SEC Staff Observations in the Review of Executive Compensation Disclosure/ SEC Comment Compilation // Cooley // Global Law Firm

By Cydney Posner

On Tuesday, the SEC issued its long-awaited report on the staff's focused review of the proxy statements of 350 public companies under the SEC's new and revised rules relating to executive compensation disclosure. In its report, the staff emphasized two themes that informed its report: the need for clear, concise and organized presentation and the need for better analysis of how and why the company awarded the types and amounts of compensation that were awarded. To help illustrate some of the points the staff makes in its report, I've attached at the end of this summary a compilation of staff comments that we have received on recent proxies and registration statements. Interestingly, the staff's approach in the Report is clearly more refined and nuanced than the approach taken by the staff in actual comments issued.

Manner of Presentation

The report points out that Item 402 of Reg S-K requires a company to provide "clear, concise, and understandable disclosure." However, companies often failed to properly emphasize the information that was material, for example, by inappropriately emphasizing mechanics to the detriment of the real focus of CD&A, the analysis.

Format. With one exception, the staff was especially pleased with the inclusion of supplementary charts, tables and graphs not specifically required by the revised rules, for example, tabular presentation of potential termination and change-in-control payments or perquisites. However, the staff was troubled by the inclusion by a few companies of alternative summary compensation tables, which were sometimes confusing or inconsistent with the required tables. In those cases, the staff may have asked the companies to de-emphasize the alternative table, ensure that it was not presented more prominently than the required table, clarify through a disclaimer that the alternative was not a substitute for the required table and explain differences between compensation amounts presented in the alternative table and compensation amounts presented in the required table.
Clarity. The staff found that disclosure in many cases could have been clearer and more concise. In fact, the staff emphasized that requests to add analysis should not be interpreted as requests to lengthen disclosure. As always, boilerplate and repetition were discouraged.

Analysis in CD&A

General. As John White, Corp Fin director, indicated in a speech delivered contemporaneously with release of the Report, the absence of "meaningful analysis" was the "biggest shortcoming of the first-year disclosures. Stated simply — Where’s the analysis?" In a principles-based CD&A, companies must provide a discussion "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." While companies happily described their compensation philosophies, policies and processes in great detail, they often failed to explain how those philosophies and policies were applied, why they resulted in the numbers presented and how the information gathered through the companies' processes was analyzed and resulted in the decisions made. White suggests that, in crafting CD&A, companies should consider, from their perspective, the key "hows" and "whys" including:

the key analytic tools used by the compensation committee;
the findings that emerged from the analysis; and
the resulting actions taken impacting executive compensation in the last year.

Relationship among components of compensation. The report indicates that a significant number of companies failed to discuss the extent to which the amounts paid or awarded under each compensation element influenced the decisions they made regarding amounts they paid or awarded (or contemplated) under other compensation elements.

Tally sheets. In staff comments, companies were asked to explain what "tally sheet" information was and discuss how it affected the committee’s decisions.

Differences in compensation among NEOs. The rules require that companies identify material differences in compensation policies and decisions for individual NEOs where appropriate. However, where policies or decisions are materially similar, the discussion may group the NEOs together. The report indicates that the staff reviewed the Summary Compensation Table and, where material differences in compensation were apparent, issued a comment requesting more detailed information about those specific elements of compensation for the affected NEOs.

Performance targets. The staff issued more comments regarding performance targets than any other topic. The Report indicates that, under the SEC's principles-based disclosure model, in determining whether disclosure of performance targets is required, companies should first assess whether the targets are a material element of their compensation policies and decisions. (One way that has been suggested to assess the materiality of performance targets is whether their disclosure would enable shareholders to determine the difficulty of achieving the targets and obtaining the related benefits.) If a company determines that the targets are not material, no disclosure is required. If they are material, disclosure is required unless the company can establish, using the same analysis that is employed with confidential treatment requests, that their disclosure would cause competitive harm to the company. The staff frequently required companies to demonstrate in supplemental correspondence the competitive harm that would be suffered. If the company was successful in that effort, it was then required to describe how difficult it would be for the executive or how likely it would be for the company to achieve the undisclosed target levels. The staff often sought more specific disclosure on that aspect also.

A substantial number of companies alluded to corporate and individual performance targets used to set compensation in connection with bonuses and otherwise, but often did not make clear how the performance targets were used or considered in making compensation decisions. The Report indicates that, if these determinations were made on a subjective basis, the company should make these "qualitative inputs" clear.

If a performance target was presented as a non-GAAP financial number, the staff required companies to disclose how it would calculate that number.

Future or prior time periods. The staff often asked companies to disclose performance targets for the current year. The Report indicates that a company may need to discuss prior and current year performance targets to "place its disclosure in context" or "affect a fair understanding of a named executive officer’s compensation." Disclosure of whether the company or the NEO achieved or failed to achieve targets in prior years may also be material in certain situations, such as where a company has a multi-year compensation plan or where target levels vary materially between years.

Benchmarks. Companies that disclosed that they had used compensation information from other companies to determine their own compensation levels often failed to identify the component companies in the comparable or peer group or the components of compensation that were compared. In addition, many companies did not adequately explain how they used comparative compensation information and or describe its impact on compensation decisions. Where a company stated that it used comparative compensation information, but retained discretion as to how to use it, the SEC often asked for disclosure of the nature and extent of that discretion and whether or how it exercised that discretion. In addition, companies that referred to benchmarking to a vague or broad range of data were asked to explain more specifically where their compensation fell within that range.

Change-in-control and termination arrangements. Companies often failed to discuss adequately why they structured the material terms and payment provisions in their change-in-control and termination arrangements as they did and how potential payments and benefits under these arrangements may have influenced their decisions regarding other compensation elements.

