Providing practical guidance since 1975.

51 Executive Compensation Disclosure Tips

Recently, Broc conducted a contest on CompensationStandards.com, asking the community to send in their own tips about drafting executive compensation disclosures. Below are the 51 tips that he received from members:

Use tabular disclosure wherever possible. In the CD&A, use a concise compensation elements table that permits shareholders to see the element of compensation and the purpose behind it. In the Summary Compensation Table, place a separate “All Other Compensation” table in the applicable footnote. Finally, use tabular disclosure in the Potential Payments Upon Termination or Change-in-Control section to summarize the payments to be made upon the officer’s termination (only one table if possible). Examples of good disclosures in these areas are:

Compensation Elements Table: Kellogg Company, Best Buy
All Other Compensation Table: The Midland Company
Potential Payments Upon Termination Table: Eli Lilly and Company

Write the CD&A in question and answer format. This format makes it easier to read for the average shareholder and ensures that the CD&A answers S-K’s requirements. If a narrative format is later desired, the Q&A format can easily be modified to add headings instead of the questions.
Stay abreast of what other companies and their advisors are saying. When first preparing to tackle your company’s executive compensation section, it is extremely useful to see how other companies are disclosing their programs and practices. Print off several compensation sections from some well-respected companies and read their disclosure. Also, sign-up to receive Mark Borges’ blog postings from Compensationstandards.com.
Do not copy and paste last year’s CD&A. While last year’s CD&A is certainly helpful when getting started, as the SEC has indicated in its comment letters, much more analysis is required to comply with the CD&A’s requirements than was generally disclosed last year. Helpful materials also include last year’s Compensation Committee minutes, compensation related SEC filings, equity compensation plans, and bonus plan materials. Persons to speak with are Compensation Committee members, representatives from accounting and human resources, compensation consultants, and management.
Keep it readable. Perhaps the best way to ruin disclosure is if no one can understand it. One way to help keep your focus on readability is to copy and paste the CD&A draft into an online tool that calculates its Gunning Fog Index. A free website where you can do this is http://simbon.madpage.com/Fog/.
Consider recommending that the Board adopt a Related Party Transaction Policy – makes compliance with new Item 404(b) of Reg. S-K much easier.
Look through the CD&A in the last proxy statement and look again at the CD&A questions and examples in the SEC’s adopting release. Are there any matters that should be covered in this year's written executive compensation program adopted by the Compensation Committee?
Implement a system to track the number of option awards and stock awards held by directors at fiscal year end to comply with the new Instruction to Item 402(k) set forth in the December 2006 Release.
Make sure that an attorney reviews the assumptions used by compensation consultants to calculate the amounts disclosed in 402(j) (Potential Payment Upon Termination or a Change in Control). Severance, change of control and termination provisions in agreements and benefit plans can involve complex legal determinations.
Review the rules and FAQs related to calculating the value of option and stock awards with your Company’s internal finance team, instead of just asking them to provide the FAS 123(R) values. There may be nuances to the rules for compensation disclosure purposes that affect the calculations or result in additional disclosure.

Use footnotes judiciously, particularly in the SCT, as they clutter the already dense table and break up the flow of the disclosure. It is better to discuss the information in context in the supplemental narrative below the tables.
The needs of the reader, not the format of the SEC’s rules, should drive the design of compensation disclosures. While you need to comply with the rules, the needs and preferences of stockholders suggest presenting information in a complete, engaging, and informative manner. Do not use S-K as a crutch to avoid telling important pieces of the story.
Disclosures should feedback into compensation decisions. If the description of a compensation program is unintelligible due to complexity, employees probably do not understand the program either. Use this discovery as an opportunity to simplify compensation programs that really motivate employees and improve the link between pay and performance.
Create supplemental tables to provide insight into the components of the SCT, particularly where a column includes multiple elements. If the stock or option awards columns or the non-equity incentive plan compensation column are comprised of multiple awards, a supplemental table is an easy way for the reader to see the relative weight of each element.
Start early – our process begins at least six months prior to filing. This allows sufficient time to structure, design, gather, draft, and edit the disclosures to make them as readable as possible.
Make sure to review the company's historic compensation committee and board minutes involving approval of compensation plans and other benefits to ensure there is not a conflicting or non-disclosed philosophy that should be included in CD&A. Then give the company a refresher on minute-taking practices.
In the “Outstanding Equity Awards at Fiscal Year-End Table,” include a column for the grant date of each award. This adds to the volume of information in the table, but it also puts the large number of outstanding awards in context.
Gather all of your executive compensation information first, before deciding how to populate the tables or what to cover in the narrative/footnotes. After working on the tables/narrative disclosures for awhile, I learned information that changed the perspective I wanted to take or the priority of information to be disclosed - which created a lot of rewriting.
Have someone from media communications review the draft before widely circulating it for review. Media savvy personnel are great at spotting ambiguity and disclosures that may generate unexpected attention, and they can help simplify the language.
Involve legal advisors (and “fact checkers”) early in the process.

