By proposing a new compensation analysis section that would sit atop the pay tables in financial reports and proxies, the Securities and Exchange Commission could force companies to provide a much more detailed discussion of how they pay their top earners, experts say.
Among the SEC’s recently proposed rule changes on executive-compensation disclosure is a plan for issuers to provide a new “compensation discussion and analysis” section in their proxies, registration statements, and annual reports and eliminate the current compensation-committee report and performance graph.
In the new analysis section, companies would have to provide a comprehensive description of compensation programs and decisions, including discussions of policies and reasons for cash, non-cash, long-term, and equity-based pay. The proposal represents a big change from current requirements, according to Michael McCoy, an attorney in the corporate finance and securities group of Bryan Cave, a St. Louis-based law firm.
The devil will be in the details. In their reports, compensation committees have often supplied only broad statements about a company’s remuneration practice and the cash and stock-based parts of executive pay. Currently, most companies don’t engage in detailed discussions on individual pay packages, notes McCoy.
In contrast, the SEC had been seeking “robust discussions” by compensation committees when it adopted the current disclosure rules 14 years ago, according to its January proposal. “The SEC has said in different [forums] that it is not very happy with the disclosure that committees have provided in the compensation committee report,” says McCoy.
But in recent years, a minority of companies, mostly big ones, have gone beyond the requirements to provide different elements of what the SEC is now proposing, says Mark Borges, a principal at Mercer Human Resource Consulting in Washington, D.C. “For midsized companies and others outside the top tier, the [proposed] change would be dramatic because they have had more general reports,” he adds.
Indeed, companies’ compensation reports have generally looked the same, observes Diane Doubleday, global leader of executive remuneration services at Mercer’s San Francisco office.
Under the proposed change, however, “boilerplate disclosure will not comply,” the commission advised in its proposal. Instead, the required narrative would explain such things as what compensation is designed to reward and not reward; how the company determines the amount (and, where relevant, the formula) for each element of compensation; and what corporate performance is considered in making compensation policies and decisions.
Further, the proposal calls for the compensation discussion and analysis section to be “filed” with the SEC rather than just “furnished” — a less rigorous procedure. Filing them will subject issuers to added liabilities under the Exchange Act of 1934.
That technical difference doesn’t translate into a practical difference, however, because companies are always potentially at risk for the accuracy of their reports, noted McCoy. “In the compensation disclosure and analysis section, the SEC is seeking to require a thorough narrative of all material elements of an issuer’s compensation for named executive officers,” he said.
While it’s unlikely that the commission would dictate how the information in the new disclosure section should be presented, the commission might prefer a fully integrated presentation of all the information, with links and cross-references to information elsewhere, says Borges, a former SEC official. He also expects the new section would appear before all other disclosure and thus set the context for the information in the tables.
All that material will entail considerable extra time for management and boards to develop. “I encourage board members to read the discussion in the proposal,” says Doubleday. “The discussion of the compensation discussion and analysis gets across the SEC’s view and serves as a road map for the compensation committee’s charge.”
But the jury is still out about whether amplified compensation will yield improved actions on the part of companies and management. “The question at the end of the day is: will that disclosure result in changed behavior or [will] we have the same decisions but with more information?” Doubleday wonders.