New SEC Executive Compensation Disclosure Interpretations
June 8, 2009
On May 29, 2009, the Division of Corporation Finance posted new Compliance and Disclosure Interpretations (“C&DIs”) regarding executive compensation disclosure required in proxy statements and Annual Reports on Form 10-K pursuant to Item 402 and 601 of Regulation S-K. These new C&DIs are set forth below as well as a link to all of the C&DIs regarding Regulation S-K. The new C&DIs are mostly in the nature of clarifications but do shed light on some questions with respect to which issuers previously may have taken varying reasonable positions. For example, the Division has indicated that tax gross-ups should be reported in the same year as the benefits to which they relate and not in the year in which the payments are actually made to the executive. The only C&DI that seems to somewhat contradict a previous position of the Division states that if a person was an “named executive officer” in Year 1, was not one in Year 2, and then becomes one again in Year 3, in the summary compensation table of Year 3’s proxy statement, compensation for all three years (including Year 2) is required to be disclosed.
New SEC Regulation S-K Compliance and Disclosure Interpretations Regarding Executive Compensation:
Section 119. Item 402(c) – Executive Compensation; Summary Compensation Table
Question 119.18
Question: A person who was a named executive officer in year 1, but not in year 2, will again be a named executive officer in year 3. Must compensation information for this person be disclosed in the Summary Compensation Table for all three fiscal years?
Answer: Yes. [May 29, 2009]
Question 119.19
Question: A person who is a named executive officer for year 1 is entitled to a gross-up payment in respect of taxes on perquisites or other compensation provided during the year. The tax gross-up payment is not payable by the company until year 2. Is the tax gross-up payment reportable in the Summary Compensation Table in year 1?
Answer: Yes. To provide investors with a clearer view of all costs to the company associated with providing the perquisites or other compensation for which tax gross-up payments are being made, Item 402(c)(2)(ix)(B) disclosure of the tax gross-up payment should be included in the Summary Compensation Table for the same year as the related perquisites or other compensation. [May 29, 2009]
Section 120. Item 402(d) – Executive Compensation; Grants of Plan-Based Awards Table
Question 120.05
Question: An incentive performance plan will pay out at different levels depending upon the actual performance results over the relevant performance period. Is the grant date fair value reportable in column (l) of the table determined based on threshold, target or maximum performance?
Answer: The grant date fair value reportable in column (l) is determined based on maximum performance, so that investors can see the maximum grant date fair value numbers that were authorized in granting the award. [May 29, 2009]
Question 120.06
Question: Under a long-term incentive plan, a named executive officer receives an award for a target number of shares at the start of a three-year period, with one-third of this amount allocated to each of three single-year performance periods. How is grant date fair value determined for purposes of the disclosure required in column (l) of the table?
Answer: The grant date and grant date fair value are determined as provided in FAS 123R. Under paragraph A. 67 of FAS 123R, if all of the annual performance targets are set at the start of the three-year period, that is the grant date for the entire award. The grant date fair value for all three tranches of the award would be measured at that time, and would be reported in column (l). If each annual performance target is set at the start of each respective single-year performance period, however, paragraph A.68 of FAS 123R provides that each of those dates is a separate grant date for purposes of measuring the grant date fair value of the respective tranche. In this circumstance, only the grant date fair value for the first year’s performance period would be measured and reported in column (l). [May 29, 2009]
Question 120.07
Question: During the fiscal year, an outstanding equity incentive plan award held by a named executive officer is amended or otherwise modified, resulting in incremental fair value under FAS 123R. Must the incremental fair value be reported in column (l) of the table?
Answer: Yes. This is required by Item 402(d)(2)(viii) and Instruction 7 to Item 402(d). [May 29, 2009]
Section 122. Item 402(f) – Executive Compensation; Outstanding Equity Awards at Fiscal Year-End Table
Question 122.03
Question: A company’s performance-based restricted stock unit (“RSU”) plan measures performance over a three-year period. After the end of the three-year performance period (2007-2009), the compensation committee will evaluate performance to determine the number of RSUs earned by the named executive officers. The named executive officers must remain employed by the company for a subsequent two-year service-based vesting period (2010-2011). Upon completion of service-based vesting, the company will pay the named executive officers the shares underlying the RSUs. In the Outstanding Equity Awards at Fiscal Year-End Table for fiscal year 2009, how should information about the shares underlying the RSUs be reported?
Answer: The number of shares reported should be based on the actual number of shares underlying the RSUs that were earned at the end of the three-year performance period. This is the case even if this number will be determined after the 2009 fiscal year end. The shares should not be reported in columns (i) and (j) because they are no longer subject to performance-based conditions. Instead, the shares should be reported in columns (g) and (h) because they are subject to service-based vesting. [May 29, 2009]
Section 217. Item 402(a) – Executive Compensation; General
217.14 Item 402(c)(2)(ix)(G) requires Summary Compensation Table disclosure of the dollar value of any insurance premiums paid by, or on behalf of, the registrant during the covered fiscal year with respect to life insurance for the benefit of a named executive officer. Item 402(j) requires description and quantification of the estimated payments and benefits that would be provided in each covered termination circumstance, including the proceeds of such life insurance payable upon a named executive officer’s death. However, if an executive officer dies during the last completed fiscal year, the proceeds of a life insurance policy funded by the registrant and paid to the deceased executive officer’s estate need not be taken into consideration in determining the compensation to be reported in the Summary Compensation Table, or in determining whether the executive is among the registrant’s up to two additional individuals for whom disclosure would be required under Item 402(a)(3)(iv). [May 29, 2009]
Section 246. Item 601 – Exhibits
246.15 Consistent with the requirements of Item 601(b)(10)(iii), a company files its nonqualified deferred compensation plan as an exhibit. The company subsequently establishes a rabbi trust under the nonqualified deferred compensation plan. Establishment of the rabbi trust would trigger filing under Item 601(b)(10)(iii) only if it materially modifies participants’ rights under the previously filed nonqualified deferred compensation plan. [May 29, 2009]
Link to SEC Regulation S-K Compliance and Disclosure Interpretations:
http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm
Please feel free to contact any of your regular contacts at the Firm or the lawyers listed in the Corporate Governance or Employee Benefits sections of this website if you have any questions.
