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One of my more popular blogs lately was one about how the Associated Press reports on total compensation numbers. Now, Moody’s explains how they look at what has been disclosed in the new batch of proxy statements filed this proxy season.

On CompensationStandards.com, in this podcast, Mark Watson, Managing Director, Corporate Governance Specialist Team of Moody’s Investors Service, explains the “in’s” and “out’s” of “Moody’s User Guide to Compensation Disclosures” (which is posted in CompensationStandards.com’s “Investor Demands for Reasonable Pay” Practice Area), including:

– What is the purpose of Moody’s new user guide for compensation disclosures? Why did Moody’s put one together?
– In your staff’s review of the disclosures made so far, which areas do you think are being adequately disclosed? Which areas need improvement?
– What do you recommend that companies do for next year?

More on the “Readability” of Compensation Disclosures

I’m still getting plenty of feedback from my blog about the SEC Chairman’s recent comments on the lack of plain English in compensation disclosures. One of the themes in these responses is how – after a decade since the SEC’s plain English initiative began – practitioners had never heard of the metrics used in the Chairman’s speech. These commentors point out that the Gunning-Fog and Flesch-Kincaid tests are not mentioned a single time during any of the SEC’s plain English rulemaking or commentary over the years.

In the wake of the Chairman’s speech, a group of compensation consultants conducted this follow-on readability study that is pretty interesting, looking at more disclosures, the SEC’s rules themselves and even Dr. Seuss’ “Green Eggs & Ham” for comparison purposes.

The upshot is that I think the SEC will have to revisit the plain English requirements if it is going to insist on using the metrics that the Chairman mentioned in his speech, because it doesn’t look like any company is coming anywhere close to what has been targeted as a “good” score. And I would bet that would be true for disclosure in any SEC filing, whether it be a proxy statement, prospectus, etc. This situation might be saying as much about these metrics as they do about disclosures generally; I think the metrics have to be examined more carefully before being applied as the litmus test of whether it is “good disclosure.”

Meanwhile, I imagine it won’t take long for shareholder activists to grab onto this issue – particularly since Microsoft Word has a tool that allows anyone to easily gauge the “readability” of a document. So my advice is for all companies to run the numbers and find out the readability of their CD&As (and other disclosures) now before someone comes calling. And of course, we wouldn’t be surprised to see Corp Fin get back into the business of issuing plain English comments. Should be fun…

Implementing the SEC’s Compensation Rules: Companies Start Providing Feedback

Even nine months after the SEC adopted its final executive compensation rules, it is still receiving comment letters on them. The first company to weigh in on the new rules after filing its initial proxy statement under them is Leggett & Platt, with this comment letter that focuses on confusion in the media in reading the disclosures as well as the impact of the sudden December rule change made by the SEC.

Leggett & Platt is not the only company frustrated by the SEC’s December change in the rules. As Marc Trevino and Joseph Hearn of Sullivan & Cromwell noted in their survey of compensation disclosure trends by the Fortune 50, Citigroup decided to include multiple pages in its proxy statement regarding the meaning of retirement-eligible accounting under FAS 123R, including this excerpt:

“In the view of the committee and Citigroup, the December 2006 SEC release regarding reporting of equity compensation in the Summary Compensation Table does not reflect the way the committee and Citigroup analyze and make equity awards. Under the new rules, the treatment in the Summary Compensation Table of awards with the same terms for all the named executive officers may differ depending on age and length of service with Citigroup, and accordingly, may make it difficult to discern the committee’s judgments about executive performance for 2006. The purpose of the foregoing discussion and disclosure is to make it clear that the committee made incentive awards for 2006 and in prior years based on the fair value of the awards and not on the accounting treatment of those or prior awards on Citigroup’s financial statements under SFAS 123(R) or other applicable accounting standards.”