Executive and Director Compensation Tables

There were surprisingly few comments regarding the required tables. These comments generally related to specific disclosure requirements, such as disclosure of assumptions regarding option grants, disclosure of each grant in the Grants of Plan-Based Awards table or disclosure of the vesting dates of options, shares of stock and equity incentive plan awards held at fiscal-year end by footnote in the Outstanding Equity Awards at Fiscal Year-End table.

Compensation Committee Report

Some companies failed to include all required information, such as whether the compensation committee reviewed and discussed the CD&A with management.

Related-Person Transaction Disclosure

There were few comments on related-person transaction disclosure; however, some companies failed to indicate whether their policies and procedures for review, approval or ratification of related-person transactions were in writing or how they were otherwise evidenced. The staff will continue to review related-person transaction disclosure, keeping in mind the SEC's view that it is integral to "a materially complete picture of financial relationships with a company,"

Corporate Governance

The staff's comments on corporate governance matters focused primarily on who was involved in making compensation decisions, particularly the role of executive officers, and especially the CEO, in determining or recommending the amount or form of executive and director compensation. Companies also failed to adequately describe the role compensation consultants played in the decision-making process, including the nature and scope of a consultant’s assignment and the material instructions given by the company.

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COMPILATION OF SEC COMMENTS

In addition to the first and recent second waves of comment letters the SEC staff has issued as part of its "focused review" of executive compensation disclosure in proxy statements, the staff has also been commenting in some detail in its review of executive compensation in registration statements. In fact, some of the same staff members that were in the focused review program are now handing out reams of compensation comments in this new chapter of their lives. The compilation of compensation-related comments below includes comments issued as part of the staff's review of registration statements as well as comments issued as part of the staff's focused proxy review. Proxy comments are designated by asterisks. The comment letters emphasize the same topics that the staff emphasized in its Report (summarized above) and that John White has been emphasizing in his speeches (see postings on 8/17/07 and 5/09/07):

analysis, particularly on the different components of compensation and on change-of-control and termination payments;
adequacy of disclosure surrounding performance targets, particularly with respect to the "really vague disclosure" about "individual performance goals and targets" without further discussion;
adequacy of justification for withholding targets under the confidential treatment standards;
if targets were properly withheld, the adequacy of the alternative disclosure about the difficulty of achieving the targets;
clarity of the disclosure regarding benchmarking; and
disclosure regarding who makes compensation decisions, including the CEO’s and others’ roles in the decision-making process.

What's interesting here is that the jousting with the staff is immediate, and, in particular, we can see the staff's unremitting lack of enthusiasm for claims of confidentiality. As always, the staff remains poised for further comment.

In the bullets below is a slightly redacted sampling of comments reflecting the common themes:

More Analysis in CD&A

General. The staff has typically asked for more quantitative or qualitative analysis of how specific amounts were determined, how the elements fit in with the overall compensation objectives and how the various elements of compensation affect each other.

Please describe the executive compensation philosophy referenced on page __.
We note your disclosure about how annual salaries are set at the time of hire taking into account the "executive officer’s scope of responsibilities, qualifications, experience, …." and in ensuing years on an assessment of "the executive’s performance against job responsibilities, ... company performance and ...." Please describe specifically how these factors were used to make compensation decisions during the applicable periods.
We note disclosure on page ___ that one of the primary objectives of the compensation committee is to "align executives’ incentives with stockholder value creation." Please expand your disclosure to indicate how your executive compensation programs will be, or have been, designed to do this. See Item 402(b)(1)(i) of Regulation S-K.
Please expand your disclosure in this section to specifically discuss how each compensation element and the company’s decisions regarding that element affect decisions regarding other elements. See Item 402(b)(1)(vi) of Regulation S-K.
…. To the extent you have not already done so, please provide an analysis for each compensation decision, whether it is an increase in salary or an award of a stock option.
Please describe with specificity how you determined the size of each grant mentioned in the table on page __.

Relationship among components of compensation. The staff regularly inquired about how various components of compensation affected other components.

Please revise your disclosure to clarify how the amounts paid under each element affect decisions regarding the amounts paid or awarded under the other elements of your compensation program. The Compensation Discussion and Analysis should explain and place in context how and why determinations with respect to one element may or may not have influenced the Compensation Committee’s decisions with respect to other allocated or contemplated awards. Refer to Item 402(b)(l)(vi) of Regulation S-K.
Discuss the extent to which each compensation element affects decisions regarding other elements. See Item 402(b)(1)(vi).
***Please refer to Item 402(b) of Regulation S-K and Section 11.B. of Release No. 33-8732A and revise your disclosure to provide appropriate information pursuant to the item requirement. For example, it is not clear how you determine the amount for each element to pay and how your decisions regarding each element fits [sic] into your overall compensation objectives and how the amounts paid under each element affect amounts paid under the other elements. Refer to Item 402(b)(1)(vi). We do note your disclosure regarding the corporate and personal goals used in determining cash bonus amounts, but, as a general matter, your disclosure does not appear to contain quantitative or qualitative analysis; [sic] regarding the determination of actual amounts paid under each element, how each element fits into your overall compensation objectives and how the amounts paid under each element affect decisions regarding the amounts paid or awarded under the other elements of your compensation package.

Focus on Changes. The comments seem to focus particularly on changes, or the absence of changes.

Please describe why base salaries were kept the same in 2006.
Please discuss the reasons for the decision to leave base salaries unchanged for 2007.
Please explain the reason for the change in the target percentage for your President, as you discuss on page ___.
Please disclose the timing and reason for the compensation committee’s change from revenue to bookings in 2006.
To the extent that the compensation terms with your new [NEO] reflect differences from the compensation described here and elsewhere in your prospectus, please discuss those differences and the reasons for the changes.

Individual or Personal Performance Factors. The comments seem to spotlight individual or personal performance factors, which could prove to be especially troubling for many companies and perhaps embarrassing for the individuals.

