Essential Practice Tips You Oughta Know

Here is a compilation of practice pointers from the panels of the two-day conference - "Implementing the SEC's New Executive Compensation Disclosures: What You Need to Do Now!" – co-sponsored by TheCorporateCounsel.net and CompensationStandards.com. The pointers are separated by each panel’s topic.

"The New CD&A"

By Mark Borges, Mercer Human Resource Consulting

  1. Prepare mock-ups of the disclosure tables to reference when you begin drafting. In the Adopting Release, the Commission indicates that the CD&A is intended, in part, to explain the compensation information that is presented in the disclosure tables and the other required narrative discussions. Consequently, once the company has identified its compensation policies and decisions, it should use the tables as a reference when drafting the CD&A discussion. This will ensure that all relevant topics are considered and discussed, as necessary, and that the tables and related narratives are woven into or cross-referenced in the discussion as appropriate.
     

  2. Make sure that the discussion of post-employment compensation arrangements and related decisions is consistent with the required tabular presentations of this information.  The discussion of a company’s executive compensation program is supposed to cover post-employment, as well as current, compensation arrangements. In this regard, companies will need to ensure that the discussion of various post-employment arrangements (for example, retirement plans) is consistent with the descriptions of these programs that accompany the Pension Plan Table. In describing the rationale for each post-employment plan and arrangement, it may be appropriate to cross-reference the description of the plan or arrangement that is provided in the narrative supplement to the relevant post-employment disclosure.
     

  3. Think holistically about your disclosure concerning stock options and other equity-based awards. While the new rules focus attention on the timing considerations for the grant of stock options, how the grant dates of other types of equity-based awards are determined is likely to be of interest to shareholders in the current environment. Consequently, it is probably worth addressing award determinations more broadly in the CD&A. The questions in the Adopting Release to be considered when addressing the coordination of stock option grants with the release of material, nonpublic information can also be used for purposes of determining relevant disclosure for other types of awards as well.
     

  4. Document the rationale for any decision to withhold performance measures and/or targets from the discussion of performance-based compensation. The new rules require companies to provide specific information about the measures used and targets established for performance-based compensation for the named executive officers except to the extent that such information involves a trade secret or commercial or financial information the disclosure of which would result in competitive harm to a company. Where a company determines that it is appropriate to withhold the disclosure of specific performance information because, in its analysis, this standard has been satisfied, it is important for the company to articulate and document the rationale for its decision. It is likely that the SEC staff will be reviewing CD&A disclosures during the 2007 proxy season and may request substantiation of any decision to withhold specific performance measures and/ort targets. Having this rationale in hand will greatly simplify responding to any such request and demonstrate that the company had a reasoned basis for withholding this information.

By Ron Mueller, Gibson Dunn & Crutcher

  1. Begin now! Drafting the CD&A this first year will require a significant amount of time. The CD&A cannot be finalized until all of the tables are complete, but if you wait until then to begin drafting, it will be extremely difficult to satisfy the disclosure goals required by the SEC.
     

  2. Prepare for an iterative process. Don’t expect the CD&A to spring, Venus-like, fully wrought (and writ).  Prepare others for the reality that numerous drafts will be necessary and manage expectations by circulating a T&R schedule that allows time for review, feedback and comments on several rounds of drafts which may be in various stages of development.  Obtain buy-in from key constituencies early in the drafting process.  For example, early in the process, circulate preliminary descriptions of the compensation program’s objectives (perhaps with a list of how each arrangement serves each particular objective) to the Compensation Committee or its chairman, senior executives, the heads of HR and IR, outside counsel and the outside compensation consultant.
     

  3. Remember the "best practices" drafting lessons from MD&A. Begin with an overview that provides context for the remainder of the discussion; focus on material information and not on immaterial factors that did not affect compensation policies or payments (even if included in the 15 examples under the rules); focus on "why," not just "what;" and do not merely repeat information that is evident from the tables.
     

  4. Do not rely on last year’s Board Compensation Committee Report. While there may be portions of a well drafted BCCR that can be helpful for early drafts of certain portions of the CD&A – such as the description of how specific compensation elements operate – the focus of the CD&A is different from the BCCR and requires new elements of disclosure: what are the objectives of the compensation program? how does each element of compensation further that objective? what is the interaction among different elements of compensation? how did these objectives and elements apply to each named executive officer’s compensation?
     

