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Compensation Disclosure & Analysis CD&A
 Summary
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 New
S-K 402(b)
requires a CD&A section
- A narrative discussion of executive compensation programs
- Supplants board's compensation committee report
Drafting CD&A
- SEC
staff has published its observations on review of
executive compensation disclosure, which report
provides essential guidance for drafting CD&A
- CD&A should lead-off executive compensation disclosures
- "Calls for a discussion of the material
factors underlying
compensation policies and decisions reflected in the data presented in the
tables" that follow
- Must cover compensation for the last fiscal year
- Including actions taken after the end of the year
- May also require discussion of
post-termination arrangements, on-going compensation arrangements and policies
that the company will apply on a going-forward basis.
- S-K item provides guidance for drafting CD&A
- 402(b)(1) lists six key questions to answer
- 402(b)(2) lists 15 examples of issue to
address
- CD&A supplants board's compensation committee report
- CD&A is considered
soliciting
material that is filed
- Covers much of what was formerly covered by
the board's compensation committee report
- The CD&A is to be included in the proxy statement
and in Part III of Form 10-K. As part of the Form 10-K, the CD&A is information
covered by the officer certifications required by the Sarbanes-Oxley Act
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The CD&A need not include confidential information regarding performance target
levels if disclosure of that information would result in competitive harm
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The new CD&A may describe performance criteria based on non-GAAP measures
without complying with Regulation G as long as the CD&A discloses how the
criteria are calculated from the audited financial statements
- While CD&A must cover compensation for the last fiscal year (including actions taken after the end of the year), the SEC notes that it may also require discussion of post-termination arrangements, on-going compensation arrangements and policies that the company will apply on a going-forward basis
See
Filed not
Furnished
See
also SEC FAQs 1.24.07 |
S-K 402(b) Compensation discussion and analysis
 General
requirement S-K 402(b)(1)
- "Explain all material elements of the registrants compensation of the
named executive officers",
including by discussing:
- Objectives of the company's compensation programs
- What the compensation program is designed to
reward
- Each element of compensation
- Why each element is chosen
- How amounts and formulas for pay are determined
- How elements fit into overall compensation
objectives
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Illustrative
examples S-K 402(b)(2)
- Text
- Lists examples of policies or matters for CD&A discussion
- Long-term v
currently paid out
I
- Cash v non-cash (v
various forms of non-cash)
II
- Long-term comp: types of awards used
III
- Timing of awards
IV
- Items of corporate performance
referred to
V
- Linkage between compensation and these items
VI
- Linkage to individual NEO
performance
VII
- Response to any financial restatement
VIII
- Rationale for increasing or decreasing
compensation
IX
- Linkage between prior compensation and other comp
X
- change-in-control triggers
XI
- Accounting and tax considerations
XII
- Security ownership guidelines (hedging policies)
XII
- Benchmarking practices
XIC
- Role of executive officers in determination comp
XV
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Instructions |
SEC Releases and Reports
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Staff
Observations in the Review of Executive Compensation Disclosure
- SEC
staff has published its observations on review of
executive compensation disclosure
- "A report discussing the principal themes
that emerged from its initial review of the disclosure of 350 public companies
for compliance with the Commissions new and enhanced rules for executive
compensation and related disclosure"
Final
release 33-8732 Aug 2006
- Compensation discussion and analysis II.B
Proposal
release 33-8655 Jan 2006
- Compensation discussion and analysis II.A
- CD&A: intent and operation
II.A.1
- Proposed CD&A instructions
II.A.2
- Filed status II.A.3
- Elimination of performance graph -
compensation committee report
II.A.4
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Stock Options
