SEC Overhauls Executive Compensation Disclosure

Transcription

1 SECURITIES LAW August 2006 SEC Overhauls Executive Cmpensatin Disclsure On August 11, 2006, the Securities and Exchange Cmmissin ( SEC ) issued the text f the new executive cmpensatin disclsure rules that will apply beginning with 2007 prxy statements. The changes in the prxy disclsure requirements represent a significant verhaul f the disclsure system adpted in 1992, intrducing new and revised tables and re-intrducing extensive narrative disclsure requirements. The SEC Release adpting the new rules als revises certain Frm 8-K requirements applicable t executive fficers and directrs and makes ther changes. This Securities Law Alert prvides a quick verview f the mst significant changes t the prxy rules and then a mre detailed discussin f these and the ther changes. Quick Outline f Significant Changes Cmpensatin Discussin and Analysis prepared by management replaces frmer Bard Cmpensatin Cmmittee Reprt Disclsures required regarding plicies and practices fr timing and pricing f ptin grants Summary Cmpensatin Table substantially revised and expanded Full grant date fair value f ptins and ther equity awards under Statement f Financial Accunting Standards N. 123R, Share-Based Payment ( FAS 123R ), replaces infrmatin n number f shares r units Ttal Cmpensatin clumn includes virtually all cmpensatin fr named executive fficers Perquisites and ther persnal benefits must be included in cmpensatin if exceed $10,000 Named executive fficer definitin changed t include chief financial fficer regardless f cmpensatin and $100,000 threshld based n ttal cmpensatin rather than salary and bnus Frm 8-K required t reprt salary and bnus infrmatin that is nt available when prxy distributed Six new tables added t cver: explanatins f infrmatin included in the Summary Cmpensatin Table; infrmatin n exercises and hldings f previusly granted equity awards; pst-emplyment cmpensatin; and directr cmpensatin infrmatin. New Cmpensatin Cmmittee Reprt added Chicag Indiana Michigan Washingtn, D.C..

2 Narrative disclsure required t accmpany tables Plain English required fr nearly all prxy disclsures Perfrmance graph mved frm prxy statement t Annual Reprt t Sharehlders Threshld fr related-persn transactin disclsures increased t $120,000 frm $60,000 Discussin f New Prxy Statement Disclsure Requirements The new rules stress principles-based disclsure, that is a rule identifies the disclsure cncept and then prvides illustrative examples t help identify the types f disclsure that may be applicable. The new rules fr prxy statement disclsures becme effective fr prxy statements filed n r after December 15, 2006, and the new rules applicable t Frm 10-K disclsures becme effective fr filings fr fiscal years ending n r after that date. Cmpensatin Discussin and Analysis Under the new rules, the cmpensatin disclsures in the prxy statement will begin with the narrative verview in the Cmpensatin Discussin and Analysis ( CD&A ). Patterned after Management s Discussin and Analysis in Frms 10-K and 10-Q, the CD&A calls fr a discussin f the material factrs underlying cmpensatin plicies and decisins reflected in the data presented in the tables. The CD&A will be deemed filed and thus subject t liability under Sectin 18 f the Securities Exchange Act fr false r misleading statements. The CD&A must explain fr each executive named in the Summary Cmpensatin Table (the Named Executive Officers ) the bjectives f the cmpany s cmpensatin prgram, what the prgram is designed t reward, each element f cmpensatin, why the cmpany chses t pay each element, hw the amunt f each element is determined and hw each element and the cmpany s decisins abut such element fit int the cmpany s verall cmpensatin bjectives and affect decisins regarding ther elements. Unlike the current Bard Cmpensatin Cmmittee Reprt n Executive Cmpensatin, which fcuses n cmpensatin fr the last fiscal year, the CD&A, t the extent applicable, will require discussin f pstterminatin cmpensatin arrangements, n-ging cmpensatin arrangements and plicies that the cmpany will apply n a ging-frward basis. Revised Summary