Release No. 33-8732A Release No. 34-54302A Release No. IC-27444A

Securities and Exchange Commission

Executive Compensation and Related Person Disclosure
Section II.C.5.

II. Executive and Director Compensation Disclosure

*****

C. Compensation Tables

*****

5. Post-Employment Compensation

As we proposed, we are making significant revisions to the disclosure requirements regarding post-employment compensation to provide a clearer picture of this potential future compensation. As we noted in the Proposing Release, executive retirement packages and other post-termination compensation may represent a significant commitment of corporate resources and a significant portion of overall compensation. First, we are replacing the former pension plan table, alternative plan disclosure and some of the other narrative descriptions with a table regarding defined benefit pension plans and enhanced narrative disclosure. We have revised the table from the table proposed. Second, we are adding a table and narrative disclosure that will disclose information regarding nonqualified defined contribution plans and other deferred compensation. We have adopted this table substantially as proposed. Finally, we are adopting revised requirements substantially as proposed regarding disclosure of compensation arrangements triggered upon termination and on changes in control.

a. Pension Benefits Table

We proposed significant revisions to the rules disclosing retirement benefits to require disclosure of the estimate of retirement benefits to be payable at normal retirement age and, if available, early retirement. Disclosure under the rules prior to todays amendments frequently did not provide investors useful information regarding specific potential pension benefits relating to a particular named executive officer.²⁹¹ In particular, it may have been difficult to understand which amounts related to any particular named executive officer, obscuring the value of a significant component of compensation.

We therefore proposed a new table that would have required disclosure of the estimated retirement benefits payable at normal retirement age and, if available, early retirement, under defined benefit plans. Under the proposal, benefits would have been quantified based on the form of benefit currently elected by the named executive officer, such as joint and survivor annuity or single life annuity.

Some commenters objected that the proposed revisions would result in disclosure that would not be comparable and could be manipulated.²⁹² In particular, the calculation of benefits would depend on such factors as the form of benefit payment, the named executive officers marital status, and the actuarial assumptions applied, which would vary from company to company and plan to plan. Explanations of the complicated methodologies involved could hinder transparency.

Some commenters suggested that the Commission prescribe standard assumptions for calculating annual benefits for disclosure purposes, such as a single life annuity and retirement at age 65, in order to facilitate comparability.²⁹³ Other commenters suggested disclosure of the present value of the current accrued benefit computed as of the end of the companys last completed fiscal year,²⁹⁴ achieving comparability by reporting the economic value of the benefit that the executive has accumulated through the plan.

Because the latter approach achieves comparability and transparency by disclosing a benefit that already has accrued, we view it as preferable to an approach that would normalize disclosure based on hypothetical annual benefit assumptions prescribed by the Commission that might bear no relationship to the assumptions that the company actually applies with respect to the plan. Furthermore, this approach will make clearer the relationship of this table to the Summary Compensation Table disclosure of increase in pension value. This approach will also lessen the burden on companies, since they are required to calculate the present value for the Summary Compensation Table. Accordingly, the table we adopt today requires disclosure of the actuarial present value of the named executive officers accumulated benefit under the plan and the number of years of service credited to the named executive officer under the plan reported in the table, each computed as of the same pension plan measurement date for financial statement reporting purposes with respect to the audited financial statements for the companys last completed fiscal year.²⁹⁵ This disclosure applies without regard to the particular form(s) of benefit payment available under the plan.

Whether or not the plan allows for a lump-sum payment, presentation of the present value of the accrued plan benefit provides investors an understanding of the cost of promised future benefits in present value terms.²⁹⁶ Companies must use the same assumptions, such as interest rate assumptions, that they use to derive the amounts disclosed in conformity with generally accepted accounting principles, but would assume that retirement age is normal retirement age as defined in the plan, or if not so defined, the earliest time at which a participant may retire under the plan without any benefit reduction due to age.²⁹⁷ The estimates are to be based on current compensation, and as such, future levels of compensation need not be estimated for purposes of the calculation. The valuation method and all material assumptions applied will be described in the narrative section accompanying this table.²⁹⁸ A separate row will be provided for each plan in which a named executive officer participates.²⁹⁹ For purposes of allocating the current accrued benefit between tax qualified defined benefit plans and related supplemental plans, a company will apply the applicable Internal Revenue Code limitations in effect as of the pension plan measurement date.³⁰⁰ At the suggestion of a commenter, we have simplified the name of the table.³⁰¹