The discussion regarding base salary should describe what specific items of corporate performance are taken into account in setting compensation policies and making compensation decisions. Moreover, the discussion should also describe the elements of individual performance and/or contribution that are taken into account in structuring and implementing specific forms of compensation. We note that you do not describe the specific elements of individual performance that were used in establishing cash incentive payments for the named executive officers. See Items 402(b)(2)(v) and (vii) of Regulation S-K. Note that corporate objectives or targets should be described to the extent they do not involve confidential trade secrets or confidential commercial or financial information. See Instruction 4 to 402(b) of Regulation S-K. Please revise accordingly.
You disclosure in the _______ bullet points on page ___ indicates that individual performance factors are taken into account in determining and approving compensation for your named executive officers. Please expand your Compensation Discussion and Analysis to include a more specific discussion and analysis of how the applicable elements of your compensation packages are structured and implemented to reflect the individual performance of your named executive officers. You should disclose the elements of individual performance, both quantitative and qualitative, and specific contributions the compensation committee considered in its evaluation, and if applicable, how they were weighted and factored into specific compensation decisions. Refer to Item 402(b)(2)(vii) of Regulation S-K.
... you state that for 2007, base salaries were set by reviewing current salaries against company and individual performance as well as general economic factors. Please describe what factors regarding company and individual performance impacted the salary levels and how those salary levels were impacted. Please also describe the general economic factors considered and how those factors affected salary levels.
*** You provide a description of how company performance affects compensation, but only a general discussion and little analysis of the effect of individual performance, even though your disclosure suggests it is a material factor considered by the compensation committee. For example, in your discussion of your executive compensation philosophy on page ___, you state that one of the ... principle objectives of the compensation committee is to provide total compensation that is tied to, and varies based upon, both individual and corporate performance. On page ___ you indicate in the last paragraph that the compensation committee determines base salary increases for the named executive officers based upon, among other factors, the committee’s subjective evaluation of the performance of the executive officers, as well as.... In your discussion of annual cash bonus on page ___, you state ... that in the event performance targets are achieved, the amount of an executive’s bonus varies based on individual performance, but you provide only a one sentence discussion of the [individual and group performance determination] that was used to determine 2006 bonuses. Please expand your disclosure to provide additional qualitative, and if applicable, quantitative detail and an analysis of how individual performance contributed to actual 2006 compensation for the named executive officers. For example, in [determining individual and group performance for] a named executive officer, what factors does the compensation committee consider in its assessment of such officer’s overall performance and, if applicable, how are they weighted? Are certain factors or goals considered more determinative of compensation levels than others? In responding to this comment, please address your statement in footnote __to your summary compensation table that all goals were [predetermined and subject to objective measurement.] See Item 402(b)(2)(vii) of Regulation S-K.

More Detail. The staff appears to be asking for significantly more detail in CD&A, arguably regardless of the extent of detail already provided. The request for further detail is a leitmotif of many of the comments. It may well be that the staff is presuming a level of analysis and precision on the part of compensation committees that may not occur in all cases.

***Disclose the range[s] of company performance ..., how ... net income and revenue... are weighted in terms of their contribution to [company performance determinations], the ranges of achievement for each performance goal and how achievement of a performance goal correlates to a percentage of that goal’s portion of [company performance determinations]. For example, on a percentage basis what are the minimum, target and maximum levels of achievement for your net income goal, and how would achievement of 110% of the target level affect that particular goal’s portion of [company performance determinations]? Also, to the extent applicable, disclose the range of values of the [individual and group performance determination].

Different treatment among NEOs and CEO. In its proxy review, the staff's comments we received focused on the disparity between the compensation paid to the CEO and the other NEOs. In reviewing registration statements, the staff has also issued comments requesting descriptions on an individual basis of how compensation amounts were determined for each named executive officer other than the CEO.

You disclose that the ... target bonus amounts ranged from __% to __% of an executive’s base salary. Please provide discussion and analysis as to how the compensation committee determined the applicable percentage for each named executive officer and the reasons why those percentages vary among your named executive officers.
Please more specifically disclose the size of the "modest" increases in 2007 and explain how that size was determined. If the increase were not proportionate for each named executive, please discuss the reasons for the differences.
We note that you do not generally pay cash bonuses, except with respect to your CEO. Expand to explain why your CEO is eligible to receive such bonuses while your other executives are not. Also explain the circumstances under which you have awarded or may award your CEO a cash bonus and the factors considered by your board in determining that such a bonus was warranted.
As a related matter, please expand your disclosure to discuss in more detail how you determined the compensation levels for each of your named executive officers. Your revised disclosure should also compare and discuss the differences in compensation among all of your executive officers and should address all components of your compensation program.
***Your Compensation Discussion and Analysis should be sufficiently precise to identify material differences in compensation policies with respect to individual named executive officers. Refer to Section II.B.1 of Commission Release No. 33-8732A. For example, we note the disparity between your chief executive officer’s compensation and that of the other named executive officers. Please provide a more detailed discussion of how and why your chief executive officer’s compensation differs from that of the other named executive officers.
***The Compensation Discussion and Analysis should be sufficiently precise to identify material differences in compensation policies with respect to individual named executive officers. Refer to Section II.B.1. of Commission Release No. 33-8732A. We note the disparity between your chief executive officer’s base salary and that of the other named executive officers. We also refer you to stock and option awards granted to your chief executive officer noted in the table on page ___ as compared to the lesser awards granted to the other named executive officers. Please provide a more detailed discussion of how and why your chief executive officer’s compensation differs from that of the other named executive officers.

