
required a companyfs compensation committee to describe each measure of
company performance on which it based the Chief Executive Officerfs
compensation. Companies were not required to disclose target levels
involving confidential commercial or business information where disclosure
would have had an adverse effect on the company.
In adopting the revised rules, the Commission carefully considered
public company disclosure practices and the differing views of a wide
variety of commenters. Rather than presenting a specific requirement to
disclose corporate and individual performance targets, the Commission
adopted a principles-based disclosure model in which a company determines
whether performance targets are a material element of its compensation
policies and decisions. If a company determines they are material, Item
402 provides the disclosure framework for the company to follow.
We found that a substantial number of companies alluded to using, or
disclosed that they used, corporate and individual performance targets to
set compensation policies and make compensation decisions. We found that
corporate performance targets ranged from financial targets such as
earnings per share, EBITDA, and growth in net sales, to operational or
strategic goals such as increases in market share or targets specific to a
particular division or business unit. Most companies we reviewed disclosed
that their compensation committees considered individual performance in
making executive compensation decisions, although few companies disclosed
how they analyzed individual performance or whether they focused on
specific individual performance goals as part of that analysis.
We issued more comments regarding performance targets than any other
disclosure topic in our review of the executive compensation and other
related disclosure of the 350 companies. We often found it difficult to
understand how companies used these performance targets or considered
qualitative individual performance to set compensation policies and make
compensation decisions. In making these comments, we do not seek to
require companies to defend what may properly be subjective assessments in
terms of purely objective or quantitative criteria, but rather only to
clearly lay out the way that qualitative inputs are ultimately translated
into objective pay determinations.
Where it appeared that performance targets were material to a companyfs
policy and decision-making processes and the company did not disclose
those targets, we asked it to disclose the targets or demonstrate to us
that disclosure of the particular targets could cause it competitive
harm.1 We reminded companies of Instruction 4 to Item
402(b) which requires them to discuss how difficult it will be for the
executive or how likely it will be for the company to achieve undisclosed
target levels or other factors. Where a company omitted a performance
target amount but discussed how difficult or likely it would be for the
company or individual to achieve that target, we often sought more
specific disclosure that would enhance investor understanding of the
difficulty or likelihood.
Where a company presented a non-GAAP financial figure as a performance
target and the company did not disclose how it would calculate that
figure, consistent with Instruction 5 to Item 402(b)(2), we asked it to
disclose how it would do so. For example, where a company disclosed total
shareholder return as a performance target, we asked the company to
disclose how it would calculate total shareholder return and describe how
it would influence compensation decisions.
In adopting the revised rules and addressing commentersf requests for
clarification about whether the Compensation Discussion and Analysis is
limited to compensation for the last fiscal year or should also address
prior or current year matters, the Commission stated:
While the Compensation Discussion and Analysis may also
require discussion of post-termination compensation arrangements, on-going
compensation arrangements, and policies that the company will apply on a
going-forward basis, Compensation Discussion and Analysis should also
cover actions regarding executive compensation that were taken after the
last fiscal yearfs end. Actions that should be addressed might include, as
examples only, the adoption or implementation of new or modified programs
and policies or specific decisions that were made or steps that were taken
that could affect a fair understanding of the named executive officerfs
compensation for the last fiscal year. Moreover, in some situations it may
be necessary to discuss prior years in order to give context to the
disclosure provided.
While disclosure will always depend upon each companyfs particular
facts and circumstances, there are a number of situations where a company
may find it necessary to discuss prior and current year performance
targets to place its disclosure in context or affect a fair understanding
of a named executive officerfs compensation. It also may be material for a
company to disclose whether the company or the named executive officer
achieved or failed to achieve targets in prior years. Those situations may
include, for example, where a company has a multiple year compensation
plan or where target levels vary materially between years. Where a
companyfs disclosure implied that its current or prior year targets were
material to an understanding of a named executive officerfs compensation
for the last fiscal year or were otherwise material in the context of that
companyfs Compensation Discussion and Analysis, consistent with
Instruction 2 to Item 402(b) of Regulation S-K, we asked it to disclose
prior year and current year targets.
Benchmarks
When a company discloses that it has used compensation information from
other companies to determine its own compensation levels, the company may
be engaging in benchmarking its total compensation or other material
elements of compensation. Benchmarking is presented in Item 402(b)(2) as
an example of information that may be material to an individual companyfs
compensation policies and decisions. If a company uses benchmarking, and
it is material to its compensation policies and decisions, Item 402
requires it gto identify the benchmark and, if applicable, its components
(including component companies).h
In a substantial number of comments, we asked companies to provide a
more detailed explanation of how they used comparative compensation
information and how that comparison affected compensation decisions. Where
a company stated that it used comparative compensation information, but
retained discretion on how to use it, we asked it to provide appropriate
disclosure. For example, if a company stated that it benchmarked its
compensation, but it retained discretion to benchmark to a different point
or range, or to not benchmark at all, we asked it to disclose the nature
and extent of that discretion and whether or how it exercised that
discretion.
