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Clearing Up Executive Compensation

By Linda E. Rappaport, Doreen E. Lilienfeld, and Amy B. Gitlitz
April 26, 2006

Part One of Two

The U.S. Securities and Exchange Commission (SEC) published its proposal to revamp the rules governing the disclosure of executive and director compensation on Jan. 27, 2006. The proposed rules stand to significantly alter the compensation disclosure requirements applicable to registration statements, proxy statements, annual reports and Form 8-Ks, and are intended to ensure that investors receive disclosure that is 'clearer and more complete.' The regulations are the first attempt at a major overhaul of compensation disclosure since 1992 and were proposed in response to the widespread criticism that the current disclosure requirements do not engender a complete and accurate description of executive pay packages.

The proposal, to adapt the old saying, combines something old, something new and something borrowed.

  • What's old: Retaining the tabular approach as the basis for disclosure to categorize information and promote comparability between years and among companies.
  • What's new: A new column has been added to the Summary Compensation Table that would provide one figure disclosing total compensation. There are also several required supplemental tables on equity and non-equity incentive compensation, retirement benefits and other defined compensation arrangements, including a required narrative in which issuers must explain and describe the tabular data. Moreover, the proposed rules require enhanced details with respect to payments to executives upon a separation of employment or a change in control and enhanced tabular disclosure of director compensation arrangements.
  • What's borrowed:Portions of Item 303 of Regulation S-K, which calls for Management's Discussion and Analysis of Financial Condition and Results. The staff has created a new Compensation, Discussion and Analysis, or CD&A, requirement that would provide a general overview of compensation and a discussion of the data in the tables. In addition, the plain English rules that apply to prospectuses will also apply to compensation disclosure in proxy statements.

Reform Needed; Does This Do It?

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