October 22, 2008

John White: Musing on How TARP May Impact All Executive Compensation Disclosures (Not Just Big Banks)

At our “3rd Annual Proxy Disclosure Conference” yesterday, Corp Fin Director John White delivered an important speech – entitled “Executive Compensation Disclosure: Observations on Year Two and a Look Forward to the Changing Landscape for 2009” – during which John talked briefly about how the TARP’s executive compensation provisions could potentially spill-over and impact the many companies not directly subject to TARP. Specifically, John addressed the TARP provision that requires participating financial institution’s compensation committees to meet with the senior risk officers of the institution to ensure that the incentive compensation arrangements do not encourage the senior executive officers to take “unnecessary and excessive risks that threaten the value of the financial institution.” Here is an excerpt from John’s remarks on this topic:

Most of you are not from financial institutions, so let’s talk for a moment about non-participating companies. This new Congressionally-mandated limitation on having compensation arrangements that could lead a financial institution’s senior executive officers to take unnecessary and excessive risks that could threaten the value of the financial institution obviously applies on its face only to participants in the TARP.

But, consider the broader implications and ask yourself this question: Would it be prudent for compensation committees, when establishing targets and creating incentives, not only to discuss how hard or how easy it is to meet the incentives, but also to consider the particular risks an executive might be incentivized to take to meet the target — with risk, in this case, being viewed in the context of the enterprise as a whole? I’ll let you think about what Congress might want. We know what our rules require. That is, to the extent that such considerations are or become a material part of a company’s compensation policies or decisions, a company would be required to discuss them as part of its CD&A. So please consider this carefully as you prepare your next CD&A.

Also, more broadly speaking, I expect that current market events are already affecting many companies’ compensation decisions and thus should be affecting the drafting of their upcoming CD&A’s. Regardless of whether your company participates in the TARP and consequently finds itself having to make new material disclosures, you should not merely be marking up last year’s disclosure. Instead, you should be carefully considering if and how recent economic and financial events affect your company’s compensation program.

For example, have you modified outstanding awards or plans, or implemented new ones? Have you reconsidered the structure of your program, or the relative weighting of various compensation elements? Have you waived any performance conditions, or set new ones using different standards? Have you changed your processes and procedures for determining executive and director pay, triggering disclosure under Item 407? These questions and more should be addressed as you consider disclosure for 2008.

Corp Fin’s ’09 Narrowly Selected Review of Executive Compensation Disclosures

Regarding Corp Fin’s review of compensation disclosures filed during the upcoming proxy season, John said this during his speech:

We also are looking at how we will shape our Corporation Finance review program for 2009 in light of recent market events, including the new executive compensation provisions in TARP and continued investor interest in executive compensation. As you know, our selective review program is guided by Section 408 of Sarbanes-Oxley, which requires that we review all public companies on a regular and systematic basis, but in no event less frequently than once every three years. The Act also sets out criteria for us to consider in scheduling these regular and systematic reviews, including considering companies that “experience significant volatility in their stock price,” companies “with the largest market capitalizations,” and companies “whose operations affect any material sector of the economy.” As you also will recall, in 2007 we did a targeted review of the executive compensation disclosure under our then-new rules for 350 companies of all sizes.

Our plan for 2009 will be responsive to current conditions. In 2009 we will select for review and review the annual reports of all of the very largest financial institutions in the U.S. that are public companies. This group will include the nine large financial institutions that have already agreed to participate in the Treasury’s capital purchase program. Our reviews will include both the financial statements and the executive compensation disclosures of these companies. We also intend to monitor the quarterly filings on Form 10-Q and current reports on Form 8-K of these companies.

Today: “5th Annual Executive Compensation Conference”

Today is the “5th Annual Executive Compensation Conference.” Note you can still register to watch online – and note that the archived video for yesterday’s “3rd Annual Proxy Disclosure Conference” is now available.

How to Attend by Video Webcast: If you are registered to attend online, just log in to or to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference” on the home pages of those sites will take you directly to today’s Conference.

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for or If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is the Conference Agenda; times are Central.

How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except Pennsylvania (but hours for each state vary; see the list for each Conference in the FAQs).

– Broc Romanek