Disclosure of Performance Targets; Competitive Harm; Difficulty of Achievement of Goals. In a speech this spring, White noted that the staff would be taking a hard look at whether too many companies were "incorrectly asserting that they would suffer competitive harm if they provided the required material disclosure about performance targets used for executive compensation purposes." Even if the disclosure may properly be omitted, White notes, companies must alternatively provide investors with a sense of how hard the targets were to achieve or how likely it was they would be met. Investors view the information as necessary to enable them to assess "whether or not the targets are real targets or are more akin to shadows and are going to result in essentially guaranteed awards. I am not impressed by disclosure that targets 'are difficult but possible to achieve' without more. Another complaint I have heard relates to identification of targets simply as 'intended to encourage superior performance.' Is there any target for which that is not true? Without more, identifying a target simply as 'challenging but achievable' or as 'designed to promote excellence and motivate management' seems an empty disclosure that I would not think is useful to investors." As a result, these particular comments came as no surprise and required the type of analysis required in a CTR. Note the continued focus on individual as well as corporate goals.

In the context of registration statement review, the staff apparently would not take no for an answer, at least on the first go-round. Note also that the staff did not limit its requests to bonus compensation and focused again on individual as well as corporate performance targets.

Please describe the "corporate goals and …. milestones" used to determine cash incentive payments. Your general description on ... page __… is not sufficient. Please provide a more detailed and accurate description of these corporate goals and milestones for each of 2006 and 2007.
On pages __ and ___ you refer to "business objectives" set by the board of directors that would impact ____________'s and ________’s salaries. Please describe these business objectives and how they have impacted the salaries since the time set.
We note your disclosure that your compensation programs "should reward consistent performance that meets or exceeds expectations." Please clarify what is meant by "expectations." For example, are you referring to individual or corporate performance goals? Please note that such performance-related factors are generally required to be disclosed pursuant to Item 402(b)(2) of Regulation S-K.
You disclose that in _______, the compensation committee approved the principal terms of your ________ Bonus Plan and that in ____ 2007 your board of directors modified the _____ Bonus Plan to establish revised ___ and ______ threshold and target amounts. Please disclose the initial and revised performance metrics under the ____ Bonus Plan. See Item 402(b)(2)(v) and Instruction 2 to Item 402(b). To the extent you believe that disclosure of the information would result in competitive harm such that the information could be excluded under Instruction 4 to Item 402(b), please provide us with a detailed explanation supporting your conclusion. To the extent that it is appropriate to omit specific targets or performance objectives, you are required to provide appropriate disclosure pursuant to Instruction 4 to Item 402(b) of Regulation S-K. Refer also to Question 3.04 of the Item 402 of Regulation S-K Interpretations available on our website at www.sec.gov. In discussing how difficult or likely it will be for you to achieve the target levels or other factors, you should provide as much detail as necessary without disclosing information that poses a reasonable risk of competitive harm. Similarly, disclose the milestones established by your board of directors that are necessary to be achieved in order for the named executive officers mentioned … on page __ to receive the bonuses to which they are entitled under their respective employment agreements.
We note that you have not provided a quantitative discussion on the "pre-approved corporate goals" and "individual goals" to be achieved for your executive officers to earn their discretionary annual bonuses. Please provide such disclosure or alternatively tell us why you believe that the disclosure of such information would result in competitive harm such that the information could be excluded under Instruction 4 to Item 402(b). Further, qualitative goals generally need to be presented to conform to the requirements of Item 402(b)(2)(v). To the extent that it is appropriate to omit specific targets. discuss how difficult it would be for the executive or how likely it will be for the registrant to achieve the target levels or other factors. Please see Instruction 4 to Item 402(b).
Please discuss the extent to which goals were achieved, and explain the reasons for any deviations from the target percentages.
We reissue prior comments __ and __ of our letter dated _______, 2007. Please provide us with your analysis of the competitive harm that would result from disclosing the corporate performance targets for the historical period and for the current year. Your response that "quantitative corporate targets under the 2006 and 2007 Incentive Plans are confidential and commercial information" is conclusory [and] does not demonstrate why you believe this to be so. With respect to historical periods, we believe it would be difficult to show the competitive harm that ... would result from disclosure of such targets. Moreover, the revised disclosure on pages __-__ describes individual performance goals on a general basis. This disclosure should be provided on an individualized basis. Finally, to the extent you have provided us with a sufficient basis for concluding that the corporate performance targets constitute confidential information, your statement that the revenue targets "were designed to be difficult to achieve" does not adequately explain the level of difficulty associated with achieving the targets. Please revise.
We note your response to prior comment __; however, it remains unclear why you cannot provide more specific disclosure. For example, it is unclear how disclosure of prior year’s financial goals is likely to cause substantial competitive harm. Likewise, it appears that you could provide more specific information about the ________ goals without revealing the customer names that you say are likely to cause substantial competitive harm. Therefore, we reissue prior comments __ and __.
***You disclose that bonus payments are linked to the attainment of overall corporate goals and individual goals established for each executive officer and you disclose that your CEO compensation is linked to annual and long-term strategic and operational goals. While we note your disclosure [regarding your most challenging goal in one field], you do not indicate what specific goals were established [in other fields]. Please provide adequate discussion and analysis of the quantitative or qualitative aspects of the necessary goals to be achieved in order for your executive officers to earn their incentive compensation. You should disclose the specific quantitative and qualitative aspects of the performance objectives used to determine incentive amounts and how your incentive awards are specifically structured around such performance goals and individual objectives. To the extent you believe that disclosure of the information would result in competitive harm such that the information could be excluded under Instruction 4 to Item 402(b), please provide us with a detailed explanation supporting your conclusion. To the extent that it is appropriate to omit specific targets or performance objectives, you are required to provide appropriate disclosure pursuant to Instruction 4 to Item 402(b) of Regulation S-K. Refer also to Question 3.04 of the Item 402 of Regulation S-K Interpretations available on our website at www.sec.gov. In discussing how difficult or likely it will be for the registrant to achieve the target levels or other factors, you should provide as much detail as necessary without disclosing information that poses a reasonable risk of competitive harm.
***You have not provided a quantitative discussion of the terms of the necessary performance objectives to be achieved in order for your executive officers to earn their incentive compensation. Please disclose the specific net income and revenue targets used to determine incentive amounts. Given your statement in footnote ___ to the summary compensation table that annual cash bonus goals were [predetermined and subject to objective measurement], also disclose the performance measures used [to assess] each named executive officer’s [individual and group performance determination]. To the extent you believe that disclosure of these performance objectives is not required because it would result in competitive harm such that you may omit this information under Instruction 4 to Item 402(b) of Regulation S-K, please provide on a supplemental basis a detailed explanation for such conclusion. Please also disclose how difficult it would be for the named executive officers or how likely it will be for you to achieve the undisclosed target levels or other factors. General statements regarding the level of difficulty or ease associated with achieving performance goals are not sufficient. In discussing how difficult it will be for an executive or how likely it will be for you to achieve the target levels or other factors, please provide as much detail as necessary without providing information that would result in competitive harm.

