• Requires a company to provide "clear, concise, and understandable disclosure of all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers ... and directors ... by any person for all services, rendered in all capacities ..."

• SEC suggested ways companies could improve the manner in which they presented their executive compensation disclosure

• Consider making some items of their disclosure more prominent; where a company emphasizes material information and de-emphasizes less important information, investor understanding of the companys disclosure is improved
• Improve presentation by emphasizing established compensation levels and de-emphasizing and shortening lengthy discussions of compensation program mechanics

• SEC comments were issued when formatting or manner of presentation adversely affects overall readability

• Approximately two-thirds of the companies reviewed included charts, tables and graphs not specifically required by the revised rules

• SEC found these additional presentations to be helpful
• SEC suggested disclosure of the total amounts required to pay their named executive officers upon termination or a change-in-control

• Methods of presentation tailored to a particular companys circumstances believed to be useful to investor understanding and is encouraged

• Few companies included alternative summary compensation tables
• Where alternative tables were found to be confusing, or included compensation amounts calculated in a manner inconsistent with the revised rules, companies were asked to de-emphasize the alternative table and ensure that it was not presented more prominently than the required table
• Where necessary, companies were asked to state that the alternative summary compensation table is not substitute for the information required under the revised rules
• Companies that presented alternative summary compensation tables were asked to explain differences between compensation amounts presented in those tables and compensation amounts presented in the required tables

• When SEC adopted the revised rules, it affirmed its support of plain English principles

• Companies are required to follow the drafting principles presented in Exchange Act Rules 13a-20 and 15d-20 when presenting their executive and director compensation, related person transactions, beneficial ownership and corporate governance disclosures

• In several instances, companies made a good faith effort to provide clear and understandable disclosure, but fell short of full compliance with the underlying disclosure requirements

• Significant number of companies could improve their analyses of how and why they made certain executive compensation decisions
• Careful drafting consistent with plain English principles could result in a shorter, more concise and effective discussion

• Significant number of companies were asked to replace boilerplate discussions of individual performance with more specific analysis of how the compensation committee considered and used individual performance to determine executive compensation
• If the CD&A repeated information from the required compensation tables

• The company was asked to replace that disclosure with a clear and concise analysis of the information in the required compensation tables
• Or to relocate the discussion to the narrative following the appropriate tables or the footnotes to those tables

• If the disclosure appeared identical to language in a compensation plan or employment agreement

• The company was asked to present the information in a clear and understandable manner

• Some companies were also asked to be mindful of font size in their tables and related footnote presentations

• Rules "are intended to provide investors with a clearer and more complete picture of compensation to principal executive officers, principal financial officers, the other highest paid executive officers and directors"

• CD&A is a principles-based requirement for disclosure of material information about compensation objectives and policies for named executive officers
• Allows each company to assess its own facts and circumstances and determine what elements of the companys compensation policies and decisions are material and warrant disclosure
• Primary focus of CD&A should be [m]uch like the overview that we have encouraged companies to provide with their Managements Discussion and Analysis of Financial Condition and Results of Operations. . . .
• In addition to discussing its compensation policies and decisions, a company must analyze the material factors underlying those policies and decisions

• In the comment letters, many companies were asked to enhance their analyses of compensation policies and discussions, including how they determined the amounts of specific compensation elements

________

• S-K 402(b)  CD&A

• Substantial number of companies were asked to refocus their CD&A presentations on the substance of their compensation decisions and to disclose how they analyzed information and why their analyses resulted in the compensation they paid
• Significant number of companies were asked to discuss the extent to which the amounts paid or awarded under each compensation element affected the decisions they made regarding amounts they paid or awarded under other compensation elements

• For example, if a company disclosed that its compensation committee analyzed tally sheet information, the staff asked for an explanation of what tally sheet information was and how it impacted the committees decision on compensation awards

• In adopting CD&A, SEC stated that [t]he Compensation Discussion and Analysis should be sufficiently precise to identify material differences in compensation policies and decisions for individual named executive officers where appropriate. Where policies or decisions are materially similar, officers can be grouped together. Where, however, the policy or decisions for a named executive officer are materially different, for example in the case of a principal executive officer, his or her compensation should be discussed separately.
• Where a company's disclosure led the SEC to believe there were material differences in compensation policies and decisions for individual named executive officers:

• The company was reminded of the need for separate disclosure

• Substantial number of companies alluded to using, or disclosed that they used, corporate and individual performance targets to set compensation policies and make compensation decisions

• Corporate performance targets ranged from financial targets (e.g., earnings per share, EBITDA, and growth in net sales) to operational or strategic goals (e.g., increases in market share or targets specific to a particular division or business unit)
• Most companies disclosed that their compensation committees considered individual performance in making executive compensation decisions, although few companies disclosed how they analyzed individual performance or whether they focused on specific individual performance goals as part of that analysis

• Where it appeared that performance targets were material to a companys policy and decision-making processes and the company did not disclose those targets

• Companies were asked to disclose the targets or demonstrate that disclosure of the particular targets could cause competitive harm
• And companies were reminded of Instruction 4 to Item 402(b), which requires discussion of how difficult it will be for the executive or how likely it will be for the company to achieve undisclosed target levels or other factors

• Where a company omitted a performance target amount but discussed how difficult or likely it would be for the company or individual to achieve that target

• SEC often asked for more specific disclosure about the difficulty or likelihood

• Where a company presented a non-GAAP financial figure as a performance target

• Consistent with Instruction 5 to Item 402(b)(2), the staff asked companies to disclose how they would calculate the figure and how it would influence compensation decisions

• SEC also offered clarification of whether CD&A is limited to compensation for the last fiscal year or should also address prior or current years

•  A company may find it necessary to discuss prior and current year performance targets to place its disclosure in context or affect a fair understanding of a named executive officers compensation
• E.g, where a company has a multiple year compensation plan or where target levels vary materially between years

________

• Performance targets

• If a company uses benchmarking, and it is material to its compensation policies and decisions, Item 402 requires it to identify the benchmark and, if applicable, its components (including component companies)
• Companies were asked to provide a more detailed explanation of how they used comparative compensation information and how that comparison affected compensation decisions
• Where a company stated that it used comparative compensation information, but retained discretion on how to use it

• The company was asked to disclose the nature and extent of that discretion and whether or how it exercised that discretion

• Where a company indicated that it benchmarked compensation to its peers, but did not identify the peers or provide sufficient details concerning the benchmarking it used

• The company was asked to identify the companies to which it compared itself as well as the compensation components it used in that comparison

• Where a company indicated that it benchmarked compensation to a vague or broad range of data regarding those companies

• The company was asked to explain more specifically where its compensation fell within that range

________

• S-K 402(b)  CD&A

• Significant number of companies could enhance their CD&A by discussing and analyzing their decisions regarding change-in-control and termination arrangements

• Companies were asked to disclose why they structured the material terms and payment provisions in their change-in-control and termination arrangements as they did
• Companies were also asked to discuss how potential payments and benefits under these arrangements may have influenced their decisions regarding other compensation elements

________

• S-K 402(b)  CD&A
• S-K 402(j)  Termination /  Change-in-control
• Termination and CIC Arrangements  Disclosure precedent