Cmpensatin Table The revised Summary Cmpensatin Table shws the Named Executive Officers cmpensatin, whether r nt actually paid, fr the last three fiscal years. Optins and ther awards previusly reprted in terms f the number f shares r units granted will be reprted as the grant date fair value f the award under FAS 123R. Any cmpensatin that is currently payable but has been deferred fr any reasn must be included in the apprpriate clumn in the table. The new Ttal Cmpensatin clumn aggregates the dllar value f the cmpensatin disclsed in the ther clumns f the table. If salary r bnus fr the prir fiscal year cannt be calculated as f the date f the prxy statement, a Frm 8-K will be required nce the amunts becme knwn and will need t include the revised Ttal Cmpensatin amunt. Three new clumns cver plan-based awards. The Stck Awards clumn disclses the FAS 123R grant date fair value f stck-related awards ther than stck ptins, such as restricted stck and phantm stck. The Optin Awards clumn gives the FAS 123R value f ptins, stck appreciatin rights and ther equity-based cmpensatin instruments that have ptin-like features. The Stck Awards and Optin Awards clumns will disclse the full cmpensatin cst f an award in the fiscal year the grant is made even if the award is subject t vesting and nly a prtin f the cst f the award will be expensed in the cmpany s financial statements fr the given fiscal year. The new Nn-Equity Incentive Plan Cmpensatin clumn reprts the dllar value f all amunts earned pursuant t incentive plans under which awards are nt within the scpe f FAS 123R. The new Change in Pensin Value and Nnqualified Deferred Cmpensatin Earnings clumn includes the aggregate increase in actuarial value fr the Named Executive Officer f all defined benefit and actuarial plans, including supplemental plans, accrued during the year and the abve-market interest earned n nnqualified deferred cmpensatin. The All Other Cmpensatin clumn replaces and expands the cverage f the Other Annual Cmpensatin Chicag Indiana Michigan Washingtn, D.C..

3 and All Other Cmpensatin clumns in the current Summary Cmpensatin Table. The new All Other Cmpensatin clumn will include all cmpensatin nt required t be included in any ther clumn. Any item f cmpensatin included in the All Other Cmpensatin clumn that exceeds $10,000 must be separately identified and quantified in a ftnte. With the exceptin f perquisite and persnal benefit amunts, all items f cmpensatin must be included in the All Other Cmpensatin clumn regardless f hw small the amunt. If the aggregate amunt f perquisites and persnal benefits received by a Named Executive Officer fr the fiscal year is less than $10,000, then nne f that cmpensatin (ther than tax reimbursements) is required t be included in the All Other Cmpensatin clumn. Thus, despite its name, the All Other Cmpensatin clumn cntinues t exclude certain cmpensatin. Cmpensatin Cmmittee Reprt The new rules require the inclusin f a shrt Cmpensatin Cmmittee Reprt similar t the current audit cmmittee reprt. The Cmpensatin Cmmittee Reprt must state whether the cmmittee has reviewed and discussed the CD&A with management and whether it has recmmended the CD&A t the Bard f Directrs fr inclusin in the prxy statement and Frm 10-K. The Cmpensatin Cmmittee reprt will be furnished rather than filed. The principal executive and financial fficers will be able t rely n the Cmpensatin Cmmittee Reprt in prviding their certificatins required in Frms 10-K and 10-Q. New Tables Six new tables will fllw the Summary Cmpensatin Table in the prxy statement: Grants f Plan-Based Awards Table: prvides back-up infrmatin fr the Summary Cmpensatin Table, such as the number f shares underlying ptin grants and the exercise price f ptins granted. Outstanding Equity Awards at Fiscal Year-End Table: prvides infrmatin n utstanding awards, such as the number f shares underlying vested and unvested stck ptins and restricted stck grants. Optin Exercises and Stck Vested Table: prvides infrmatin n the amunts a Named Executive Officer realized upn the exercise f ptin awards and the vesting f stck awards. Pensin Benefits Table: requires disclsure