Although it is unclear whether this approach to illustrating levels of difficulty will find favor with the staff or will be useful in connection with IPOs, one approach that some companies have adopted is to use percentages to illustrate levels of difficulty:

"The committee sets the company performance measures with a goal of having the minimum threshold met approximately 90% of the time, the target level met approximately 50-60% of the time, and the maximum level met approximately 10% of the time. Target levels are generally set with reference to the company’s annual budget (adjusted for actual financial performance year-to-date to a level expected to achieve the 50-60% probabilities of achievement referenced above). The minimum and maximum levels are set at an amount expected to result in the 10% probability of non-achievement and achievement, respectively, referenced above."

"Over the past five years, the Company has achieved performance in excess of the target level five times but has not achieved the maximum performance level. The payout percentage over the past five years has been between approximately 120% and 150% of the participant’s target award opportunity with an average approximate payout percentage over the past five years of 135% of the target award opportunity. Generally, the Committee sets the minimum, target and maximum levels such that the relative difficulty of achieving the target level is consistent from year to year."

Disclosure of Targets for 2007. While the comment letters our clients received regarding proxy statements did not include this comment, the staff's Report indicates that the staff requested performance target information for the current year's incentive plans (in addition to the prior year's plans). That comment appeared fairly consistently in connection with review of registration statements. (Of course, one could read the cited Instruction 2 to Item 402(b) to require a discussion only of the "information contained in the tables" and to require future period disclosure only if it could "affect a fair understanding" of the NEOs' compensation for the last fiscal year, but the staff's views in the comment process do not appear to be as nuanced as the Report would suggest.) One question even inquires regarding future NEOs.

Explain in more detail the performance objectives and financial budgetary goals established for 2007 that will be considered in determining annual cash incentive compensation. Explain what factors the board considered in determining the percentages that would apply if described objectives were met. Clarify how annual cash incentives will be determined if some, but not all, corporate performance objectives are met.
Please revise the disclosure to cover actions regarding executive compensation taken after the end of your last fiscal year. In this regard, target information regarding corporate objectives and individual performance, such as the information to be provided for fiscal year 2006, should also be provided for fiscal year 2007. See Instruction 2 to Item 402(b).
Please provide a discussion and analysis of compensation of additional officers that you know are to be named executive officers for 2007, particularly to the extent that their compensation will differ from disclosure regarding current named executive officers. See the second sentence of instruction 2 to Regulation S-K Item 402(b).
Please provide us with your analysis of the competitive harm that would result if the 2007 revenue thresholds were disclosed.
We note that your disclosure in response to the second sentence of prior comment __ cites the prior year bonus percentages. Therefore, please explain the basis for the prior year bonus percentages and explain the reasons for the changes to those percentages for 2007.
We note the restricted stock awards granted in _____ 2007 from footnote __ to your table on page ___. Please revise your Compensation Discussion and Analysis to address any compensation actions that were taken after the last fiscal year’s end. Refer to the second sentence of Instruction 2 to Item 402(b) of Regulation S-K.
We note your response to prior comment __. However, the instruction you cite indicates that Compensation Discussion and Analysis should cover actions regarding executive compensation taken after the registrant’s last fiscal year end. Given your disclosure that you have taken such actions, we reissue the comment. Also, given that you did not grant discretionary bonuses in 2006 and did so in 2007, it appears that a discussion of the 2007 actions would be necessary to fully understand the operation of your compensation program before investing in your company.

More Details on Benchmarking and Application of Data. The staff wants to know more about the components of the surveys, the level at which compensation was targeted and the level at which it was actually paid. There are also a number of comments relating to how the benchmarked data were used and adjusted. Where there were no surveys, the SEC asks about alternatives to surveys. Where amounts are determined on a discretionary basis, the staff wants that to be made plain.