  5. Don’t lose sight of the Company’s message. If applicable, explain how the Company’s view of an executive’s "total" compensation differs from the amount reported in the "Total" column of the Summary Compensation Table.  Think about, take into account and address issues that may be of concern to your investors.  Look beyond the SEC rules and consider what the CD&A says about the Company and its board and executive management.  The detail and care reflected in the CD&A will say more to investors than the sentences themselves about the Company’s attitude to a highly sensitive and emotionally charged corporate governance matter.

"Who is Covered under the New Tables"

By Ron Mueller, Gibson Dunn & Crutcher

  1. Determine how to report under the Summary Compensation Table. For many companies, it will be necessary to have the information reportable under the Summary Compensation Table before you can be certain who the NEOs are.  Determine who will generate that information and how soon it can be calculated. 
     

  2. Don’t forget the "sleepers." Amounts that are "earned" but not paid under non-equity incentive plans, tax gross-ups, amounts paid or accrued in connection with any termination of employment, matching contributions and perquisites will each influence who is an NEO.
     

  3. Consider the effects on Section 162(m) planning. The definition of "named executive officer" is more divergent than ever from the definition of "covered employee" under Section 162(m) of the Tax Code.  Discuss the implications of this on the Company’s plans with your tax counsel. 

"Tackling the New Summary Compensation Table"

By Alan Kailer, Jenkens & Gilchrist

  1. Although the rules are new and one might assume they are a complete statement of the disclosure requirements, it is not sufficient merely to carefully read the text of the rules and the accompanying instructions. The Adopting Release contains a substantial amount of interpretation of and gloss on the rules.  In addition, some prior interpretations in the Commission’s releases or telephone interpretations should be considered because they may be still be relevant.
     
  2. Each company will need to work very carefully through the treatment of each different kind of incentive plan award and equity awards in the different tables.  Frequently awards that are reported in a similar manner in one table are reported differently in other tables.  For example:

    Non-equity incentive plan compensation is reported at the date earned in the SCT, but at the award date in the Grants of Plan-Based Awards table.  Because they are included in the SCT only at the award date, grants of equity incentive plan awards are included in "Total" compensation at that date, but non-equity incentive plan awards are included in "Total" compensation at the date earned.

    Equity incentive plan awards are included with non-incentive equity awards in the SCT, but are disclosed separately in the Grants of Plan-Based Awards and Outstanding Equity Awards at Fiscal Year-End tables.

    The incremental value of any Option Awards that were repriced or materially modified during the year must be reported in the SCT, but repriced options are not required to be reported in the Grants of Plan-Based Awards table.  Materially modified Stock Awards are not required to be reported in either the SCT or the Grants of Plan-Based Awards table.  However, each repricing, material modification or waiver of any award during the last completed year must be described in narrative.

  3. If an NEO has transferred any unvested or unexercised awards, the company must closely consider the reporting requirements for each table.  All awards made to an NEO for the relevant period must be disclosed in the SCT and the Grants of Plan-Based Awards table, even if the award was transferred (with or without value) during the period.  The other tables report the transfer based on when the NEO has realizes value for the award.  Therefore, the Outstanding Equity Awards at Fiscal Year End table includes transferred awards if the transfer was without value.  The Option Exercises and Stock Vested table must report any awards transferred for value during the year, but not transfers other than for value.

By Mark Borges, Mercer Human Resources Consulting

  1. Be sure that description of option valuation assumptions is sufficiently specific. Instruction 1 to Item 402(c)(2)(v) and (vi) permits a company to cross-reference the discussion of assumptions in the company’s financial statements or financial statement footnotes to satisfy the requirement to disclose the assumptions that were used in calculating the grant date fair value of stock awards and option awards.

    Many of these discussions only contain a description of the general assumptions that were used to calculate the grant date fair value of all equity-based awards made during the year, and don’t address the specific assumptions that may have been used for executive officer grants and awards (particularly, the expected option term). In this case, a cross-reference may not be sufficient to satisfy the Instruction. The financial statement discussion may need to be enhanced, or the company may simply need to describe the specific assumptions used for grants and awards to the Named Executive Officers in a footnote to the Stock Awards and Option Awards columns of the Summary Compensation Table.
     