f the actuarial present value f the Named Executive Officers accumulated benefits, the number f years f credited service under the plan and the amunt f payments made during the last fiscal year. Nnqualified Deferred Cmpensatin Table: includes infrmatin n the cntributins, earnings and balances under each plan that prvides fr the deferral f cmpensatin n a basis that is nt tax qualified. Directr Cmpensatin Table: presents infrmatin n directr cmpensatin similar t the infrmatin n Named Executive Officers prvided in the Summary Cmpensatin Table, except that infrmatin is required nly fr the cmpany s last fiscal year. Narrative Disclsures Accmpanying Tables The new rules require that the Summary Cmpensatin Table and Grants f Plan-Based Awards Table be accmpanied by a narrative descriptin f any additinal material factrs necessary t an understanding f the infrmatin disclsed in the tables. Types f disclsure that may be required include descriptins f the material terms f the Named Executive Officers emplyment agreements, material mdificatins t ptins, ptin vesting schedules and descriptins f perfrmance-based cnditins applicable t awards. Narrative disclsures als are required t accmpany the ther tables. Pst-Emplyment Benefits The new rules require narrative disclsures regarding written and unwritten arrangements that prvide payments in cnnectin with the resignatin, severance, retirement r ther terminatin f a Named Executive Officer, r a change in the respnsibilities f such an fficer r a change in cntrl f the cmpany. The disclsures must include descriptins f the specific circumstances that wuld trigger payment r ther prvisin f benefits and estimates f the amunts f the benefit. Fr purpses f calculating the amunts (if the triggering event has nt yet ccurred), triggering events will be assumed t have ccurred n the last business day f the cmpany s last cmpleted fiscal year and the price per share f the cmpany s securities will be Chicag Indiana Michigan Washingtn, D.C..

4 assumed t be the clsing market price n that date. The new rule eliminates the $100,000 threshld that applied t similar disclsures under the current rules. Perquisites and Other Persnal Benefits The SEC cntinues t take the psitin that it is nt apprpriate t prvide a definitin f perquisites r persnal benefits, but the Release des include interpretive guidance abut factrs t be cnsidered in determining whether an item is a perquisite r ther persnal benefit: An item is nt a perquisite r persnal benefit if it is integrally and directly related t the perfrmance f the executive s duties (i.e., the executive needs it t d the jb ). If an item cnfers a direct r indirect benefit that has a persnal aspect, then it is a perquisite r persnal benefit unless the item is generally available n a nn-discriminatry basis t all emplyees. The Release includes the fllwing examples f items that wuld be cnsidered perquisites r persnal benefits: club memberships nt used exclusively fr business entertainment purpses; persnal financial r tax advice; persnal travel using vehicles wned r leased by the cmpany; persnal use f ther prperty wned r leased by the cmpany; security prvided at a persnal residence r during persnal travel; cmmuting expenses; and discunts n cmpany prducts nt generally available t emplyees n a nn-discriminatry basis. Perquisites and persnal benefits cntinue t be valued n the basis f aggregate incremental cst, but under the new rules disclsure f the methdlgy fr cmputing the aggregate incremental cst must be included in a ftnte t the Summary Cmpensatin Table. Named Executive Officers The new rules als amend the definitin f Named Executive Officer, which nw includes the fllwing: The principal executive fficer; The principal financial fficer; and The ther three mst highly cmpensated executive fficers (and up t tw frmer executive fficers) whse ttal cmpensatin fr the last fiscal year exceeds $100,000. Ttal cmpensatin fr the purpses f determining Named Executive Officers differs frm ttal cmpensatin in the Summary Cmpensatin Table in that it des nt include increases in the actuarial value f pensin benefits and abve-market interest n deferred