Use the language from your participant communications in your disclosure – chances are if it helps your participants understand your plans, it will help proxy readers.
Lead a meeting of the Compensation Committee (and possibly the full board) where you read through the 20 or so questions the SEC suggests answering in the CD&A. For each question, discuss a good answer and an inappropriate answer. For some questions it may be necessary to explain (e.g., the tax and accounting consequences of various awards to the Company and the executive, for committee members who may not be familiar with this subject in detail). For other questions, it may be useful to explain the rationale or origin of the question (e.g., discuss the Disney stock awards in connection with the "accumulated wealth" question or the peer group selected by Grasso in connection with that question). That way, the Committee members will have these questions and this background in their minds as they make decisions, which will result in better decisions and a better record.
Have internal audit review the tables before filing. This allows an independent auditor, not under proxy pressure, to verify the numbers. The attorney has additional comfort in the accuracy, along with the Disclosure Committee, CEO/CFO and Board. For any external review, it shows every effort was made to ensure accuracy/completeness.
Think about how you will disclose and communicate each component of compensation during your compensation planning process. It will make it easier when you actually have to and/or may lead you to make different decisions in your compensation planning.
Start drafting as soon as you’ve finished designing and rolling out the executive compensation plans while all the decision making and rationale for the plan year is fresh in your mind.
Start with a comprehensive outline and fill in the details from there.
Don’t dread it, have fun with it. It is a great opportunity for compensation professionals to exhibit their craft.
As this contest states – cheat. Read the disclosures of other organizations and learn from how other organizations have disclosed what might have applicability to your organization.
Start the CD&A with a summary chart of the five most important decisions taken by the Compensation Committee in the past year. Explain how those decisions reflect the comp philosophy and impact the compensation delivered.
Disclose the total vested and unvested in-the-money-value of stock options disclosed so shareholders could compare the value earned from these grants on a year to year basis. This might also be accomplished by showing the total value of all outstanding equity grants. As to the latter approach, we acknowledge this may overstate the value of performance shares since some may not pay out. Nonetheless, we think it important to understand the value "earned" in each year via equity grants.

Require companies to disclose the difference between a payout under an AIP and LTIP. While we would love to have seen companies disclose these payouts in their CDA, many companies did not. Similarly, require the grant date fair value on the grant tables to be broken out separately by grant.
Require use of uniform termination tables that will permit meaningful comparisons between companies and require these tables to show the full "walk-away" value (including previously vested options, etc.)
For the CD&A, require companies to affirmatively state when they are claiming confidentiality. If the plan permits Compensation Committee discretion to determine the payouts, make it clear that is the reason why the goals are not disclosed and require the Compensation Committee reasoning to be articulated in the CD&A. Where goals are confidential, the SEC needs to articulate the factors companies must consider in determining the "degree of difficulty" in attaining those goals.
As many in the press are ignoring the SCT FAS 123R values for options and stock grants, to say nothing about the negative number problem, we would prefer the SEC go back to its original September approach and require disclosure of the full FAS 123R value for the grants made during the year. Most press accounts and Compensation Committees are looking to the grant table FAS 123R values in compiling total compensation, so returning to the September approach will create far more consistency than under the current approach.
Review the proxies of your peer group. Pick the best stuff out of them. Don't reinvent the wheel.
Provide templates of all the disclosure templates that you customize to report your specific company's programs to Payroll, HR, accounting, legal, and others that need to provide data.
When the D&O Questionnaire is forwarded to executive officers and directors or with the first draft of the 10-K or proxy state statement, include all the details to the Directors, CEO and NEO's that will support the compensation and option data that will be reported; e.g., for All Other Compensation CEO and NEO's did not understand where and how numbers were derived.
Fire the attorneys (this could be tips 1-5)
Make sure you include all the internal subject matter experts and record keepers in the compensation disclosure draft reviews. This will likely include employees in legal, accounting and HR organizations.
Prepare short checklist of most significant overriding framework issues/disclosures that relate to your compensation policies, practices and philosophy and highlight the draft disclosures that relate to each issue on the checklist. Then have a meeting with top management and compensation committee of the board to review the items on the checklist and the related disclosures to be certain that everybody is on the same page – that they understand the policies, practices and philosophies and that they understand and agree with the related disclosures – or determine appropriate changes.
Having a focused checklist will ensure that the most significant issues get raised, debated and discussed and agreed to once a year among the compensation committee and management and that they don’t get buried in 30 pages of other disclosures. (This doesn’t eliminate the responsibility to review and approve all disclosures, it just ensures that the most significant issues are specifically given more discussion time which they deserve and not treated at the same level as smaller details and not given the oral discussion focus they deserve given the volume of disclosures.)