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CD&A
must address the companys practices
for timing and pricing of stock options, including
- Practices of selecting option grant dates for
executive officers in coordination with the release of material non-public
information
- Timing of option grants to executive officers
vis--vis option grants to employees generally
- Role of the compensation committee and
executive officers in determining
the timing of option grants
- Formula used to set the exercise price of an option grant
- e.g., closing
price on
the date of grant
- e.g., average price of the companys stock
over a specified
period
of time
Specific
requirements were added to final rules
- Response to emerging scandal over backdating and
spring loading of stock options
See
also Letter from SEC Chief Accountant
9.19.07
- Accounting guidance on stock option grants
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Filed not Furnished
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CD&A
is filed
- Subject to Regulation 14A or 14C
- Subject to Exchange Act §18 liability
- To extent included or incorporated by reference
into periodic report, CD&A and other executive compensation disclosures would
be covered by PEO and PFO certifications required under Sarbanes-Oxley
- Company's disclosure controls and procedures also
apply to preparation of CD&A
Replaces
board's compensation committee report,
which was
furnished
under old Item 402(k)
SEC
commentary
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SEC FAQs
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S-K
Item 402 FAQs
- These FAQs were last updated
8.08.07
- Supersede old S-K 402 FAQs in 1997 Telephone
Manual
and its March 1999 Supplement
- See
S-K 402 FAQs
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Select Precedent Disclosures 2008
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Select
Proxy and Other 1934 Act Filings
- Notable for discussion of tally sheets and
Compensation Committee consideration of pension accruals and prior equity
compensation awards
- See also discussion of the role of individual
goals for NEO compensation decisions
- As well as discussion of annual cash incentive
award plan and related performance goals for 2007
- Notable for discussion of 5-step annual bonus
process
- See also discussion of NEO bonus awards and
related performance targets (four financial measures) and bonus calculations
- Notable CD&A in light of SEC staff observations
on 2007 executive pay disclosures
- Includes section titled "Analysis of NEO
Compensation During 2007"
- Notable for plain English
- Executive Summary at start of CD&A
- No employment contracts, pension plan
or deferred compensation
- Notable description of decision process for
principal components of executive pay
- Financial targets not disclosed, so note "degree
of difficulty" disclosure on page 35
- Discussion of changes made to 2008 long-term
incentive program for NEOs and other executives on page 37
- Notable CD&A in light of SEC staff observations
on 2007 executive pay disclosures
- Discussion of engagement and role of compensation
consultants
- Tabular discussion of base salary increases and
targeted total cash compensation relative to prior year and targeted market
position
- Narrative and tabular discussion of 2007 and 2008
equity awards, which includes reasons for variations from targeted market
position
- Tabular presentation of performance measures
- Includes substantial information with regard to
2008 compensation decisions
- Notable CD&A in light of SEC staff observations
on 2007 executive pay disclosures
- Executive Summary at start of CD&A
- Notable lack of perquisites, supplemental
retirement benefits, deferred compensation, and special severance or change of
control arrangements
- Our executives are eligible for the same severance policy as our workforce, which caps severance payments to an amount equal to six months of salary. We have no executive company cars or executive car allowances nor do we offer or pay for financial planning services. Additionally, we do not own any corporate aircraft and we do not pay for executives to fly first class. We believe that we are currently below competitive levels for comparable companies in this area of our overall compensation package; however, we have no current plans to change our policy of not offering such executive benefits, perquisite programs or special executive severance arrangements.