cmpensatin. In the Release, the SEC did nt adpt the s-called Katie Curic rule, which wuld have required narrative disclsures regarding the three mst highly cmpensated emplyees wh were nt executive fficers but wh were paid mre than the Named Executive Officers. Cmmentatrs n the rule were cncerned that it culd require disclsures abut entertainment persnalities, prfessinal athletes and similar emplyees. The SEC is requesting additinal cmments n a pssible mdificatin f the prpsed rule t require disclsures regarding the mst highly cmpensated emplyees wh exert significant plicy influence by having respnsibility fr significant plicy decisins within the cmpany, a significant subsidiary f the cmpany, r a principal business unit, divisin r unit f the cmpany. The SEC als is requesting cmment n whether the rule shuld apply nly t large accelerated filers. Related-Persn Transactins The new rules increase the threshld fr disclsing related-persn transactins frm $60,000 t $120,000. The rules als require disclsures f a cmpany s plicies and prcedures fr the review, apprval r ratificatin f related-persn transactins. Small Business Issuers Small business issuers are nt required t prvide the CD&A and the nly tables required f small business issuers are the Summary Cmpensatin Table, the Outstanding Equity Awards at Fiscal Year-End Table and the Directr Cmpensatin Table. Infrmatin in the Summary Cmpensatin Table will be required fr the last tw fiscal years and the Named Executive Officers will include nly the principal executive fficer and the ther tw mst highly cmpensated executive fficers with ttal cmpensatin exceeding $100,000. Chicag Indiana Michigan Washingtn, D.C..

5 Frm 8-K Changes In an effrt t restre a mre balanced apprach t the filing requirements added by the 2004 Frm 8-K amendments, the Release amends Frm 8-K Items 1.01, Entry int a Material Definitive Agreement, and 5.02, Departures f Directrs r Certain Officers; Electin f Directrs; Appintment f Certain Officers; Cmpensatry Arrangements f Certain Officers. The new rules mdify the disclsure requirements relating t management cntracts and plans and mve certain requirements frm Item 1.01 t Item A new instructin t Item 5.02 als clarifies that the Named Executive Officers fr whm disclsure is required are thse Named Executive Officers included in the mst recently filed prxy statement. The Frm 8-K changes will becme effective 60 days after the new rules are published in the Federal Register, s they can be expected t becme effective during the latter half f Octber Recmmended Actins Officers and ther emplyees respnsible fr prviding infrmatin fr the prxy statement need t be made aware f the new types f infrmatin required abut executive fficers and directrs Timelines and assignments fr the 2007 prxy seasn need t be revised t prvide fr an earlier start and the additinal time that will be required fr cmpliance with the new requirements Plicies and prcedures fr the review, apprval r ratificatin f related-persn transactins need t be adpted (if nt previusly adpted) Fr mre infrmatin regarding these develpments, yu may cntact Barnes & Thrnburg LLP at the numbers listed belw. Indianaplis Catherine L. Bridge Lynne M. McMahan Kepten Carmichael David B. Millard Julie Russell Dilts Eric R. My Stephen J. Duttn Jan Neuenschwander Curt W. Hidde Michael G. Patn David Hper Hillary J. Spike-Frdice Jeffrey A. Hpper Claudia V. Swhier Alan A. Levin Steven W. Thrntn Thmas M. Maxwell Suth Bend Chicag Alan B. Feldbaum Larry D. Blust Brian J. Lake David Edwards Brian A. Casey Lee T. Plk Jhn C. Smarrella Elkhart Grand Rapids Brian J. Clark Lawrence Duthler J. Sctt Treger R. Paul Guerre Rand W. Nilssn Kimberly L. Thmas Washingtn, D.C. Randlph J. Stayin This Barnes & Thrnburg LLP publicatin shuld nt be cnstrued as legal advice r legal pinin n any specific facts r circumstances. The cntents are intended fr general infrmatinal purpses nly, and yu are urged t cnsult yur wn lawyer n any specific legal questins yu may have cncerning yur situatin. Please send address changes r requests t pt ut f these alerts t jennifer.whitley@btlaw.cm. Chicag Indiana Michigan Washingtn, D.C..