New SEC Compensation Disclosure Guideline

The new SEC rules and disclosure procedures regarding compensation, corporate governance and related party transactions have a fairly straightforward intent: to improve disclosure and comparability regarding executive compensation and other governance matters. However, the consequences will be greater expense and time to comply with these seemingly simple but actually complex disclosure requirements. In this CEO Topic, we will talk about the possible outcomes related to the increased transparency regarding compensation. In addition, while most public companies are already aggressively working on new disclosures and those considering a public offering are certainly generally aware of these requirements, it is also worth presenting some thoughts on process as companies implement systems to satisfy the new rules.

The new SEC rules will ensure that executive compensation information is more clearly and consistently presented. All elements of compensation such as severance payments, stock options, benefits and bonuses, including a description of performance targets, will have to be detailed in required filings and generally valued in present dollar terms. This more transparent presentation of compensation will certainly result in some movement in direct compensation and away from perks and other deferred programs, all of which will have to be valued in present dollar terms and thus in many cases appear to inflate the compensation of senior executives. It will place a greater burden of evaluating current company practices on the board of directors and the compensation committee. In the near term, it will likely receive attention from shareholder, industry watchers and the media, and may put pressure on compensation practices by industry segment. However, in the longer term, the new rules will likely make compensation-related decisions easier to benchmark and compare among peer companies. In the view of some, the actual result will be to inflate compensation levels at the senior level through the present valuing of benefits and, counterintuitively, lead to even higher compensation levels as boards seek to compensate their executives in the third and fourth quartile range of comparable companies.

While the new rules are complicated and will certainly require additional resources and effort upfront, certain suggestions will ease the process of re-engineering the key component of the new rules: the Compensation and Discussion Analysis (CD&A). As you embark on the process, there are a few key areas worth highlighting:

Remember the intent of the legislation: The changes adopted by the SEC are meant to require better and more useful information to shareholders. It is the SEC’s intent to mandate disclosure “in plain English” so as to be understandable to the lay reader. In many respects, the goal is to simplify rather than overcomplicate the process.

Get started early and set key objectives: The process is likely to be time-consuming and complex. It is best to get your team in place early and determine a plan of action with key milestones and completed items. A schedule for preparing various items in the CD&A is essential.

Assemble the right team: Compliance with new requirements takes substantial effort and expense. Lawyers, accountants, internal staff and actuaries will all have to be involved in the process. It is essential to involve your compensation committee as the new rules set the bar even higher for their active involvement and participation.

Evaluate how controls and procedures need to change: Different information needs to be captured and analyzed to create the CD&A. This will inevitably impact systems in place and require coordination among experts. This is a good time to analyze the flexibility of your systems and make improvements as needed.

As you go through the process of fulfilling these new requirements, consider leveraging outside expertise as you are building internal resources and capabilities. Your board of directors, your audit committee and, in particular, your compensation committee should play a key role in oversight and advice. If you wish to discuss this topic further, please feel free to contact your GA team.