- Discussion of liquidity limits (limits on
executive stock sales in lieu of stock ownership requirements) to promote high
levels of stock ownership
- Notable CD&A, which starts with overview of
objectives and components of compensation program and statement of compensation
philosophy
- Disclosure of specific performance targets in
CD&A
- Notable compensation consultant policy
- No firmwide or individual performance targets
- Notable description of compensation elements in
CD&A
- Notable CD&A discussion of changes to executive
pay program in 2007
- Elimination of CEO employment agreement, certain
retirement plan benefits, and executive perquisite allowance
- Adoption of "say on pay" policy, revision of
shareholder approval policy for severance arrangements, policy regarding
independence of compensation consultant, and executive pay "clawback" policy
- 2007 executive pay benchmarked against two peer
groups, Industry Peers and Market Peers
- 2008 executive pay will be benchmarked against
single peer group, Relate Dow Peers
- Detail on performance measures
- Alternative compensation tables to summarize
differences between actions taken by compensation committee and amounts reported
in Summary Compensation Table
- Notable dialogue with SEC on reasons for
differences in NEO compensation and need for supplemental disclosures in CD&A
- Notable summary, with disclosure of key
quantitative factors from MD&A in 2007 annual report
- See supplemental tables for compensation
elements, performance criteria, peer group comparison, 3-year financial
performance, and 2007 compensation actions
- CD&A includes "Committee Decision and Analysis"
sections for various compensation elements
- Notable CD&A discussion of tally sheets and
related analysis by compensation committee
The Tally Sheets provide the Committee with context for the decisions
they make in relation to total direct compensation. Although they do not
necessarily drive decision making with regard to specific components of the
total compensation program, the Tally Sheets enable the Committee to
holistically assess total direct compensation and the relationship of various
components of the total compensation program to each other. The Tally Sheets
also enable the Committee to determine how much wealth creation opportunity
exists through equity-based compensation and how strong the retention power is
as a result of unvested value. The Tally Sheets may also influence the
Committees views on a variety of issues, such as changes to severance plans and
employment agreements, special equity grants to promote retention, or changes in
long-term variable equity incentives.
- CD&A includes Executive Summary that lists
primary components of executive pay, with discussion of objectives and key
features of each element
- Benchmarking discussion includes detailed
tabular disclosure on peer group companies (revenues, net income, and market
capitalization)
- CD&A addresses annual performance review of each
NEO as well as internal pay equity and wealth accumulation analysis
- CD&A includes tabular disclosures to enhance
discussion of performance pay as well as awards to individual NEOs
- First proxy filings as public company
- Notable "say on pay" proposal, broken into three
separate resolutions, and related CD&A disclosures
- CD&A divided into five parts
- Tabular presentation of pay elements
(description and purpose)
- Notable discussion of incentive pay decisions
- Compensation tables included as part of CD&A
- Captioned heading for Supplemental Compensation
Disclosure in CD&A
The following table is designed to show the total 2007 compensation of our NEOs as we internally view and communicate it
...
- Executive Summary at start of CD&A
- Notable CD&A discussion of tally sheets and
related analysis by compensation committee
The Committee uses the tally sheets to review each Named Executive Officers total annual compensation to provide a perspective on their potential wealth accumulation from our compensation programs, pension accruals and compensation previously paid, and to provide a general context for compensation decisions. However, the Committee believes that, in general, an executives compensation level should reflect the executives performance and the current market value of his or her services.
- Tabular presentation of pay elements
(description and purpose)
- Supplemental tables to report on target and
actual compensation mix
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Select Precedent Disclosures 2007
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Select
Proxy and Other 1934 Act Filings
- Notable for plain English
- See discussion of allocation of executive pay
components (page 11)
- See also discussion of practices relating to
performance-based compensation (page 12) and performance targets (pages 14 - 19)
- Notable for CD&A analysis (benchmarking, mix of
compensation components, targets for long-term incentives (without disclosure of
specific performance targets), cross-reference to discussion of compensation
consultant found in Corporate Governance section
- Notable detail with regard to instructions and
scope of engagement for compensation consultant (pages 18 - 19)
- Notable discussion of Compensation Committee's
use of peer groups and benchmarks
- Provides supplemental narrative and tabular
disclosures that explain and quantify expense reported in Stock Awards column of
Summary Compensation Table
- For each NEO, separates expense related to 1>
