I. History
II. SEC Rules and Regulations
III. SEC Staff Guidance
a. Compliance and Disclosure Interpretations 4-11
1. Backdating Guidance Also Applies to Restricted Stock, Etc. 4-11
2. Covering Arrangements Outside Tables 4-12
3. Transition for Years Immediately After 2006 Rules Adopted 4-12
4. Omitting Performance Target Levels 4-12
5. Meaning of “Benchmarking” 4-14
6. Role of Compensation Consultants 4-14
7. Disclosure of Compensation in Current & Future Years 4-14
8. Disclosure of Non-GAAP Financial Measures 4-15
b. Comment Letters 4-16
1. Analysis in the CD&A 4-17
- Prominence of CD&A 4-18
- General Requests for Analysis 4-18
- Compensation for Individual NEOs & Internal Pay Equity 4-18
- Use of Discretion 4-19
- Role of Executive Officers, Compensation Committee & Board of Directors 4-20
- Severance & Change in Control Arrangements 4-20
- Wealth Accumulation 4-20
- Option Grant Practices 4-21
2. Performance-Based Compensation Disclosure 4-21
- Performance Target Levels for Last Completed Fiscal Year 4-22
- Presentation of Performance Target Levels 4-22
- Performance Target Levels for Current Fiscal Year & Future Periods 4-22
- Withholding of Performance Target Levels 4-23
- “Degree of Difficulty” Disclosure 4-24
- Use of Discretion 4-24
- Enhanced Disclosure Regarding Performance Plans 4-25
3. Benchmarking 4-25
- Identification of Peer Group 4-25
- Targeted Percentiles 4-26
4. Individual Performance Disclosure 4-26
c. October 2007 Staff Report 4-27
1. Manner of Presentation 4-27
- Emphasis 4-27
- Format 4-27
- Alternative Summary Compensation Tables 4-27
- Clarity 4-28
- Adding Analysis 4-28
- Avoiding Boilerplate 4-28
2. CD&A-Specific Issues 4-29
- Compensation Philosophies & Decision Mechanics 4-29
- Differences in Compensation Policies & Decisions 4-29
- Performance Target Levels 4-29
- Benchmarking 4-30
- Severance & Change in Control Arrangements 4-30
d. John White’s October 2008 Speech 4-31
- Analysis 4-31
- Performance Measure Target Levels 4-33
- Benchmarking 4-34
e. Shelley Parratt’s November 2009 Speech 4-34
- No More Free Passes 4-34
- What Staff Comments to Expect 4-35
- Specific Examples 4-35
- Meaningful & Understandable Disclosure 4-36
f. SEC Staff View on the Relationship of Compensation & Risk 4-36
IV. How the Rule Works
a. Overall Approach 4-37
- “Holistic” Approach to Analyzing Compensation Arrangements 4-37
- SEC Staff’s Continued Focus 4-37
- Principles-Based Disclosure 4-37
- Focus on Plain English 4-38
- Smaller Reporting Companies & EGCs 4-39
b. Scope of CD&A 4-39
- Includes Entirety of Executive Compensation Arrangements 4-39
- Individuals Covered 4-39
- Length of CD&A 4-40
- Whose “Voice” When Drafting CD&A 4-40
- Time Frame Covered Longer than Last Fiscal Year 4-40
- Alternative Formats 4-42
- Role of Board & Compensation Committee 4-42
- Role of Compensation Consultants 4-42
- CEO/CFO Certifications 4-43
- Liability for CD&A 4-43
c. Disclosure Requirements 4-43
- Seven Line Item Requirements 4-43
- Fifteen Examples to Consider 4-44
- “Materiality” 4-45
- The “Analysis” 4-45
- Provide the Context 4-46
- An “Analysis” Caption 4-46
- The “How” of Analysis 4-47
- Disclosure about Compensation-Setting Process 4-47
- The “Why” of Analysis 4-47
d. Executive Summaries 4-50
e. Benchmarking 4-51
- Identifying Component Companies 4-51
- SEC Staff Concerns 4-52
- Definition of Benchmarking 4-52
- Problems with Peer Group Benchmarking 4-53
- Internal Pay Equity 4-53
- The Challenges of “Why” 4-53
- Discretion to Deviate 4-54
f. Performance Target Levels 4-54
- Disclosure of Target Levels: Basic Requirement 4-54
- Disclosure of Target Levels: Framework for Analysis 4-54
- Materiality Prong: Target Levels for Completed Periods 4-54
- Materiality Prong: Target Levels for Current & Future Periods 4-55
- Anticipate Shareholder Concerns 4-55
- Describe Program Changes in CD&A 4-56
- Competitive Harm Disclosure Exclusion 4-56
- Presentation 4-57
- Use of Discretion . 4-57
- “Degree of Difficulty” Disclosure 4-57
- Non-GAAP Rules Don’t Apply 4-58
- Adjustments Common 4-59
g. Post-Employment: Severance & Change in Control Arrangements 4-60
h. Equity Award Grant Practices 4-60
i. Disclosing the Impact of the Prior Year’s Say-on-Pay Vote 4-62
- Disclosure Requirement 4-62
- Response to Significant Opposition 4-62
j. Risk Disclosures 4-63
V. Common Questions and Our Analysis
a. Compensation Committees 4-64
