Speech by Deputy Director of Corp Fin re executive comp disclosure

At the Annual Proxy Disclosure conference on Monday, Shelley Parratt, Deputy Director of Corp Fin, gave a speech about executive comp disclosure and expectations for the 2010 proxy season. While we've heard much of this song before (start the CD&A from scratch; include more analysis of why the compensation decisions were made; material targets and actual achievement levels against those targets must be disclosed unless disclosure would cause CTR-level substantial competitive harm, and it's hard to show substantial competitive harm related to targets that are tied to company-wide financial results that have already been publicly reported), there were a few items of note.

• The current proposal to expand CD&A to address how employee compensation policies may affect risk "may well be in place for the coming proxy season" and, as a result, companies "should start thinking about how you would gather the additional information necessary to make the proposed disclosures…."

• After three years of "futures" comments (i.e., "in future filings, explain…."), the staff wants to discourage companies from waiting to comply until the SEC prods them into compliance by issuing comments. As a result, "any company that waits until it receives staff comments to comply with the disclosure requirements should be prepared to amend its filings if it does not materially comply with the rules." [emphasis added]

• Performance targets may still be material (and therefore need to be disclosed), even where, as happened a lot last year, bonuses were not awarded because targets were not met or where a board abandoned or ignored unmet performance targets and awarded bonuses in an exercise of discretion rather than based on established targets. While the fact that a target was not met may be a factor to consider in the materiality determination, "it is not a dispositive one." For example, the target may play an important role in the way the company provides incentives to its management. Moreover, where the incentive is paid notwithstanding failure to meet the target, "it can suggest that the targets, and compensation, are not sensitive to risk since the compensation is paid without regard to the risk outcome. In the absence of disclosure about those targets, we question whether shareholders are presented with the complete picture with which they can judge whether the board is acting in their best interests. Accordingly, in most cases, we would expect to see companies disclose and discuss such targets in their CD&A.."

• Investors seem to be frustrated by the increase in boilerplate language and CD&A length, so try to shorten disclosure by deleting unnecessary background and process-oriented information. (One suggestion that has been floated is to move some of the mechanical plan description, which can be complex and lengthy, to the narrative under the Grants of Plan-Based Awards table.)