White speaks on executive compensation

By Cydney Posner

The SEC has just posted a recent speech by the head of Corp Fin, John White, regarding the new executive compensation disclosure rules. In his speech, he notes that the SEC will be reviewing the new disclosures filed by a "critical mass of companies" and plans to issue a report on those reviews this fall. However, some "early snapshots" reveal:

• The new CD&As may be a bit short on the "A" for analysis, although White acknowledges that "many companies seem to have made a good faith attempt in this regard." When CD&A disclosures are reviewed, Corp Fin "will be looking to see if you've answered the 'how' (as Chairman Cox said) and the 'why' questions rather than merely the 'who, what, where and when.' " The staff's "expectations for the second year will be higher."
• The length and complexity of CD&As has received much criticism. There are several projects underway to craft examples or models of plain English disclosure under the new rules. However, White believes that "criticisms of the length and language of the new disclosures can go too far. One of the primary drivers of length of the disclosure in proxy statements is that executive compensation itself tends to be very complicated and varies significantly in form and function, in spirit and letter, from company to company." Because of the SEC's layered approach, readers will be able to drill down as desired, but must recognize that not all information will be of interest to all readers.
• Companies are not eager to disclose performance targets, and investors are complaining about the absence of this disclosure. The staff will be taking a hard look at whether too many companies are invalidly claiming the confidential information exclusion, that is, "incorrectly asserting that they would suffer competitive harm if they provided the required material disclosure about performance targets used for executive compensation purposes." In the course of the review process, the staff could ask companies to "justify their use of the exclusion. Companies that are using the exclusion and therefore not disclosing their specific performance targets should be prepared to provide the staff with an open and full explanation of those decisions and those targets."
• Even if the disclosure may properly be omitted, companies must alternatively provide investors with a sense of how hard the targets are to achieve or how likely it is they will 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." This rule requirement is one that may be "recalibrated" in subsequent rulemaking.
• Under the final rules, negative numbers may be presented in the tables as a result, for example, of a decrease in actuarial value of pension plans or from adjustments to compensation cost related to equity-based awards (such as expensing of options). In some cases, those negative numbers are netted in the mix and affect the totals. The SEC will be evaluating the rules and disclosure in light of the complaints they have received regarding this issue.
• Concerns have also been raised that the role played by the CEO in the compensation process has not been adequately disclosed. Examples of questions that companies should be asking include: "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?"
• The new rules regarding disclosure of perquisites are making a real difference, with significantly more perks being disclosed than in prior years.

White recognizes that compliance with the new principles-based rules has been a challenge, and he confirms that Corp Fin will show "sensitivity and respect for the principles-based nature of the new disclosure regime. That does not mean we will not comment on disclosure deficiencies and failures when we think we see them, however. Or that we will not ask hard questions. As with our review process generally, some of our comments will be satisfied by future disclosures, but some companies may find themselves needing to file amended Reports on Form 10-K this year. We are taking all of this very seriously."