Please disclose the ___ publicly traded companies that you used in benchmarking compensation. Similarly, disclose the names of the companies in the "group of publicly-traded companies in the _____________ industry" that were used in determining the initial compensation of your chief executive officer.
We note your references to compensation surveys. Please identify the surveys you used and their components, including component companies. Also, while we note in your disclosure that you do not use a specific formula to set pay in relation to the data you use, please disclose where within the range of compensation revealed in the surveys your compensation was set. Please provide disclosure that is more specific than "below average" and "competitive" like on page __ and "comparable companies" like on page __.
Throughout this section you refer to benchmarking to compensation paid by other companies. To the extent that you have used other companies as a benchmark for setting compensation, identify those other companies, disclose the criteria used to select them, disclose where your compensation falls in relation to those other companies and disclose which items of compensation you have benchmarked.
We note your disclosure that you take into account available data regarding the aggregate amount and elements of compensation paid by companies of "similar size and stage of development." Please expand to identify these other companies and define what you mean by "similar size and stage of development." Also identify the "... portfolio companies" with whom members of your board are affiliated. Explain whether the compensation packages of these companies contain similar types and structures of compensation that you have provided to your executive officers. Also specify how each component of your compensation program and the aggregate amount of compensation paid relates to the data you have analyzed from these companies. See Item 402(b)(2)(xiv).
Please clarify your statement that you have not historically benchmarked your executive compensation against your peer companies in light of your statement that you have historically taken into account publicly available data relating to the compensation practices of other companies within and outside your industry and that you adjust salaries from time to time to realign them with market levels. To the extent you believe your compensation packages to be competitive with your peer companies, please identify the companies that form the basis for this statement. See Item 402(b)(2)(xiv) of Regulation S-K.
We note your response to comment ___. Please more clearly identify the components of the compensation surveys you use. For example, disclose the number of companies in the surveys and the range of revenues those companies generate.
Please clarify the extent to which the data you have analyzed from other companies impacts the amount of compensation paid and the elements that are included in your compensation program. We note your disclosure that such data is "taken into account," which does not appear to sufficiently describe why you choose to pay each element or amount of compensation. Also clarify the degree to which an individual’s and/or your company’s performance factors into compensation decisions.
Expand the discussion in the ____ paragraph to clarify the extent that the committee’s subjective analysis resulted in adjustments from the comparable company analysis.
We note the disclosure in response to prior comment ___ regarding the equity-based incentives being part of your efforts to make total compensation competitive. Please quantify the extent to which the increased salaries and equity incentives affected compensation relative to the benchmark disclosed.
We note your disclosure that your compensation committee did not use a specific formula to set pay in relation to market data. If compensation decisions were based on the subjective discretion of the committee, please say so clearly and directly without implying that objective factors were used.
We note your disclosure that base salary is based primarily on market factors and that you believe the base salaries of your executives are commensurate with the general salary levels for "similar positions" in companies of "similar size and stage of development." Expand to specify for each named executive officer how their base salary relates to the data you have analyzed from other companies, identifying the other companies and the "similar positions" you have used for comparative purposes. See Item 402(b)(2)(xiv).
***Given that you seek to offer a level of compensation to your executive officers that is competitive with the compensation paid by your selected peer group of companies, please specify how each element of compensation you provide to the named executive officers relates to the data you have analyzed from the comparator companies and include discussion of where you target each element of compensation against the peer companies and where actual payments and each element of compensation actually fell within the targeted parameters. To the extent actual compensation was outside of a targeted range, please discuss why. Refer to Item 402(b)(2)(xiv) of Regulation S-K.
***You indicate on page ___ that in addition to the ... report from [consultant], the compensation committee utilized the …Compensation Survey and the ... Survey to provide further data points and to help the committee calibrate the findings of the compensation consultant. Please describe these surveys, indicate the number and type of companies used in such surveys and discuss the degree to which the compensation committee considered such companies comparable to you.
***You indicate in... section that the compensation committee sets base salary structures and annual cash incentive targets for named executive officers around the ______ percentile of its peer group and sets equity incentive targets around the ____ percentile of the peer group. You also indicate that to retain and motivate your key executives, the committee may... deviate from these general percentages. Disclose the percentiles of the peer group represented by actual compensation paid for 2006.

More on non-equity incentive or bonus compensation.

Please discuss and analyze specifically how and why the performance metrics under the 2007 Bonus Plan were changed mid-year.
Refer to the last paragraph of this section. Please identify who received the discretionary bonuses, when and why. Clarify how the amounts were set.
Please also describe how the cash incentive payments paid for 2006 were determined based upon the criteria you established for those payments.

Equity awards. Generalities will not suffice; the staff wants to know how actual amounts and types of equity awards were determined for individuals.

Please identify with specificity each factor mentioned in the _______ paragraph that determined the size of the grant to each named executive. Also identify the specific "performance milestones" mentioned in the ____ paragraph and how achievement of those milestones determined the size of the grant.
Please disclose the current "pre-approved" goals required for future grants as mentioned in the fourth paragraph. Also, clarify whether the size of the grant upon achievement of the goal has been determined.
Explain the purpose of repurchasing certain shares held by Messrs. _____________ and ______________ in __________ 2007 and then granting new stock options and a related bonus.
You disclose that the process followed by the compensation committee in setting compensation for executives involves reviewing potential stock dilution. Please expand your disclosure to discuss and analyze how this review factored into the actual compensation awards. Similarly, you disclose that the compensation committee reviews recommendations for the various elements of compensation taking into account each executive’s unvested options. Please also discuss and analyze how each named executive officer’s unvested options factored into the actual compensation awards.
We note your disclosure here and on page __ that Mssrs. __________ and ___________ were awarded stock options or stock awards for fiscal year 2006. Please disclose with specificity the basis for each of these awards, including any individual and corporate achievements upon which such awards were based. See Item 402(b)(2)(v)-(vii). Also, given your disclosure here that you have considered the overall number of shares held by Mr. __________ when determining the level of his equity award, please explain how the amount of shares he holds relates to his stock award for 2006.
***Please expand your Compensation Discussion and Analysis to include a more detailed analysis of how the Compensation Committee determined the actual amounts of the stock option, restricted stock unit awards, and stock bonuses for each named executive officer. Although we note disclosure regarding general policies relating to these forms of compensation, please include disclosure that not only sets forth the actual amounts awarded under these forms of compensation but also provides substantive analysis and insight into how the Compensation Committee determined the actual award amounts. For example, please discuss and analyze how the Compensation Committee determined to award the actual number of shares underlying the stock option and restricted stock awards for your named executive officers, and the rationale for the variances in those awards among such officers.
***If applicable, describe the basis for allocating compensation between stock options and restricted stock awards. See Item 402(b)(2)(iii) of Regulation S-K.

