A few hours ago, the SEC proposed sweeping changes to Item 402 of Regulation S-K to make executive and director compensation disclosures more principles-based and to simplify reporting requirements. Among many other proposed changes, there would be significant changes to the number of covered executives, compensation tables, perks reporting and Dodd-Frank-related disclosures.
Here’s the 542-page proposing release – and here’s the fact sheet. There’s a 60-day comment period. The SEC acted just as OIRA’s 90-day review window was nearing a close.
The level of interest in this proposal can’t be overstated. When the SEC last comprehensively acted on pay disclosures, I launched CompensationStandards.com (which actually was called “CompensationStandardsConference.com” the first year) – and I held our first proxy disclosure conference in the wake of those final rules being adopted in 2006. It was bedlam.
Here are 13 takeaways – a more comprehensive Alert will be out next week:
1. Fewer Named Executive Officers: The definition of named executive officers (NEOs) would be limited to the principal executive officer (PEO) and principal financial officer (PFO), reducing the number of covered executives from typically five or more to two in most circumstances.
2. Three New Compensation Tables: The existing compensation tables, including the Summary Compensation Table, would be replaced entirely with three new tables:
- Granted Compensation Table: Reports compensation opportunities granted during the fiscal year, including salary, cash bonuses and equity awards, generally at target value.
- Earned Compensation Table: Reports compensation actually earned, including salary, bonuses, vested stock awards, exercised options, retirement contributions and perks.
- Status of Equity Awards Table: Tracks individual equity awards throughout their lifecycle, bridging the gap between compensation granted and compensation earned.
3. Higher Perks Disclosure Threshold: The aggregate perquisite reporting threshold would increase dramatically from $10,000 to $150,000 per NEO. Individual benefits qualifying as de minimis fringe benefits under the Internal Revenue Code would be excluded from tracking and threshold calculations.
4. Greater Flexibility for Perquisite Determinations: Companies would have discretion to determine whether benefits are integrally and directly related to an executive’s duties, provided their determinations are reasonable and made in good faith. Existing guidance identifying specific perks – including certain personal security arrangements – would be removed.
5. Simplified CD&A Requirements: CD&A would become more principles-based, focusing on three topics:
(i) compensation program objectives in relation to corporate strategy,
(ii) material compensation elements and how amounts are determined, and
(iii) whether and how the most recent say-on-pay vote influenced compensation decisions, if applicable.
The existing list of illustrative topics would be eliminated.
6. Streamlined Pay-Versus-Performance Disclosure: The complex “Compensation Actually Paid” calculation would be replaced with compensation reported in the new “Earned Compensation Table.” Required performance metrics would be limited to cumulative total shareholder return, the reporting period would shrink from five to three years – and disclosure would cover only the PEO and PFO.
7. Reduced Clawback Disclosures: Certain disclosures concerning the application of clawback policies would be eliminated or simplified. The two financial statement correction checkboxes on the covers of Forms 10-K, 20-F and 40-F would also be removed.
8. Simplified CEO Pay Ratio Calculations: The median employee calculation would be limited to U.S. full-time employees, excluding international, seasonal, temporary and part-time employees. Companies would determine the median employee every five years instead of every three years. Compensation calculations would use the “Granted Compensation Table” methodology.
9. More Flexible Director Compensation Disclosures: Companies would continue disclosing material aspects of director compensation programs and amounts earned by individual directors – but certain prescriptive presentation requirements and compensation categories would be eliminated.
10. Reduced Termination and Change-in-Control Disclosures: Prescriptive quantitative disclosures of hypothetical termination and change-in-control payments would be eliminated, replaced by qualitative descriptions of material arrangement terms.
11. Simplified Golden Parachute Disclosures: Golden parachute compensation requirements would become more principles-based, with streamlined tables and greater flexibility to provide narrative explanations.
12. Additional Time for Registration Statement Disclosures: Companies filing long-form registration statements, such as Form S-1, would have up to 120 days after fiscal year-end to provide executive compensation information for the preceding fiscal year, matching the timing currently available for short-form registration statements.
13. Elimination of Certain Compensation-Related Disclosures: Requirements addressing compensation policies and practices related to risk management – as well as equity awards granted close in time to the release of material nonpublic information – would be eliminated.
Authored by
Broc Romanek