New CD&A Must Do Some Heavy Lifting on Options

Has anyone noticed that the SEC is using the new Compensation Discussion & Analysis adopted as part of the new executive compensation disclosure regime as the primary vehicle for options dating disclosure? It is a good vehicle to use because it will be in the annual report and is subject to Sarbanes-Oxley Section certification by the company’s chief executive and financial officers.

The CD&A, which is modeled on the MD&A, is envisioned as a narrative principles-based overview explaining material elements of the company’s compensation for named executive officers. The SEC requires companies to address option compensation in the CD&A, including the timing and pricing of stock option grants. The company should also discuss the reasons it selects particular grant dates and awards, as well as the methods used to select the terms of awards, such as the exercise prices of stock options. Importantly, any plan to select option grant dates in coordination with the release of inside information should be disclosed in the CD&A. Thus, the CD&A is looming as one of the most critical and hot sections of the financial statement.