In February 1992, the SEC announced that
it would consider changes to the disclosure in proxy statements of
compensation of senior executive officers. The SEC's goal is to ensure
that the marketplace receives information about executive compensation
that is easier to understand and more relevant to proxy voting and
investment decisions. The fundamental principle of the SEC's actions is
that market forces, rather than legislators or bureaucrats, should shape
corporate compensation policies.
The SEC on June 23 proposed revisions to the rules governing executive
compensation disclosure. After substantial revisions and simplification of
the proposed rules in response to almost 1000 letters of comment, the SEC
today announced the following rule changes:
Deletion of rules that require the inclusion in proxy statements of
long, narrative, legalistic discussions of compensation plans, including
option plans and pension plans.
Disclosure of the compensation of
the CEO, regardless of amount of compensation, and
the four most highly paid senior executive officers, other than the
CEO, who earn more than $100,000 per year in salary and
bonus.
The rules provide for a new comprehensive table disclosing the annual
salary, bonuses, and all other compensation awards and payouts of the
named officers.
Stock options will be disclosed as a number awarded and will not be
assigned a value.
The table covers a three-year period, although two of the columns
("Other Annual Compensation" and the catch-all "Other Compensation") may
be phased in by companies over the first three years of reporting. Small
business issuers may phase in the entire table over three
years.
Two tables detailing options and stock appreciation rights (SARs) are
required.
One table summarizes the number and terms of options/SARs granted
during the fiscal year. The table may list potential values for the
options/SARs based on assumed annual compounded rates of stock price
appreciation (five percent and ten percent). Alternatively, a value for
the options on the date of grant may be calculated by using a financial
formula for calculating the present value of the options.
The second table summarizes exercises of options by the named
executives (including the net value received) and the number of, and the
spread (the difference between the current market price of the stock and
the exercise price of the option) on, unexercised options that they
hold.
The new rules require a table outlining awards under the long-term
incentive plans, such as phantom stock grants and restricted stock
grants that vest after a period of time upon satisfaction of a
performance goal.
A pension table is required to set forth estimated annual benefits
payable upon retirement under pension plans. This table is not required
for small business issuers.
Disclosure is required regarding standard compensation arrangements
for directors (payments for services on board and committees), as well
as any other compensation for services (such as consulting
contracts).
The rules require a new report to shareholders by the members of the
compensation committee that generally discusses the company's
compensation policies for executive officers and the committee's bases
for determining the compensation of the CEO for the past fiscal year.
The report also must include a discussion of the relationship of
executive compensation and CEO compensation to corporate
performance.
The rules specify that the report should not include disclosure of
specific quantitative or personal factors or confidential
information.
This report is a key element in enhancing the communication between
directors and shareholders and in reinforcing the directors' cognizance
of their accountability to the shareholders.
Limited Liability: The rules also specifically provide that this
report will have the same status as the annual report to shareholders.
Shareholders dissatisfied with the report should act through their power
to elect directors, not through litigation.
This requirement applies to compensation committee decisions made
after the effective date of the rules and does not apply to small
business issuers.
The rules require a new chart that graphs the performance of the
cumulative total return to shareholders (stock price appreciation plus
dividends) during the previous five years in comparison to returns on a
broad market index (such as the S&P 500) and a peer group index
(such as the S&P Retail Index, depending on the line of business of
the company). This format provides flexibility for the marketplace to
develop appropriate, meaningful comparisons for the more than 13,000
public companies registered in the United States.
Limited Liability: The rules also specifically provide that this
chart will have the same status as the annual report to shareholders.
Shareholders dissatisfied with the presentation in the chart should act
through their power to elect directors, not through litigation.
This requirement does not apply to small business
issuers.
If after effective date of the rules a company reprices any options
or SARs held by a named executive, it must prepare a table detailing
terms of that repricing and any other repricing that has occurred during
the past ten years that the company has been public.
The compensation committee is required to explain the reasons behind
the repricing in the last fiscal year and the basis for determining the
new prices.
The requirement of a ten-year repricing history does not apply to
small business issuers.
Additional disclosure is required in the proxy statement regarding
relationships existing on or after Jan. 1, 1993, between directors and
the company if:
the compensation committee included employees or former or current
officers of the company or its subsidiaries,
there is "interlocking" membership between the company's
compensation committee and another company's compensation committee
(that is, a member of one company's compensation committee sits on
another company's compensation committee or board, and vice
versa).
This disclosure is not required for small business
issuers.
The new rules are effective immediately upon publication in the
Federal Register.
Companies may still use the old rules for proxy statements, if they
file the proxy statements with the SEC before Jan. 1, 1993 (unless the
proxy statement pertains to an annual meeting of a company with a fiscal
year ended on or after Dec. 15, 1992).
As noted above, certain disclosure rules are not applicable to, or
are phased in for, companies eligible to use the SEC's small business
forms (companies that have annual revenues of less than $25 million, and
whose public float is under $25 million).
ISS' Corporate Programs Division offers products and services (described on ISS' website) to issuers of proxy
solicitations consisting primarily of advisory and analytical services, self-assessment tools and publications. ISS has
adopted a number of policies and practices to guard against any possible conflicts of interest between our institutional
proxy advisory service and our corporate services. Please see
ISS' Business Policies for further information.