New SEC Regulation S-K Compliance and Disclosure Interpretations Regarding Executive Compensation:
Section 119. Item 402(c) – Executive Compensation; Summary Compensation Table
Question 119.18
Question: A person who was a named executive officer in year 1, but not in year 2, will again be a named executive officer in year 3. Must compensation information for this person be disclosed in the Summary Compensation Table for all three fiscal years?
Answer: Yes. [May 29, 2009]
Question 119.19
Question: A person who is a named executive officer for year 1 is entitled to a gross-up payment in respect of taxes on perquisites or other compensation provided during the year. The tax gross-up payment is not payable by the company until year 2. Is the tax gross-up payment reportable in the Summary Compensation Table in year 1?
Answer: Yes. To provide investors with a clearer view of all costs to the company associated with providing the perquisites or other compensation for which tax gross-up payments are being made, Item 402(c)(2)(ix)(B) disclosure of the tax gross-up payment should be included in the Summary Compensation Table for the same year as the related perquisites or other compensation. [May 29, 2009]
Section 120. Item 402(d) – Executive Compensation; Grants of Plan-Based Awards Table
Question 120.05
Question: An incentive performance plan will pay out at different levels depending upon the actual performance results over the relevant performance period. Is the grant date fair value reportable in column (l) of the table determined based on threshold, target or maximum performance?
Answer: The grant date fair value reportable in column (l) is determined based on maximum performance, so that investors can see the maximum grant date fair value numbers that were authorized in granting the award. [May 29, 2009]
Question 120.06
Question: Under a long-term incentive plan, a named executive officer receives an award for a target number of shares at the start of a three-year period, with one-third of this amount allocated to each of three single-year performance periods. How is grant date fair value determined for purposes of the disclosure required in column (l) of the table?
Answer: The grant date and grant date fair value are determined as provided in FAS 123R. Under paragraph A. 67 of FAS 123R, if all of the annual performance targets are set at the start of the three-year period, that is the grant date for the entire award. The grant date fair value for all three tranches of the award would be measured at that time, and would be reported in column (l). If each annual performance target is set at the start of each respective single-year performance period, however, paragraph A.68 of FAS 123R provides that each of those dates is a separate grant date for purposes of measuring the grant date fair value of the respective tranche. In this circumstance, only the grant date fair value for the first year’s performance period would be measured and reported in column (l). [May 29, 2009]
Question 120.07
Question: During the fiscal year, an outstanding equity incentive plan award held by a named executive officer is amended or otherwise modified, resulting in incremental fair value under FAS 123R. Must the incremental fair value be reported in column (l) of the table?
Answer: Yes. This is required by Item 402(d)(2)(viii) and Instruction 7 to Item 402(d). [May 29, 2009]
Section 122. Item 402(f) – Executive Compensation; Outstanding Equity Awards at Fiscal Year-End Table
Question 122.03
Question: A company’s performance-based restricted stock unit (“RSU”) plan measures performance over a three-year period. After the end of the three-year performance period (2007-2009), the compensation committee will evaluate performance to determine the number of RSUs earned by the named executive officers. The named executive officers must remain employed by the company for a subsequent two-year service-based vesting period (2010-2011). Upon completion of service-based vesting, the company will pay the named executive officers the shares underlying the RSUs. In the Outstanding Equity Awards at Fiscal Year-End Table for fiscal year 2009, how should information about the shares underlying the RSUs be reported?
Answer: The number of shares reported should be based on the actual number of shares underlying the RSUs that were earned at the end of the three-year performance period. This is the case even if this number will be determined after the 2009 fiscal year end. The shares should not be reported in columns (i) and (j) because they are no longer subject to performance-based conditions. Instead, the shares should be reported in columns (g) and (h) because they are subject to service-based vesting. [May 29, 2009]
Section 217. Item 402(a) – Executive Compensation; General
217.14 Item 402(c)(2)(ix)(G) requires Summary Compensation Table disclosure of the dollar value of any insurance premiums paid by, or on behalf of, the registrant during the covered fiscal year with respect to life insurance for the benefit of a named executive officer. Item 402(j) requires description and quantification of the estimated payments and benefits that would be provided in each covered termination circumstance, including the proceeds of such life insurance payable upon a named executive officer’s death. However, if an executive officer dies during the last completed fiscal year, the proceeds of a life insurance policy funded by the registrant and paid to the deceased executive officer’s estate need not be taken into consideration in determining the compensation to be reported in the Summary Compensation Table, or in determining whether the executive is among the registrant’s up to two additional individuals for whom disclosure would be required under Item 402(a)(3)(iv). [May 29, 2009]
Section 246. Item 601 – Exhibits
246.15 Consistent with the requirements of Item 601(b)(10)(iii), a company files its nonqualified deferred compensation plan as an exhibit. The company subsequently establishes a rabbi trust under the nonqualified deferred compensation plan. Establishment of the rabbi trust would trigger filing under Item 601(b)(10)(iii) only if it materially modifies participants’ rights under the previously filed nonqualified deferred compensation plan. [May 29, 2009]
Link to SEC Regulation S-K Compliance and Disclosure Interpretations:
http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm
Please feel free to contact any of your regular contacts at the Firm or the lawyers listed in the Corporate Governance or Employee Benefits sections of this website if you have any questions.