(Editor’s Note: This article by Joseph E. Bachelder III previously appeared in the New York Law Journal.)
On July 17, the Securities and Exchange Commission (SEC) published in the Federal Register proposed changes in proxy statement disclosure rules affecting executive compensation as well as other matters. On July 31 the House of Representatives passed the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) (the Compensation Fairness Act or the act). The bill, received in the Senate Aug. 3, has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. It is not known when, after the recess, the committee plans to take up consideration of the bill. This column will examine both of these developments (discussion of the SEC proposals is limited to those involving executive compensation).
Proposed Disclosure Rules
The proposed new rules affecting disclosure of executive compensation by companies subject to the disclosure rules of the Securities Exchange Act of 1934 (the 1934 Act) concern (a) disclosure of the impact of compensation policies and practices generally on risks of the employer, (b) the reporting of stock option and other equity awards in the Summary Compensation Table and (c) the reporting on compensation consultants.
Reporting on Risk-Related Aspects of Compensation. The proposed rules require companies to evaluate in the Compensation Discussion and Analysis (CD&A) those risks arising from general compensation policies and overall practices at the company that may have a material effect on the company. 17 CFR 229.402(b)(2). Disclosure is not limited to compensation arrangements with named executive officers. The proposed rules describe situations that may require particular attention in the CD&A such as compensation policies at business units that carry a significant share of the overall enterprise’s risk or units that vary significantly from the risk/reward structure of the company.
The proposed rules also suggest examples of issues that should be addressed such as compensation policies that may have special impact on risk (e.g., short-term versus long-term awards and how they relate to business results, short-term versus long-term), policies involving adjustments for changes in risk evaluation and how the company monitors its own responsiveness to changes in its risk environment. The proposed rules emphasize that the situations and the examples of issues described are illustrations only and not exclusive statements as to what should be disclosed.
…continue reading: Proposed Pay Reform Rules Raise Questions