  2. Consider disclosing (and taking into account when tallying total compensation) dividends paid on unvested stock awards. Even though Item 402(c)(2)(v) and (vi) no longer require disclosure of dividends if factored into an award’s grant date fair value, companies should consider disclosing these amounts anyway in a footnote to the appropriate column. The incremental portion of the grant date fair value representing the right to the future dividend stream may underreport the value of this benefit to a named executive officer. This has become an increasingly sensitive area for shareholders, particularly where the dividend payments can amount to hundreds of thousand of dollars and may, in some instances, exceed the NEO’s salary for the covered fiscal year.

    If not included in the disclosure, be sure to include in the tally sheer evaluation of the CEO’s total compensation (also it may need to be discussed in the CD&A).
     

  3. Consider using a separate table to disclose the compensation items that go into the All Other Compensation column. Even though not required, and even though separate identification and quantification of the compensation items that are reflected in the All Other Compensation column is only required for items that exceed $10,000 in value, companies should consider disclosing the value of each item in a table to accompany the column. Such disclosure will enhance the transparency of the information included in the All Other Compensation column and enable shareholders to better evaluate each compensation item. Of course, where a company opts for this approach, it should also consider a separate table for its perquisites disclosure as well.

By Ron Mueller, Gibson Dunn & Crutcher

  1. Determining how and where some compensation arrangements are reported is not intuitive. Some annual bonuses are not reported in the "Bonus" column, some performance arrangements that are denominated in cash may be reported as "Stock Awards" and amounts may be reported as earned even if not paid in the fiscal year.  You may be surprised to learn that certain compensation arrangements "fall within the scope of SFAS No. 123(R)" and thus are reported as equity awards.
     

  2. Explain it in the text and footnotes. Particularly in the first year under the new rules, a Company will want to explain in Plain English what is being reported, whether the amounts reported were actually received by an executive (and if not, what conditions may apply to the receipt of that compensation) and how the amounts reported in the Summary Compensation Table tie into (and are repeated in and elaborated upon by) information reported in the other tables.
     

  3. Coordinate the disclosures with your financial statement reporting. Some of the calculations and disclosures required for the Summary Compensation Table are based on calculations and disclosures made for financial statement reporting purposes.  Be sure you understand what those are before the financial statements are prepared (which may be well before the proxy statement is prepared).
     

  4. Make sure the CEO and CFO understand and are comfortable with the manner in which the numbers in the Summary Compensation Table (and the other Item 402 disclosures) are calculated well in advance of the proxy filing date. Certifying officers do not like surprises. 

"The New Retirement Pay Tables"

By Pamela Baker, Sonnenschein Nath & Rosenthal

  1. Get started early on the new pension disclosures.  The tables are radically different from prior disclosures and preparation of the new disclosures will require the coordination of HR, the actuaries and the accountants, at a minimum.  In addition for some companies, different departments are responsible for the records on qualified plans and nonqualified plans, thereby requiring even more coordination.  The SEC instructions permit incorporation of various assumptions by cross-reference to the discussion of assumptions in the company’s financial statements or the MD&A but the financial statements are not uniform in which assumptions they state, so don’t count on being able to incorporate by reference.
     
  2. The Company should consider streamlining the number and variety of actuarial or defined benefit plans it offers to NEOs in order to simplify disclosure and avoid some of the costs of recalculating benefits from year to year and explaining shifts in benefit amounts that may occur among plans for technical reasons when the overall benefit is unchanged.  For example, a company with a traditional pension plan and an excess benefit plan and a SERP, where the benefit under the excess plan is offset by the benefit under the qualified plan and the benefit under the SERP is offset by both the benefit under the qualified plan and the benefit under the excess plan may want to eliminate the NEOs from the excess plan and simply cover them under the SERP, with the SERP benefit offset by the qualified plan benefit.
     
  3. The footnote disclosure under the non-qualified deferred compensation table (identifying what portion of the amounts shown have previously been reported as compensation in the SCT) may not paint the picture the company wants to paint.  For various reasons (e.g., mergers, promotions to NEO status) amounts electively deferred may not have been previously reported in the SCT (or elsewhere).  Companies should consider whether supplemental disclosure would be appropriate, showing what portion of the total aggregate account balance represents amounts the executive could have taken in cash but electively deferred.
     