PENSION BENEFITS

We have moved the disclosure proposed to be included in the Summary Compensation Table of pension benefits paid to a named executive officer during the last completed fiscal year to the Pension Benefits Table so that pension benefits are disclosed only once in the Summary Compensation Table.³⁰² We remain of the view that disclosure of these payments would be material to investors, particularly where the named executive officer receives them while still employed by the company.³⁰³

The table will be followed by a narrative description of material factors necessary to an understanding of each plan disclosed in the table. Examples of such factors may include, in given cases, among other things:

• The material terms and conditions of benefits available under the plan, including the plans retirement benefit formula and eligibility standards, and early retirement arrangements;³⁰⁴
• The specific elements of compensation, such as salary and various forms of bonus, included in applying the benefit formula, identifying each such element;
• Regarding participation in multiple plans, the different purposes for each plan; and
• Company policies with regard to such matters as granting extra years of credited service.

b. Nonqualified Deferred Compensation Table

In order to provide a more complete picture of potential post-employment compensation, we are adopting substantially as proposed a new table to disclose contributions, earnings and balances under each defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified. These plans may be a significant element of retirement and post-termination compensation. Prior to these amendments, the rules had elicited disclosure of the compensation when earned and only the above-market or preferential earnings on nonqualified deferred compensation.³⁰⁵ The full value of those earnings and the accounts on which they are payable was not subject to disclosure, nor were investors informed regarding the rate at which these amounts, and the corresponding cost to the company, grow.³⁰⁶

As noted above, we are requiring disclosure in the Summary Compensation Table only of the above-market or preferential portion of earnings on compensation that is deferred on a basis that is not tax-qualified. To provide investors with disclosure of the full amount of nonqualified deferred compensation accounts that the company is obligated to pay named executive officers, including the full amount of earnings for the last fiscal year, we are also requiring new tabular and narrative disclosure of nonqualified deferred compensation, as we proposed.³⁰⁷

NONQUALIFIED DEFERRED COMPENSATION

One commenter noted that the title proposed Nonqualified Defined Contribution and Other Deferred Compensation Plans suggested that tax qualified plans that provide for deferral of compensation, such as Section 401(k) plans, would be covered.³⁰⁸ We have adopted the commenters recommendation to modify the title to clarify that the table covers only deferred compensation that is not tax-qualified, and we have also shortened the title consistent with our amendments regarding the Pension Benefits Table.

As proposed and adopted, an instruction requires footnote quantification of the extent to which amounts in the contributions and earnings columns are reported as compensation in the year in question and other amounts reported in the table in the aggregate balance column were reported previously in the Summary Compensation Table for prior years.³⁰⁹ This footnote provides information so that investors can avoid double counting of deferred amounts by clarifying the extent to which amounts payable as deferred compensation represent compensation previously reported, rather than additional currently earned compensation.³¹⁰

The table will be followed by a narrative description of material factors necessary to an understanding of the disclosure in the table.³¹¹ Examples of such factors may include, in given cases, among other things:

• The type(s) of compensation permitted to be deferred, and any limitations (by percentage of compensation or otherwise) on the extent to which deferral is permitted;
• The measures of calculating interest or other plan earnings (including whether such measure(s) are selected by the named executive officer or the company and the frequency and manner in which such selections may be changed), quantifying interest rates and other earnings measures applicable during the companys last fiscal year; and
• Material terms with respect to payouts, withdrawals and other distributions.

Where plan earnings are calculated by reference to actual earnings of mutual funds or other securities, such as company stock, it is sufficient to identify the reference security and quantify its return. This disclosure may be aggregated to the extent the same measure applies to more than one named executive officer.

c. Other Potential Post-Employment Payments

We are adopting the significant revisions that we proposed to our requirements to describe termination or change in control provisions. The Commission has long recognized that termination provisions are distinct from other plans in both intent and scope and, moreover, are of particular interest to shareholders.³¹² Prior to todays amendments, disclosure did not in many cases capture material information regarding these plans and potential payments under them. We therefore proposed and are adopting disclosure of specific aspects of written or unwritten arrangements that provide for payments at, following, or in connection with the resignation, severance, retirement or other termination (including constructive termination) of a named executive officer, a change in his or her responsibilities,³¹³ or a change in control of the company.

