The SEC has published its observations regarding executive compensation disclosure for the first round of proxy statements that were filed under the new executive compensation rules. In summary, two themes were the focus of the report:
- The Compensation Discussion and Analysis (CD&A) needs more attention to how and why compensation decisions are made; and
- Companies are encouraged to think about how they present information, including by use of plain English, tables, and graphs.
The full report contains suggestions for improved disclosure and an explanation of the types of comments that the SEC issued. The following are some highlights:
- Emphasize material information and de-emphasize less important information;
- In the CD&A, emphasize the how and why of compensation levels and de-emphasize compensation program mechanics;
- Charts, tables, and graphs not required by the rules were almost always helpful (for example, tables that explain payments upon a hypothetical termination or change-in-control);
- Disclosure that is clear and concise does not have to be long;
- Disclose how decisions affecting one element of compensation affected other elements as well; and
- Explain how subjective performance targets translate into objective pay determinations.
The SEC isn’t the only one concerned with executive compensation. Executive compensation has been mentioned by some of the front-runner candidates for president and recently by President Bush. Specifically, compensation for CEOs of large companies may be a point of discussion in next year’s election.
