May 5, 2009

Complimentary: March-April Issue of The Corporate Executive

As a “thank you” to members – and due to the importance of the analysis included in it – we have decided to share a complimentary copy of the March-April issue of The Corporate Executive with you. This issue includes pieces on:

– Grant Guidelines and Declining Stock Prices
– Excessive Windfalls in Compensation Once Stock Prices Recover
– Two Fundamental—and Very Relevant—Considerations for High Level Executives
– Executives Surrendering Underwater “Mega” Grants
– Important, Timely Guidance on the Accounting Treatment of Acceleration of Vesting—Including Ramifications for Underwater Options
– Important, Timely Suggestions from a Respected CEO

In addition, you should read this supplement as it contains our recommended key fixes to the SEC’s executive compensation rules.

Act Now: To continue receiving the practical guidance imparted in The Corporate Executive, try a no-risk trial now.

Congrats to Jesse Brill for appearing on “The Today Show” this morning during a piece on executive pay. Here is a video archive of the segment.

SEC May Reverse “December Surprise”: Equity Compensation Disclosure Methodology for the Summary Compensation Table

In her AP article, Rachel Beck notes how the SEC may be considering reversing the rules from the December ’06 “surprise” – this relates to equity compensation disclosure methodology for the Summary Compensation Table.

Here is some commentary from Cleary Gottlieb on this development:

Many of you will recall that when the SEC comprehensively revised the executive compensation disclosure rules in August 2006, equity awards were to be presented in the Summary Compensation Table based on the full grant date fair value of each year’s awards, computed in accordance with FAS 123R. This was the methodology set forth in the proposed rules in February 2006, and there was full consideration of the approach as part of the comment process before the final rule was adopted.

In an unexpected release on December 22, 2006, the SEC changed the rules to require that the grant date fair value of an equity award be reflected in the Summary Compensation Table based on the recognition of accounting expense in the reporting company’s financial statements as required by FAS 123R in respect of the award, typically over an amortization schedule that corresponds to the award’s vesting period. That revision was adopted without a public meeting, without notice and comment and without any adequate explanation as to why the change was being made. Beyond the procedural concerns, many considered that the revision undercut the purpose of the Summary Compensation Table by obfuscating the value of equity-based grants, which are of course a principal element of executive compensation, and led to unnecessary last-minute changes to the composition of the named executive officers, primarily because amortization under the accounting rules was typically not permitted for “retirement eligible” executives.

Fast forward two-plus years, and we learn that the SEC is considering a reversal back to the original August 2006 rule. Press reports on Friday stated, based on an interview with SEC Chairman Mary Schapiro, that the SEC “is considering changing a formula that critics say often allows public companies to low-ball in regulatory filings just how much top executives are paid.” If the reversal happens, it in fact should be a welcome development for critics and reporting companies alike. The inclusion in the Summary Compensation Table of the grant date fair value of equity awards granted in each year to named executive officers presents a clearer picture of compensation decisions in a given year, and makes the determination of the named executive officers more predictable and sensible.

If the press reports are correct, interesting questions arise as to the transition from the current rule to the new rule. Will unamortized awards from prior years be entirely excluded from the Summary Compensation Table? Will companies be required or permitted to recompute the amounts disclosed for prior years, as if the changed rule had been in effect in the past? Could the basis of disclosure for 2009 (if that is the first fiscal year for which the change is effective) equity awards be different than the basis for the amounts set forth in the Table for earlier years? We would expect the SEC to address these and other transition issues as part of any rule change or in accompanying guidance. Stay tuned.

SEC Filing Fees: Going Up 28% for Fiscal Year 2010

Last week, the SEC issued its first fee advisory for the year. Right now, the filing fee rate for Securities Act registration statements is $55.80 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will rise to $71.30 per million, a hefty 28% price hike. The new fees will not go into effect until five days after the date of enactment of the SEC’s 2010 appropriation – which often is delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battle over the government’s budget.

You might be asking, “How are the SEC’s fees set?” The SEC sets its filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002.” The SEC’s budget is not dependent on its fees; it’s not a self-funded agency. In fact, the SEC wishes it could use those fees as it brings much more in for the government than it’s allowed to spend. Learn more how this all works in this blog.

– Broc Romanek