Our amendments call for narrative disclosure of the following information regarding termination and change in control provisions:³¹⁴

• the specific circumstances that would trigger payment(s) or the provision of other benefits (references to benefits include perquisites and health care benefits);
• the estimated payments and benefits that would be provided in each covered circumstance, and whether they would or could be lump sum or annual, disclosing the duration and by whom they would be provided;³¹⁵
• how the appropriate payment and benefit levels are determined under the various circumstances that would trigger payments or provision of benefits;³¹⁶
• any material conditions or obligations applicable to the receipt of payments or benefits, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality covenants; and
• any other material factors regarding each such contract, agreement, plan or arrangement.³¹⁷

The item contemplates disclosure of the duration of non-compete and similar agreements, and provisions regarding waiver of breach of these agreements, and disclosure of tax gross-up payments.

A company will be required to provide quantitative disclosure under these requirements even where uncertainties exist as to amounts payable under these plans and arrangements. We clarify that in the event uncertainties exist as to the provision of payments and benefits or the amounts involved, the company is required to make a reasonable estimate (or a reasonable estimated range of amounts), and disclose material assumptions underlying such estimates or estimated ranges in its disclosure. In such event, the disclosure will be considered forward-looking information as appropriate that falls within the safe harbors for disclosure of such information.³¹⁸

We have modified the requirement somewhat in response to comments that compliance with the proposal would involve multiple complex calculations and projections based on circumstantial and variable assumptions.³¹⁹ We adopt commenters suggestions that the quantitative disclosure required be calculated applying the assumptions that:

• the triggering event took place on the last business day of the companys last completed fiscal year; and
• the price per share of the companys securities is the closing market price as of that date.³²⁰

We have also revised the rule to provide that if a triggering event has occurred for a named executive officer who was not serving as a named executive officer at the end of the last completed fiscal year, disclosure under this provision is required for that named executive officer only with respect to the actual triggering event that occurred.³²¹ These modifications will both facilitate company compliance and provide investors with disclosure that is more meaningful. We further clarify that health care benefits are included in this requirement, and quantifiable based on the assumptions used for financial reporting purposes under generally accepted accounting principles.³²²

We further clarify in response to comments that to the extent that the form and amount of any payment or benefit that would be provided in connection with any triggering event is fully disclosed in the Pension Benefits Table or the Nonqualified Deferred Compensation Table and the narrative disclosure related to those tables, reference may be made to that disclosure.³²³ However, to the extent that the form or amount of any such payment or benefit would be increased, or its vesting or other provisions accelerated upon any triggering event, such increase or acceleration must be specifically disclosed in this section.³²⁴ In addition, we have added an instruction that companies need not disclose payments or benefits under this requirement to the extent such payments or benefits do not discriminate in scope, terms or operation, in favor of a companys executive officers and are available generally to all salaried employees.³²⁵

²⁹¹ The rules prior to todays amendments provided that, for defined benefit or actuarial plans, disclosure was required under Item 402(f) by way of a general table showing estimated annual benefits under the plan payable upon retirement (including amounts attributable to supplementary or excess pension award plans) for specified compensation levels and years of service. This table did not provide disclosure for any specific named executive officer. This requirement applied to plans under which benefits were determined primarily by final compensation (or average final compensation) and years of service, and included narrative disclosure. If named executive officers were subject to other plans under which benefits were not determined primarily by final compensation (or average final compensation), narrative disclosure had been required prior to these amendments of the benefit formula and estimated annual benefits payable to the officers upon retirement at normal retirement age.

²⁹² See, e.g., letters from BRT; Chadbourne & Parke LLP (Chadbourne); Cleary; and ABA-JCEB.

²⁹³ See, e.g., letters from ABA and NACCO Industries.

²⁹⁴ See, e.g., letters from Buck Consultants; Frederic W. Cook & Co.; Professor Bebchuk, et al; and SBAF.