  4. The new tabular and footnote disclosures (e.g., actuarial assumptions) are subject to the disclosure controls and procedures leading to the required CEO and CFO certifications. New controls will need to be designed or existing controls will need to be modified to capture this new data. Advance planning is needed to avoid this becoming a last-minute problem.

By Mark Borges, Mercer Human Resource Consulting

  1. When faced with a choice between alternative approaches for disclosing estimated benefits under a defined benefit pension plan, consider showing the larger amount if its receipt is not subject to a material contingency. Given the variations in features of defined benefit pension plans, it is possible that a plan may present payment alternatives or situations that are not explicitly addressed by the new rules. In an instance where this occurs and technical compliance with the rules would lead to the disclosure of the smaller payment amount, consider disclosing the larger amount with appropriate footnote disclosure highlighting the alternatives and explaining the reasons for the potential differences in the payment amounts. This will avoid confusion and any potential issues about misleading disclosure.
     

  2. Establish procedures for tracking compensation amounts reported in the Summary Compensation Table that are deferred into nonqualified defined contribution plans and nonqualified deferred compensation arrangements.  To minimize doubled-counting, the instructions to the Nonqualified Deferred Compensation Table require a company to identify amounts reported in the Table that have previously been reported as compensation in the Summary Compensation Table. Most companies do not have existing systems that easily lend themselves to tracking this information. Consider setting up an internal system that will record on an annual basis each item (and amount) of annual and long-term compensation that is subsequently deferred by a named executive officer so that this information can be presented as required to supplement the information in the table.

By Michael Kesner, Deloitte Consulting

  1. Prepare "dry run" before yearend and review the results with the Compensation Committee.  Determine if corrective action should be taken to eliminate or modify arrangements that are inconsistent with the compensation philosophy or pay environment.
     
  2. Coordinate the disclosures required by this section with the CD&A.  If appropriate, have the Compensation Committee revisit certain aspects of the retirement and deferred compensation arrangements:
     
    • Purpose of each plan or program
    • Definition of covered compensation
    • Rationale for SERP
    • Investment alternatives
       
  3. Develop list of key assumptions and data requirements that need to be made to complete the required calculations as of yearend, and coordinate approval of such assumptions by corporate accounting and outside actuaries to ensure consistency with the financial statement reporting.
     
  4. Consider terminating the nonqualified deferred compensation plan(s) and paying out the existing balances under the Section 409A transition rules to eliminate the cost of such programs and the disclosure of the program.

"The New Equity-Based Tables"

By Martha Steinman, LeBoeuf Lamb Greene & MacRae

  1. Consider the disclosure impact of your stock option award grant practices. Even if your company has never engaged in "backdating" or "forward dating," a perfectly innocuous grant practice that entails a grant date and/or price other than closing price on the date of compensation committee action will require extra disclosure (for example, if you use average of high-low or closing market price on the preceding date).  You need to weigh the (often perfectly valid) reasons for using the grant practices you use versus the additional disclosure burden and potential impact of that disclosure.  Remember that one size does not fit all!

  2. Do not underestimate the time it will take you to prepare these disclosures, including all the footnotes.  Assign someone within your organization to start collecting and compiling the needed data NOW.  Get a feel for how much data will be included in each table.

By Alan Kailer, Jenkens & Gilchrist

  1. Although much of the discussion has focused on what is required to be reported within the body of the various tables, companies must remember that there are numerous and significant requirements for disclosure in the footnotes and narrative accompanying tables, and that many of these requirements are contained in the instructions to the disclosure items rather than in the item itself.  For example:

    In the Grants of Plan-Based Awards table, when the exercise price of an option is not the closing market price, the methodology for determining the exercise price must be disclosed either by a footnote or accompanying narrative.

    In the Grants of Plan-Based Awards table, tandem grants of an incentive plan award and a non-incentive plan award need only be reported in column applicable to non-incentive plan awards, with the tandem feature noted either by footnote or narrative.

    In the Outstanding Equity Awards at Fiscal Year-End table, the vesting dates of awards held at year end must be disclosed in footnotes to the columns in which the awards are reported.