Other Compensation and Benefits.

Briefly indicate what changes you are required to make to the employment agreements in order to comply with Section 409A of the American Jobs Creation Act of 2004.
You disclose that Mr. ________ accrues an additional paid time off per year in addition to the ... standard company paid time off policy…. Given this feature…, please provide a more detailed discussion of how and why this arrangement has been established with respect to __________. Also discuss and analyze how this arrangement factors into decisions made with respect to the other elements of Mr._____________ compensation package.

Termination Benefits. The staff wants to understand how the termination benefits fit into the grand compensation scheme and why particular benefits were made available to particular NEOs.

With respect to the severance and change of control benefits, please provide an analysis as to why you have structured these payments as you have. In particular, please also address why you have adopted a different payment level for ___________.
Please expand your Compensation Discussion and Analysis to discuss how the arrangements described in this section, including the severance benefits available to the named executive officers as a result of a change of control, fit into your overall compensation objectives and strategy and affect the decisions you made regarding other compensation elements.
***Expand your disclosure of your post-termination benefits to include a more thorough discussion of Item 402(b)(1) of Regulation S-K. Discuss how this compensation component and your decisions regarding this element fit into your overall compensation objectives and affect decisions regarding other elements. Also, analyze why you structured the employment agreements of the named executive officers in the manner summarized on page ___. For example, discuss why you chose to provide your chief executive officer... medical reimbursement and the "gross up" payment discussed on page __, why the severance and bonus portion of his severance package is more generous than that of other officers and why all named executive officers have their [equity awards] automatically vest upon occurrence of the double trigger change of control event you describe in the first paragraph on page ___.

The issue of termination benefits also comes under scrutiny outside the CD&A in the separate discussion of potential termination and change-in-control benefits required by Item 402(j).

You disclose that the named executive officers are entitled to severance payments under the severance and change of control arrangements if, following a change of control, the named executive officer is terminated without "cause" or resigns for "good reason." Please concisely define these terms in your disclosure.
Please indicate the events or circumstances that would trigger the payments due to a "change of control." In your discussion of the definition of "change of control," please indicate the basis for selecting particular events as triggering payments. Refer to Item 402(b)(2)(xi) of Regulation S-K.
***Your disclosure in this section is not fully responsive to Item 402(j). For example, you disclose dollar amounts in your table on page ___ for automatic vesting of options and restricted stock, but you do not provide the information required by Item 402(j)(3) as to this column [how the payment and benefit levels were determined]. In addition, to the extent there are any material conditions or obligations applicable to the receipt of payments or benefits, including non-compete, non-solicitation and confidentiality agreements, please describe and explain such provisions. Please provide all the information required by Item 402(j).

Comments on Tables

The staff has also made a number of technical comments about the various new tables.

Summary Compensation Table and related narrative.

We note your disclosure on page __ that Mr. _______ has been your CFO since _____ 2007. We also note that no other individuals are identified as having served in this capacity prior to Mr. _______. Compensation information must be disclosed for all individuals who served as your CFO or acted in a similar capacity at any time during your 2006 fiscal year. Given that you have not provided such disclosure for any individual who served or acted as your CFO for fiscal year 2006, please confirm that your company operated without a CFO during that time period and expand your disclosure accordingly.
….Please clarify how early exercise of a stock option generated the stock award amount specified in the table.
Please refer to footnote __ of the summary compensation table. Please quantify separately the amounts paid to Mr. ________ pursuant to the severance arrangement and that paid as accrued vacation.
We note the disclosure on page ___ that the committee did not authorize the grant of ….stock awards for the year ended December 31, 2006. Reconcile this with the "stock awards" grants reflected in the summary compensation table by discussing those awards in the appropriate narrative section.
Please expand your disclosure to include the material terms of Mr. _________’s employment contract, filed as Exhibit ______ to this registration statement. See Item 402(e)(1)(i).
Also, in an appropriate location, expand to discuss the special bonus paid to Mr. ____________ in 2007, as disclosed on page ___.

2006 Grants of Plan-Based Awards Table.

Please tell us how the revised options did not result in information to be reported in the last column per Regulation S-K Item 402(d)(2)(viii). For example, it appears from footnote __ on page ___ that the revisions may have resulted in changed vesting schedules which may have incrementally affected fair value.

Outstanding Equity Awards at Fiscal Year-End Table.

Your disclosure in footnotes ___ and ___ appears to indicate that the related options or warrants have not vested in full at this time and, therefore, are not fully exercisable. As such, and with a view towards revised disclosure, please tell us why you have included all of the common stock underlying these securities under your column entitled "Number of Securities Underlying Unexercised Options Exercisable."
***Please note that Instruction 2 to Item 402(f)(2) of Regulation S-K requires footnote disclosure of the vesting dates of options, shares of stock and equity incentive plan awards held at fiscal year-end. Please include the required disclosure.
***Footnotes ___ and ___ to this table set forth the vesting schedule of the option and stock awards but without disclosing their grant dates, it does not appear that you have complied with Instruction 2 to Item 402(f)(2) of Regulation S-K. Please make disclose by footnote to the applicable columns the vesting dates of option and stock awards held at fiscal year end.
***Footnote ___ to this table and footnote ___ to your option exercises and stock vested table each reference [specific types of equity awards]. Supplement your disclosure to describe these awards. For example, explain how such awards are earned.

Directors Compensation. The staff emphasizes that the instructions to the directors' compensation table require inclusion of much of the same information as is required for the summary compensation table.

