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