    The Outstanding Equity Awards at Fiscal Year-End table must include awards that NEO has transferred other than for value; which be identified in a footnote, disclosing the nature of the transfer.

    In the Option Exercises and Stock Vested table, for any amount realized upon vesting or exercise of an award for which receipt has been deferred, a footnote quantifying the amount and disclosing the terms of the deferral must be provided.
     

  2. Outstanding equity awards (whether or not under an incentive plan) are reported in the Outstanding Equity Awards at Fiscal Year-End table, but no reporting of outstanding non-equity incentive plan awards is explicitly required in the tables.
     
  3. In the Outstanding Equity Awards at Fiscal Year-End table, awards under an equity incentive plan are to be reported in the column for equity incentive plan awards only until the relevant performance condition has been satisfied; thereafter, equity awards are to be reported in appropriate column for other equity awards until they vest or are exercised, even if the award is subject to forfeiture conditions.
     
  4. Although the market value of Stock Awards that are not granted under an equity incentive plan must be reported in the Outstanding Equity Awards at Fiscal Year-End table, registrants have the discretion whether to report in that table the market value or payout value of Stock Awards granted under an equity incentive plan.

By Howard Dicker, Weil Gotshal & Manges

  1. There Are Additional CD&A Disclosure "Requirements" Regarding Option Grant Practices in the Body of the SEC's Adopting Release

    In the CD&A, a company is required to address matters relating the timing and pricing of stock option grants to its NEOs.  The SEC's adopting release rather than the text of the rule (Item 402(b) [CD&A]) elucidates this requirement.

    With respect to timing, the release states that if a company had since the beginning of the last fiscal year, or intends to have during the current fiscal year, a program, plan or practice to select option grant dates for executive officers "in coordination" with the release of material non-public information, the company should disclose that in the CD&A. If this is the case, the company should disclose in CD&A that the compensation committee may grant options at times when it possesses material non-public information, and the company would need to consider disclosure about how the compensation committee takes such information into account when determining whether and in what amount to make those grants.  The release, on page 25, sets forth a non‑exhaustive list of questions that a company should consider addressing in its CD&A.

    With respect to setting the exercise price, the release states that a program, plan or practice of setting the exercise price at other than the closing price on the actual date of grant will require disclosure in the CD&A (as well as in an added column to the Grants of Plan-Based Awards table).  Thus, even a company making grants to NEOs with an exercise price based on the average of the high and low sale prices on the date of grant or based on the closing market price preceding the date of grant must discuss this in the CD&A (and will also need to add a column to the table).

    Obviously, in the current environment, these matters require careful attention and, in some cases, investigation.  For example, what was the "practice" during the last fiscal year?
     

  2. Additional Columns May Be Required for the Grants of Plan-Based Awards Table

    What's the "grant date"?  If the option "grant date" is different from the date the compensation committee takes action or is deemed to take action to grant an option, a separate column is required to be added to the Grants of Plan-Based Awards table showing such date.  Remember that "grant date" and "date or grant" are now terms defined in Item 402 and refer to the grant date determined for financial statement purposes under FAS 123R.  This means you will need the assistance of an accountant because even aside from any improper conduct, the date is not always what you might have expected. 

    For example, if the compensation committee met on July 10 and made option awards but specified that the exercise price shall be the closing price of the stock on July 28 (which is intended to be two days after the earnings press release), then ordinarily the "grant date" under FAS 123R would be July 28.  Also, for example, if on November 20 the board approves a new equity incentive plan subject to stockholder approval at the next annual meeting, and on December 5 the compensation makes option awards under the plan prior to such approval, and on May 22 shareholders approve the plan, then usually the "grant date" will be May 22, the date of stockholder approval.  Take a look at paragraph numbers A77-78 of FAS 123R.

    What happens if the exercise price of an option award is less than the "closing market price" of the stock on the date of grant?  Add a column to the table and disclose the closing market price.  Don't believe this applies?  Be sure to double check.  As stated above, consider a plan or grant that specifies that the exercise price be set at the average of the high and low sale prices on the date of grant.  Or one specifying that the exercise price be the closing market price on the date immediately preceding the date of grant.  Also consider situations where the "grant date" is not necessarily what you may have expected (e.g., the stockholder approval illustration above).
     