Please describe in a footnote the amount paid as "All Other Compensation" to _________.
Please tell us how the warrants mentioned in the paragraph after the table are reflected in the table.
Please clarify whether your policy has changed from 2006 wherein none of the non-employee directors received any compensation for their service on the board or on any board committee…..
***Similar to what you have provided in footnote ___ to the director compensation table [do they mean the summary compensation table?], please include a footnote describing all assumptions made in the valuation of the option awards granted to your directors by reference to a discussion of those assumptions in the footnotes to your financial statements included in your annual report on Form 10-K. See the Instruction to Item 402(k) of Regulation S-K, indicating that the instruction to Item 402(c)(2)(v) and (vi) applies equally to Item 402(k).
***You state in footnote ___ that... each director...received an award of options to acquire ________ shares with grant value of $_________ (_____ shares multiplied by $___________). Either confirm that such value represents the grant date fair value computed in accordance with FAS 123R or disclose by footnote to the appropriate column the grant date fair value of each equity award computed in accordance with FAS 123R. Disclose by footnote to the appropriate column similar information with respect to each option award. Also, disclose by footnote to the appropriate columns the aggregate number of stock awards and the aggregate number of option awards outstanding at fiscal year end for each director. See the Instruction to Item 402(k)(2)(iii) and (iv) of Regulation S-K.

Related-person transactions

Identify the officers and directors and disclose the nature of their relationships with the various entities discussed here.
For each transaction described in this section, expand the disclosure to include the material terms of the transactions and of securities issuances, rather than cross referencing investors to other locations in the filings.
Please describe the free rent and other preferential terms of the sublease as mentioned on page ___. Also, with a view toward disclosure, please tell us the amount you paid to lease the subleased premises.
Your disclosure in the ... paragraph [on] page ___ indicates that the table summarizes the "grants" of your capital stock since January 1, ___. Please disclose the consideration, if any, delivered in exchange for these grants.
Please disclose the duration of the consulting agreements and the nature of the services provided under those agreements.
Please disclose the nature of the business of [third party] so that investors can evaluate the extent to which the collaboration agreement may result in competition for your customers.
According to the signature page … of Exhibit 10.___, ____________, one of your 5% stockholders, participated in the preferred stock financings referenced in your disclosure. We also note that Dr. ___________, who is one of your directors, is affiliated with [5% stockholder]. Please expand your disclosure here to include the information required by Item 404(a) with respect to _________ and its participation in your preferred stock financings. Please also file a copy of the stock purchase agreement for your ... preferred stock financing as an exhibit to this registration statement. See Item 601(b)(10).
Please expand your disclosure concerning your ... financings to include the specific dollar amount of each related person’s interest. Also disclose the amount of warrants issued to each related person referenced in your disclosure and the dollar value of each related person’s interest. Please also file copies of the warrants and the agreements related to the ... financings as exhibits to this registration statement.
Provide more detailed information regarding the loan program, specifically with regard to your named executive officers and directors.
We note your disclosure on page ___, which states that... "certain officers" exercised outstanding options to purchase shares of your common stock pursuant to your loan program. We also note that the principal balance on the outstanding note was $__________ as of __________. Please tell us the "certain officers" who exercised these options, the dollar value of such options, the amount due on each officer’s note and the rate at which interest accrues, or disclose all required information. Please also file copies of these loan agreements as exhibits to this registration statement.
Expand to discuss the … agreement to provide services to an affiliate of a shareholder, as briefly referenced in footnote __ on page F-__.
Please file a copy of the ... loan agreement between you and __________ as an exhibit to this registration statement. Also expand your disclosure to include the information required by Item 404(a)(5) of Regulation S-K.
***Provide the information required by Item 404(b) of Regulation S-K. For example, describe your policies and procedures for the review, approval or ratification of any transaction required to be reported under Item 404(a), including, to the extent applicable, the material features described in Item 404(b)(1).
***You describe the policies and procedures involving related transactions. Disclose whether the policies and procedures are in writing, and if not, how such policies and procedures are evidenced. See Item 404(b)(1)(iv).

Corporate Governance

Role of the CEO in determining compensation. Concerns have also been raised that the role played by the CEO in the compensation process has not been adequately disclosed. This concern was echoed in the staff's Report. In a prior speech, White suggested as examples of questions that companies should be asking: "Did the CEO have the ability to call or attend even portions of compensation committee meetings? Did she meet with any consultants used by the compensation committee? Did the CEO retain or have access to any other compensation consultants who influenced the company's executive compensation? What input did the CEO have as compensation packages were being crafted?"

We note the _____ sentence on page __. Please clarify whether the CEO establishes individual goals for himself.
Please expand to discuss in greater detail the role of Mr. ______, as Chief Executive Officer, in the compensation process. Refer to Item 402(b)(2)(xv) of Regulation S-K. Your disclosure should include a discussion of whether or not Mr. ____ makes recommendations to the compensation committee regarding the compensation of other executives as well as his own compensation. Such a discussion should identify any measures, targets or similar items used in determining compensation amounts. Explain whether Mr. ______ has the ability to call or attend compensation committee meetings.
We note your disclosure that Mr. ________ makes recommendations annually to the compensation committee with respect to annual salary adjustments, bonuses and stock option grants. Expand to state whether the compensation committee and ultimately the board of directors approved the recommendations made by Mr. ________. If the amounts established by your board of directors were different from those recommended by your compensation committee, explain how they differed. Also disclose whether the recommendations of Mr. __________ were adopted without change by your compensation committee, or explain how they differed.

Role of Consultants. The SEC also wants to know about the role of consultants in determining compensation.

You disclose that the compensation consultant provided recommendations concerning your compensation programs. Please expand your Compensation Discussion and Analysis to indicate how the committee utilized the compensation consultant’s recommendations in determining compensation policies or in establishing specific forms and amounts of compensation for your named executive officers.
Please describe and summarize the input the compensation committee received from your Human Resources department and the outside expert compensation consultant retained by the compensation committee.

SEC Staff Observations in the Review of Executive Compensation Disclosure/ SEC Comment Compilation

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