Note that this tip relates to the process of disclosures rather than to the disclosures themselves in order to enhance the quality of the disclosure by getting all the right people in a room discussing the key pertinent overriding policies and practices in order to be sure they at least once a year lift themselves out of the details to discuss the framework issues.
When presenting equity award information in the SCT, consider using different fonts or colors as a way to explain differences between the amounts that are actually earned and received in the last completed fiscal year and the amounts that the NEO has an opportunity to earn in the future. (Schering-Plough is a good example).
Provide an “annual benefits” column or other supplemental disclosure in the Pension Benefits Table to disclose the annual benefits that NEOs could receive upon retirement or upon termination. This disclosure can facilitate the discussion of pension benefits in the CD&A and termination and change-in-control section and may be easier for investors to understand as compared to the actuarial present value.
Exhibits – Take a good look at your exhibit list before you file. While last year we uncoupled the Form 8-K filing requirements for executive compensation arrangements from the exhibit filing requirements of Item 601(b)(10) for filing material contracts, a lot of the interpretive guidance that we provided about Form 8-K was equally applicable to what sorts of agreements and arrangements (whether written or unwritten) needed to be filed under Item 601(b)(10). Under the new Item 5.02(e) of Form 8-K, which deals with material compensation arrangements with named executive officers, you may have situations where something may not be material enough to require disclosure under Item 5.02(e) of Form 8-K, but must nonetheless be filed as an exhibit under Item 601(b)(10) because Item 601(b)(10) has a per se materiality standard when it comes to compensation agreements with the named executive officers and directors.
Committee Charters – One of the things the SEC did when revising and consolidating the corporate governance disclosures in Item 407 of Regulation S-K was to rationalize the way board committee charters are disclosed. As a result, the audit committee charter will no longer be required to be delivered to security holders along with the proxy statement if it is posted on the company’s Web site. Also, you now have to post the compensation committee charter to your Web site or file it as an appendix to the proxy statement if it is not available there, as is also the case with the nominating committee charter. If you go down the Web site posting route for your big three committee charters, make sure that your disclosure indicates that a current copy of the applicable committee charter is available to security holders on the company’s Web site and provide the company’s Web site address.
Definitions of Director Independence – While we are on the topic of Web site posting, new Item 407 of Regulation S-K requires that an issuer which has adopted definitions of independence for directors and committee members must disclose whether those definitions are posted on the company’s Web site, and if they are not, then you have to include the definitions as an appendix to the company’s proxy or information statement at least once every three years or if the policies have been materially amended since the beginning of the company’s last fiscal year.
Disclosure of Policies Regarding Related Party Transactions – A brand new requirement coming out of the executive compensation rulemaking is that you now have to provide, under Item 404(b) of Regulation S-K, a description of the company’s policies and procedures for the review, approval, or ratification of related person transactions reportable under Item 404(a). You have to provide this disclosure about policies and procedures even if you have no related person transactions to report for the year. In addition to the disclosure about your policies, you have to identify any transaction that you actually reported under Item 404(a) where the policies and procedures did not require review, approval or ratification or where such policies and procedures were not followed.
If your disclosure about termination and change-in-control provisions is long and complex, then maybe you should consider re-evaluate these arrangements for whether they really make sense today – and if they don’t make sense, then the Compensation Committee should take this opportunity to simplify them and to reflect the current realities.
When drafting disclosure about termination and change-in-control provisions, keep in mind how interpretations of those provisions for disclosure purposes might box you in if there is later an actual termination or change-in-control situation with one of your NEOs.
Pull together the description of all plans and how they work under one section so you don’t have to repeat information about the plans in CD&A and elsewhere.
New Form 8-K Item – If you find yourself in a situation where you don’t know the amounts of salary or bonus to report in the Summary Compensation Table, then remember that you need to include disclosing that the amount of salary or bonus is not calculable through the latest practicable date and providing the date that the amount of salary or bonus is expected to be determined and such amount must then be disclosed in a filing under Item 5.02(f) of Form 8-K. Then you have to remember to file that Form 8-K, which needs to include the amount of salary or bonus and a new total compensation figure, within four days of when you are able to calculate the number in whole or part.
Performance Graph – As a result of last year’s executive compensation amendments, your performance graph is no longer required in the proxy statement; rather, you must include it in your glossy annual report required under Rule 14a-3. The requirements for the performance graph did not substantively change, it just got uncoupled from the executive compensation disclosure. If you still want to include the performance graph in your proxy statement, you can so long as it is also in your annual report. Further, you may include the performance graph in the 10-K if you are using a “10-K wrap” format for your glossy.