  3. Be Prepared for Disclosing an Inventory of Outstanding Options

    The Outstanding Equity Awards at Fiscal Year End table requires disclosure of outstanding options held each NEO on an award‑by‑award basis.  This means that for each NEO there will be a separate row in the table for each outstanding option, disclosing, among other things, the number of shares underling the option, the exercise price and the expiration date. However, multiple awards may be aggregated where the exercise price and expiration date are identical.  The vesting schedules also must be disclosed in footnotes.

    Consider a company that has granted options to its NEOs on a quarterly basis during the past ten years.  It's possible there will be nearly 40 rows per NEO! That surely will requires some extra space in the proxy statement.  Whether because of this table or all the other disclosures under the new rules, companies will need to plan for proxy statements with more pages and adjust their packaging and mailing requirements.
     

  4. Disclose the number of shares pledged as security by management.  Brokerage accounts often implicate a pledge.

    Item 403(b) of Reg S-K will now require the table of management's beneficial ownership to include disclosure, by footnote or otherwise, of the number of shares that are pledged as security.  Companies should update their D&O questionnaires to capture this information (with illustrative examples of arrangements that may involve a pledge).

    Some pledges should be relatively easy to identify. For example, an executive officer has an outstanding loan to a bank, has pledged a particular number of shares, and has delivered a stock certificate for such shares to the bank.  Similarly, most hedging arrangements with brokerage firms, such as prepaid variable forward contracts and equity collars, involve a pledge of the underlying shares of the registrant's stock subject to the hedge.

    Normally, all securities (including shares of the registrant) held in a margin account at a brokerage firm are pledged to the firm as security for amounts owing to the firm.  Thus, all of the shares of the registrant held in the account could be considered pledged and disclosable. Companies should consider beneficial ownership footnote disclosure along the following lines:  "Ms. X maintains margin securities accounts at brokerage firms, and the positions held in such margin accounts, which may from time to time include shares of Common Stock, are pledged as collateral security for the repayment of debit balances, if any, in the accounts.  At March 31, 2007, Ms. X held [1,500] shares of Common Stock in such accounts."  Some brokerage customer agreements may also treat securities held in non-margin (or "cash") accounts as pledged collateral as well.

    While Item 403(b) does not specifically require disclosure of the nature of the pledge, companies should consider describing the circumstances.  One can expect that disclosure of pledges pursuant to customary brokerage arrangements will become boilerplate over time.

    Companies should note that pledge disclosure is required for directors and executive officers as a group, as well as for the directors, nominees and NEOs by person.  So pledge information for all executive officers, not just NEOs, must be obtained by the company.

    Companies should review their insider trading policy and consider reminding directors and executive officers of its application to pledges and the other implications of pledges (e.g., Section 16 sale on foreclosure).

    If no pledge disclosure is desirable, companies should encourage directors and executive officers to make other arrangements.  This could include for specific security interests, substituting other collateral if permitted, or for brokerage accounts, having the brokerage firm explicitly exclude company securities from any pledge or security provisions of the customer agreement.
     

  5. Include "directors' qualifying shares" in management's beneficial ownership table.

    Item 403(b) of Reg S-K will now require the table of management's beneficial ownership to include so-called "directors' qualifying shares."  These are securities that an individual has acquired to satisfy a requirement that such person be a security holder of a company in order to serve on the company's board of directors.  The requirement is usually imposed by law and included in the company's charter or by-laws.  It is commonly found in the banking industry and in companies formed outside the U.S.  It is not the same as a company's ownership guidelines, if the company has one.  Registrants should consider highlighting, by footnote or otherwise, the number of directors' qualifying shares included in the total number of shares beneficially owned.

    It also will be important to ascertain whether any member of the registrant's management has director qualifying shares in any parent or subsidiary of the registrant since Item 403(b) additionally requires beneficial ownership disclosure of equity securities of any of the registrant's parents or subsidiaries.

    Companies should update their D&O questionnaires to reflect this change.

"Dealing with the Complexities of Perks"

By Alan Dye, Hogan & Hartson and Mark Borges, Mercer Human Resources Consulting

  1. Identify all benefits that might be considered perks. The Commission has taken a broad view of what constitutes a perquisite. Companies should apply the Commission's guidance to determine what benefits, if any, are provided to directors or executive officers that might be considered perks. 