Where a company indicated that it benchmarked compensation to
its peers, but did not identify the peers or provide sufficient details
concerning the benchmarking it used, we asked it to identify the companies
to which it compared itself as well as the compensation components it used
in that comparison. In addition, where a company indicated that it
benchmarked compensation to a vague or broad range of data regarding those
companies, we asked it to explain more specifically where its compensation
fell within that range.
Change-in-control and termination arrangements
We found that a significant number of companies could enhance their
Compensation Discussion and Analysis by discussing and analyzing their
decisions regarding change-in-control and termination arrangements with
the named executive officers. Item 402(b)(1)(v) requires a company to
disclose how it determines the amount and formula, where applicable, to
pay for each compensation element. Item 402(b)(1)(vi) requires a company
to discuss how each compensation element, and the companyfs decisions
regarding that element, fit into the companyfs overall compensation
objectives and affect decisions regarding other compensation elements. We
asked a number of companies to disclose why they structured the material
terms and payment provisions in their change-in-control and termination
arrangements as they did. We also asked companies to discuss how potential
payments and benefits under these arrangements may have influenced their
decisions regarding other compensation elements.
Executive and Director Compensation Tables
We did not detect any common themes in our reviews of the required
named executive officer and director compensation tables, the footnotes to
the tables, or the narratives that followed them. Overall, we issued
relatively few comments to companies on this area of their disclosure. Our
comments regarding the required tables generally related to specific
disclosure requirements or other information concerning a particular
companyfs individual facts and circumstances. For example, if it appeared
that a company made undisclosed assumptions in valuing option awards, we
asked it to disclose those assumptions in the footnotes to the required
table or provide an appropriate cross-reference to the discussion of the
assumptions elsewhere in the companyfs filing. As another example, in the
Grants of Plan-Based Awards table, where it appeared that a company did
not disclose each grant of an award made to a named executive officer in
the last completed fiscal year under any plan, we asked it to do so.
Finally, where a company did not disclose the vesting dates of options,
shares of stock, and equity incentive plan awards held at fiscal-year end
by footnote to the applicable column in its Outstanding Equity Awards at
Fiscal Year-End table, we asked it to do so.
Compensation Committee Report
A number of companies furnished compensation committee reports that did
not include all of the information our rules require. For example, some
companies did not indicate whether the compensation committee reviewed and
discussed the Compensation Discussion and Analysis with management. We
asked these companies to revise their future reports to include all
required information.
Related Person Transaction Disclosure
We issued relatively few comments on related person transaction
disclosure. We did, however, ask a number of companies to provide a
statement that their policies and procedures for review, approval, or
ratification of related person transactions are in writing and, if not, to
explain how they evidence their policies and procedures. Furthermore, as
the Commission stated when adopting the revised rules, disclosure
regarding related person transactions is integral to ga materially
complete picture of financial relationships with a company,h and we will
continue to review company disclosures with this standard in mind.
Corporate Governance
Our comments on corporate governance matters primarily focused on who
was involved in making compensation decisions. We identified a number of
areas where a company could provide a more complete picture of which
individuals and which procedures it relied upon to consider and determine
executive and director compensation, consistent with the requirements of
Item 407(e)(3). Where a companyfs disclosure was unclear about exactly who
made the compensation decisions, we asked for clarification. Item
407(e)(3)(ii) requires a company to describe the role of executive
officers in determining or recommending the amount or form of executive
and director compensation. Where a company indicated that its principal
executive officer had a role in the compensation decision-making process,
we asked it to describe his or her role. Item 407(e)(3)(iii) requires
companies to disclose the role compensation consultants played in the
decision-making process, and we asked a number of companies to do so. In
particular, we asked companies to more specifically disclose the nature
and scope of a consultantfs assignment and material instructions the
company gave it.
1 Those companies that believe their explanation
to us should receive confidential treatment should determine whether
requesting confidential treatment of that explanation pursuant to Rule 83
is appropriate. SEC Rule 200.83 governs the procedures under which a
company may request confidential treatment for information contained in a
response letter or for supplemental information it provides to us. Rule 83
requires the company to submit a written request for confidential
treatment at the time it provides the information to us.
http://www.sec.gov/divisions/corpfin/guidance/execcompdisclosure.htm