²⁹⁵ Item 402(h)(2)(iv). If the number of years of credited service for a plan differs from the named executive officers number of actual years of service with the company, footnote quantification of the difference and any resulting benefit augmentation is required. Instruction 4 to Item 402(h)(2).

²⁹⁶ Further, basing pension plan disclosure on the accumulated benefit is consistent with nonqualified deferred compensation plan disclosure, which, as described in Section II.C.5.b. immediately below, reports an aggregate account balance.

²⁹⁷ Instruction 2 to Item 402(h)(2). Of course, the benefits included in the plan document or the executives contract itself is not an assumption.

²⁹⁸ Item 402(h)(3) and Instruction 2 to Item 402(h)(2). This requirement could be satisfied by reference to a discussion of those assumptions in the companys financial statements, footnotes to the financial statements, or Managements Discussion and Analysis. The sections so referenced would be deemed a part of the disclosure provided by this Item.

²⁹⁹ Instruction 1 to Item 402(h)(2).

³⁰⁰ Instruction 3 to Item 402(h).

³⁰¹ See letter from ABA.

³⁰² Item 402(h)(2)(v). See also Instruction 1 to Item 402(c)(2)(viii). We have included these amounts in this table rather than the Summary Compensation Table since the increase in the value of the pension benefit would have been previously disclosed in the Summary Compensation Table.

³⁰³ Item 402(a)(5) as amended provides that a column may be omitted if there is no compensation required to be reported in that column in any fiscal year covered by that table.

³⁰⁴ For this purpose, normal retirement age means the normal retirement age defined in the plan, or if not so defined, the earliest time at which a participant may retire under the plan without any benefit reduction due to age. Early retirement age means early retirement age as defined in the plan, or otherwise available to the executive under the plan. Item 402(h)(3)(i) and (ii).

³⁰⁵ See Section II.C.1.d.i. above.

³⁰⁶ See Lucian A. Bebchuk and Jesse M. Fried, Stealth Compensation via Retirement Benefits, 1 Berkeley Bus. L.J. 291, 314-316 (2004).

³⁰⁷ Item 402(i).

³⁰⁸ See letter from Foley.

³⁰⁹ Instruction to Item 402(i)(2).

³¹⁰ As described in Section II.C.1.b. above, the rules as adopted do not include the corresponding footnote that was proposed for the Summary Compensation Table.

³¹¹ Item 402(i)(3).

³¹² 1983 Release, at Section III.E.

³¹³ We confirm that this aspect of the disclosure requirement is not limited to a change in responsibilities in connection with a change in control.

³¹⁴ Item 402(j).

³¹⁵ We have eliminated the $100,000 disclosure threshold that was specified in the rule prior to todays amendments. For post-termination perquisites, however, the same disclosure and itemization thresholds used for the amended Summary Compensation Table apply. See Section II.C.1.e.i. above. We have modified Item 402(j)(2) from the proposal in response to comments to clarify that the required description covers both annual and lump sum payments. See letter from ABA.

³¹⁶ We have modified Item 402(j)(3) from the proposal to clarify the scope of the required disclosure. The proposal would have required the company to describe and explain the specific factors used to determine the appropriate payment and benefit levels under the various triggering circumstances. A commenter suggested that the proposed language was overly broad and ambiguous and could result in mere repetition of the pension payout formula and actuarial assumptions. See letter from ABA.

³¹⁷ This would include, for example, disclosure of whether an executive simultaneously receives both severance and retirement benefits, a practice commonly known as a double dip. See letter from WorldatWork.

³¹⁸ See, e.g., Securities Act Section 27A and Exchange Act Section 21E.

³¹⁹ See, e.g., letters from Cleary; Foley; HRPA; and Top Five Data.

³²⁰ Instruction 1 to Item 402(j). See, e.g., letters from Emerson; Foley; and Frederic W. Cook & Co. 

³²¹ Instruction 4 to Item 402(j). See letter from ABA.

³²² Item 402(j)(1) and Instruction 2 to Item 402(j). These would be the assumptions applied under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions (FAS 106). See, e.g., letters from Peabody Energy and WorldatWork.

³²³ See letter from Academy of Actuaries.

³²⁴ Instruction 3 to Item 402(j).

³²⁵ Instruction 5 to Item 402(j).