    2. The value of any perks identified, if they exceed $10,000 in the aggregate, will need to be taken into account in determining which executive officers will be NEOs, and will be disclosable in the Summary Compensation Table (or the Director Compensation Table).
     

  2. Establish disclosure controls and procedures to track perk usage. The value of a perk is based on the aggregate incremental cost to the company of providing the perk.  For non-cash perks that involve personal use of company assets (e.g., aircraft, automobiles, or tickets to entertainment events), calculating the cost of personal use will require tracking the extent of personal use and the cost associated with that use. Companies should develop procedures for tracking personal use, and incorporate those procedures into the company's disclosure controls and procedures.
     
  3. Revise the D&O questionnaire to elicit information about perks. The annual D&O questionnaire should be updated to elicit information about possible perks.  The questionnaire should provide examples of what might constitute a perk, to trigger recollection of infrequently provided benefits that might constitute perks and that sometimes are difficult to track through internal controls (spouse's travel to company-sponsored event, director's use of stadium skybox).
     
  4. Develop a methodology for calculating the aggregate incremental cost of perks.  Determining the aggregate incremental cost to the company of non-cash perks may require difficult calculations and/or judgments about the allocation of costs between the company and the recipient of the benefit. Determining the cost of personal use of corporate aircraft or company-owned cars, for example, may involve calculation of the cost of a particular trip as well as allocation of the fixed costs of ownership of the aircraft or car.

    Companies will need to develop a methodology in order to value perks for purposes of the compensation tables.  The methodology should be reasonable, since it will have to be explained in the proxy statement (in plain English) if the perk to which it relates has to be separately quantified in a footnote.  
     

  5. Don’t forget the foregone income tax deduction when computing the aggregate incremental cost of the personal use of corporate aircraft. Internal Code Section 274(e) limits the deductibility of expenses associated with the personal use of corporate aircraft to the amount recognized as income by the corporate executive using the aircraft. Since the aggregate incremental cost of an executive perquisite may need to encompass the indirect, as well as the direct, costs to the company of the perquisite or personal benefit, any foregone tax deduction may need to be factored into the cost calculation.
     

  6. Remember that the identification and quantification requirements for perquisites only apply to the most recent fiscal year covered in the Summary Compensation Table.  While this won’t be an issue with respect to the first year under the new disclosure rules, be aware that companies only have to describe each perquisite or quantify perquisites that exceed the greater of $25,000 or 10% of an individual named executive officer’s total perquisites for the most recent fiscal year covered in the Summary Compensation Table. This will help save space when preparing the SCT in 2008 and thereafter and providing the necessary supplemental disclosure to the All Other Compensation column.
     

  7. Club memberships that are not used exclusively for business purposes will be a disclosable as a perquisite even though the company may not incur an incremental cost for such use. The Adopting Release indicates that club memberships that are not used exclusively for business purposes will be a disclosable perquisite. In most cases, companies may opt to pro rate the cost of the membership between business and personal use for disclosure purposes. Even where there is no incremental cost to the company of such personal use, the membership will be disclosable as a perquisite if the $10,000 minimum disclosure threshold is reached. Instruction 4 to Item 402(c)(2)(ix) states that once the $10,000 disclosure threshold is reached or exceeded each perquisite, regardless of amount, must be identified by type in a footnote to the All Other Compensation column.

"How to Now Disclose Change-of-Control and Severance Arrangements"

By Scott Spector, Fenwick & West and Mike Kesner, Deloitte Consulting

  1. We suggest that a table be used to supplement the narrative explanation of benefits and assumptions. The inclusion of a table makes it easier for the reader to understand exactly what benefits an executive is entitled to receive upon a termination or a change of control.  The inclusion of a table will also aid the reader in making comparisons between executives, factual situations, and across companies.
     
  2. Appropriate cross references should be made to the Company’s CD&A discussion of employment, severance and change of control agreements, as well as other narrative or footnote discussions throughout the tables. Having cross references will help ensure that the description of arrangements is consistent, complete and accurate throughout the filing.  In addition, including footnotes to the tables will allow the information contained in the tables to be easily understood at a glance while still providing detailed and complete information.
     
