Corp Fin Staff Clarifies Executive Compensation Disclosure Rules on Fair Value and Summary Compensation Table

The SEC Division of Corporation Finance staff has clarified SEC regulations requiring disclosure of executive compensation. The interpretations involve areas that are as diverse as fair value reporting under the Grants of Plan-Based Awards Table and the dollar value of life insurance under the Summary Compensation Table, as well as the reporting of performance-based restricted stock.

The Summary Compensation Table is the principal disclosure vehicle for executive compensation, showing compensation for each named executive officer over the last three years, whether or not actually paid out. Item 402 of Regulation S-K requires Summary Compensation Table disclosure of the dollar value of any insurance premiums paid by the company with respect to life insurance for the benefit of a named executive officer. The company must describe and quantify the estimated payments and benefits that would be provided in each covered termination circumstance, including the proceeds payable upon an executive officer's death.

However, the staff said that, if an executive officer dies during the last completed fiscal year, the proceeds of a company-funded life insurance policy paid to the deceased executive officer's estate need not be taken into consideration in determining the compensation to be reported in the Summary Compensation Table, or in determining whether the executive is among the company’s up to two additional individuals for whom disclosure would be required but for the fact that they were no longer serving as an executive officer at the end of the fiscal year.

The staff also clarified that a person who was a named an executive officer in year 1, but not in year 2, and who will again be a named executive officer in year 3, must disclose compensation information in the Summary Compensation Table for all three fiscal years. The staff further noted that a tax gross-up payment for taxes on perquisites or other compensation to a person who is a named executive officer in year 1 should be reported in the Summary Compensation Table in year 1 even though the tax gross-up payment is not payable by the company until year 2.

In the staff’s view, the tax gross up payment should be reported in the same year as the compensation to which it relates in order to give investors a clear picture of all costs to the company associated with providing the perquisites or other compensation.

The staff also said that the grant date fair value reported in the Grants of Plan-Based Awards Table for an incentive performance plan that will pay out at different levels depending upon actual performance should be determined based on maximum performance, so that investors can see the maximum grant date fair value numbers that were authorized in granting the award.

Similarly, the grant date fair value under a long-term incentive plan in which a named executive officer receives an award for a target number of shares at the start of a three-year period, with one-third of this amount allocated to each of three single-year performance period is determined as provided in FAS 123R. Under FAS 123R, if all of the annual performance targets are set at the start of the three-year period, that is the grant date for the entire award. FAS 123R provides that the grant date fair value for all three tranches of the award would be measured at that time and reported.

However, if each annual performance target is set at the start of each respective single-year performance period, FAS 123R provides that each of those dates is a separate grant date for purposes of measuring the grant date fair value of the respective tranche. In this circumstance, only the grant date fair value for the first year's performance period would be measured and reported.

The staff also said that any incremental fair value under FAS 123R due to a modification of an outstanding equity incentive plan award held by a named executive officer must be reported in the Grants of Plan-Based Awards Table.

With regard to the Outstanding Equity Awards at Fiscal Year-End Table, the staff emphasized that the number of shares reported for a performance-based restricted stock unit plan measuring performance over a three-year period should be based on the actual number of shares underlying the restricted stock units that were earned at the end of the three-year performance period even though the compensation committee will evaluate performance to determine the amount of restricted earned by the named executive officers.

Since the executive officers must remain employed by the company for a subsequent two-year service-based vesting period, continued the staff, the shares should be reported in columns (g) and (h) of the table because they are subject to service-based vesting.