1. Compensation Committee Charters & CD&A 4-64
2. Compensation Committee’s Role for CD&A 4-65
3. Compensation Committee Deliberations of CD&A 4-65
4. Full Board CD&A Approval Unnecessary 4-65
b. Drafting Considerations 4-66
1. Drafting Timeline 4-66
2. “Voice” Used in Drafting 4-66
3. Cross-References To/From CD&A 4-67
4. CEO/CFO Certifications4-68 4-67
5. Including Required Tables in CD&A 4-68
6. Plain English 4-68
7. Q&A Format 4-68
8. Negative Disclosure in CD&A 4-69
9. Deficient CD&A 4-69
10. CD&A Omitted from Preliminary Proxy Statement 4-70
11. Inclusion of Non-Required Disclosure 4-70
12. Synchronize Risk Factors with CD&A 4-71
13. Can Use Subheadings as Part of CD&A 4-71
c. Compensation Consultants 4-71
1. CD&A Drafted by Independent Consultant 4-71
2. Prior Compensation Consultant Consent Before Filing CD&A 4-72
3. Duplicate Compensation Committee Procedure Disclosure 4-72
d. Scope 4-73
1. Persons Covered by CD&A 4-73
2. Number of Years Covered 4-73
3. “Fairness” in CD&A 4-74
4. Events after End of Fiscal Year 4-74
5. Examples in CD&A 4-75
6. Unusual or Nonrecurring Items 4-75
7. Analysis of Old Employment Agreements 4-76
8. New Executive Officer 4-76
e. Benchmarking 4-77
1. Benchmarking Data Used by CEO 4-77
2. Appendix for Survey Components 4-78
3. Third Party Surveys 4-79
f. Performance Target Levels & Bonuses 4-79
1. Disclosure of Performance Target Levels 4-79
2. Performance Target Levels in Exhibits 4-81
3. Disclose All Material Target Levels 4-81
4. LTIP Goal Disclosure 4-82
5. Detail Required Regarding Individual Performance Target Levels 4-82
6. Materiality of Large Number of Goals 4-82
7. Financial Measures & Confidentiality 4-83
8. Disclosure of EPS Targets 4-85
9. Disclosure of Performance Targets for Future Equity Grants 4-85
10. Bonus Terminology 4-85
11. “Umbrella” Plans: Disclose Award Allocations & Negative Discretion 4-86
12. Performance Bonus Paid Two Years Later 4-86
13. Disclosure Required When Bonuses are Not Paid 4-87
14. Multi-Part Retention Bonus 4-88
15. Capital Deployment Strategy As a Target 4-88
16. Disclose Mid-Year Changes to Performance Goals 4-89
g. Perquisites 4-89
1. Level of Disclosure 4-89
h. Equity Awards & Modifications 4-91
1. Stock Option Repricing & Extension of Option Terms 4-91
2. Spring-Loading Restricted Stock 4-91
3. Awards Made in Anticipation of Pending Merger 4-92
i. Risk Disclosures 4-92
j. Filing Two CD&As in One Year 4-93
k. Offerings 4-94
1. CD&A in Registration Statements 4-94
2. CD&A in Form S-4 for a Merger with Private Company 4-94
l. Types of Companies 4-95
1. Smaller Reporting Companies & CD&A 4-95
2. Emerging Growth Companies & CD&A 4-96
3. Foreign Private Issuers & CD&A 4-97
4. Public Debt Issuers & CD&A 4-97
5. Controlled Companies & CD&A 4-97
VI. Sample Disclosures
1. Executive Summary 4-98
2. Describe Tally Sheets If Material 4-99
3. Compensation for Individual NEOs & Internal Pay Equity 4-100
4. Disclosing Clawback Provisions 4-103
- Trend of Broader Clawback Policies 4-103
- How to Describe Clawback Policies 4-105
5. Disclosing Clawback Recoveries 4-107
6. Benchmarking 4-108
7. Performance-Based Compensation 4-109
8. Risk Disclosures 4-110
9. Use of Discretion for the Annual Incentive Plan 4-115
10. Termination & Change in Control Arrangements: The Importance of a Wealth Accumulation Analysis & Walk-Away Numbers 4-115
11. Evaluating the Need for Pensions & SERPs 4-118
12. Revisiting Perquisites 4-120
13. Accounting & Tax Implications 4-121
14. Stock Ownership Guidelines or Requirements 4-123
15. Presenting Pay-for-Performance with Graphs 4-125
a. Harris Corp 4-125
b. CVS Caremark 4-126
c. Western Union 4-128
16. Impact of Prior Year’s Say-on-Pay Vote 4-131
a. Chiquita Brands 4-131
b. Johnson Controls 4-133
c. Rite Aid 4-136
d. Dun & Bradstreet 4-137
17. Describing Individual Performance Goals 4-140
a. Clarient 4-140
b. Harris Corporation 4-145
18. “Degree of Difficulty” Statements 4-146
a. FMC Corporation 4-146
b. Altera 4-147
19. Describing Bonus In Lieu Of Missed Performance Goals 4-147
a. Triumph Group 4-148
b. Staples 4-148
20. Risk Assessment Disclosure 4-149
21. Benchmarking & Peer Group Disclosure 4-151
a. Johnson & Johnson 4-151
b. Agilent Technologies 4-151
VII. Analysis in the CD&A: Saying “To Be Competitive” is Not Analysis
- A Red Flag 4-153
- Critical Analysis 4-153
- An Example 4-154
- Our Concerns 4-155
VIII. Practice Pointers
