Wednesday, July 26, 2006

SEC Reforms Executive Compensation Disclosure

By James Hamilton, J.D., LL.M.

The SEC has adopted a sweeping overhaul of its rules governing disclosure of executive and director compensation, related person transactions, director independence and other corporate governance matters. Over the next few days, the blog will be discussing the most important revisions in this area since 1992. The broad purpose of the new regime is to improve disclosure by including all elements of executive and director compensation. It is about wage clarity, not wage controls (see SEC Press Release).

A new disclosure, the compensation discussion and analysis (CD&A), modeled on the MD&A, will address the objectives and implementation of executive compensation programs, focusing on the most important factors underlying each company's compensation policies and decisions. Despite concerns expressed by a number of commenters, the CD&A will be filed and thus be a part of the disclosure subject to Sarbanes-Oxley certification by a company's principal executive officer and principal financial officer.
Rather than eliminate the currently required compensation committee report, as proposed, the SEC will require a new furnished compensation committee report, with a statement of whether the compensation committee has reviewed and discussed the CD&A with management and, based on this review and discussion, recommended that it be included in the company's annual report on Form 10-K and proxy statement.

The SEC has dropped the universally abhorred requirement that the total compensation and job positions of each of a company's three most highly compensated non-executive employees be disclosed. Instead, it has reproposed to require disclosure of the three most highly compensated non-executive employees, but excluding employees with no responsibility for significant policy decisions within the company. The reproposal may placate commenters who argued that the compensation of non-policy making employees should not be subject to disclosure.