awards from past years, 2> awards earned for fiscal year 2007 performance, and
3> projected future payouts
- Separate tabular and narrative discussion of Awards Granted in 2006 for 2005 Performance and
Awards Granted in 2007 for 2006 Performance
- Included in section captioned Executive Compensation in 2006 and 2007
Select S-1 and S-4 Filings
SEC_CODE_REF_0090001192884
- We tracked a
collection of these filings made in the first
several weeks following
2006
effective dates for revised Item 402 disclosures
- Early source of precedent for companies with
proxy filing dates in early 2007
- As
S-K 402
applies to
Form S-1 and Form S-4, as well as
Schedule 14A
- Access latest filings
on EDGAR
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Executive Summary
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Some
companies provided executive summary or overview as introduction to more detailed CD&A
discussion Precedent
filings include
- Notable summary, with disclosure of key
quantitative factors from MD&A in 2007 annual report
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Q&A Format
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Several
companies have used Q&A format for CD&A disclosures in 2007 proxy season Precedent
filings include
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Peer Group Selection Countrywide Financial
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Congressional hearing
on severance pay packages
- Reported that hearing uncovered some notable
information with regard to composition of company's peer group
- Elimination of three smaller companies
- Replacement with Bank of America, Goldman Sachs,
and Merrill Lynch that had much higher CEO pay packages
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Supplemental Tables in CD&A
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SEC
Observations
2007 Proxy Season
Supplemental
Compensation Information in CD&A
- For further transparency, tabular and narrative
disclosures with regard to 2007 compensation actions
- Picks up compensation awarded in 2007 for 2006
performance, but not expensed in 2006 or reportable in Summary Compensation
Table
- Otherwise supplements required disclosures in Summary
Compensation Table
Precedent
Disclosures 2008
- Alternative compensation tables to summarize
differences between actions taken by compensation committee and amounts reported
in Summary Compensation Table
- Notable dialogue with SEC on reasons for
differences in NEO compensation and need for supplemental disclosures in CD&A
- Total Direct Compensation for NEOs, with
modest and significant differences when compared to reported compensation in SCT
- ... the Summary Compensation Table does not present the Named Executive Officers 2007 direct compensation opportunities (base salary, annual incentive, and equity awards) in a manner consistent with the Compensation Committees view of those opportunities during its compensation decision-making process. For example, the Summary Compensation Table reflects salaries actually earned in 2007 (as opposed to new 2007 salaries, effective April 2007) and the expense recognized in 2007 for prior years equity awards (as opposed to the value of 2007 equity awards).
- Supplemental tables to report 2007 compensation
actions and reconciliation of amounts that differ from amounts reported in
Summary Compensation Table
- Supplemental tables for compensation
elements, performance criteria, peer group comparison, 3-year financial
performance, and 2007 compensation actions
Precedent
Disclosures 2007
- Provides tabular disclosure of fiscal 2008
compensation decisions (pages 29 - 31), including weighting of performance goals
for incentive compensation (but excluding specific performance metrics)
- Separate tabular and narrative discussion of Awards Granted in 2006 for 2005 Performance and
Awards Granted in 2007 for 2006 Performance
- See also supplemental tabular disclosure of Stock
Option and Restricted Stock Unit expense calculations
2006
- Included in section captioned
Executive Compensation in 2006 and 2007
Another
Approach
- EMC
Corporation provides a supplemental Summary Compensation Table to report
compensation "received" (page 38)
- Highlights difference between compensation
"reported" from compensation "received"
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Disclaimers
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SEC
comments on use of disclaimers to clarify that, while compensation decisions are
made by the compensation committee, the CD&A is a management report
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Commentary
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SEC
- Critical of CD&As being filed
- In the past, the disclosure about
executives' pay has been among the most complicated for investors to decipher.
That's why the SEC is so adamant that the new Compensation Discussion and
Analysis be written in plain English. But now that the proxy season is well
under way, and we've reviewed the first of this year's crop, alarm bells are
ringing. Already we're seeing examples of over-lawyering that are leading to 30-
and 40-page long executive compensation sections in proxy statements.
Law
firm
- Ten practical tips for preparing the CD&A
- Insights - and Key Examples - from the First
CD&As
- CD&A Debut: A Reality Check
- The Materiality of Performance Targets
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Related Topics
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