  3. Care should be taken to disclose all of the definitions and all material operative assumptions and conditions that relate to triggering events for severance and change of actual payments. The definition of terms such as "Cause", "Good Reason" and "Change of Control" can have a impact on the amount of benefits to which an executive will be entitled in the event a change in control or termination occurs.
     
  4. Consider stating that the reasonable estimate (or range) of costs of Section 280G gross-up payments does not take account of mitigation for payments being paid in consideration of non-competition agreements or as reasonable compensation. The amount of a potential 280G gross-up payment can be significantly reduced by assuming that a portion of the compensation is either reasonable compensation or attributable to a non-competition agreement.  By stating that the 280G gross-up amount estimate is not reduced by these factors provides investors with the maximum cost exposure the company would be subject to in the event of a change in control.  It also avoids providing details to the IRS of the company’s ultimate tax position but preserves the company’s ability to take such positions.  In addition, the assumptions used in calculating the 280G gross-up amount should be described (for example, tax rates, option assumptions, and discount rates).
     
  5. We recommend that the Committee review a "dry-run" of this table before year end, and consider modifying these arrangements, as appropriate. This will enable the company’s compensation committee to consider whether changes to agreements are necessary or appropriate before the effective date of the new rules.

"Crafting the New Director Compensation Disclosures"

By Sue Morgan, Perkins Coie and Scott Spector, Fenwick & West

  1. Consider CD&A Discussion of the Principles of Director Compensation. The director compensation table must be accompanied by narrative disclosure addressing material factors necessary to an understanding of the information in the table.  This would generally include a description of the company's standard compensation arrangements for directors, naming directors with different compensation arrangements and describing the arrangements, and, if applicable and material, information regarding option granting practices. 

    Companies may want to consider including with these items a CD&A-type overview of the company's director compensation policies and decisions, including the overall objectives of the program, the rationale underlying each element of compensation and the method of determining specific amounts for each type of compensation. 
     

  2. Consider Describing All Perquisites Even If Below New Disclosure Threshold. The new rules require disclosure of perquisites and personal benefits only if the value is $10,000 or more for a director.  This means that directors can receive up to $9,999 of perquisites without any disclosure. (Note that related tax gross-ups are separately included in All Other Compensation and are not included in the perquisite total.)

    Companies should consider disclosing all perquisites or providing a narrative description of the types of perquisites and average or maximum amounts paid even if disclosure is not otherwise required.  Since there was no threshold under the prior rules, this disclosure would have been given in prior proxy statements and its discontinuance might concern investors.  Typical disclosable director perquisites include reimbursement for travel and related expenses for spouse travel to attend board events and free use of certain company products and services.
     

  3. Weigh the Costs and Benefits to the Company of Director Legacy and Charitable Gift Programs.  The new rules will heighten the visibility of director legacy and charitable gift programs by requiring tabular disclosure as All Other Compensation of any current costs of the programs (such as funding through insurance on the director's life) and footnote disclosure of the total dollar amount payable and other material terms.

    These programs typically obligate a company to make a donation of $500,000 to $1 million to one or more charitable institutions designated by the director, payable in installments after the director's retirement or death.  Several companies in recent years have terminated participation in the programs for new directors (including Lockheed Martin, Procter & Gamble and United Technologies).
     

  4. Address Committee Policies and Procedures for Determining Director Compensation. The new rules require a separate narrative description of the policies and procedures of the compensation committee (or other persons performing equivalent functions) for the consideration and determination of executive compensation.

    The same disclosure is required for director compensation, and will be made for the governance committee if, as at many companies, that committee determines director compensation.  Included in the disclosure is any role played by compensation consultants, naming the consultants, and describing who retains them, the nature and scope of their assignment and the material elements of the directions given to them.
     

  5. Consider Disclosing the Specific Compensation of Each Director by Name Even if Compensation Is Identical.   The new rules require disclosure of each director's compensation by name on a separate row in the director compensation table, although directors whose elements of compensation are identical may be grouped on a single row.

    Because most companies will have differences that require separate disclosure for at least some directors, for clarity companies should consider disclosing the specific compensation of each director by name rather than grouping multiple directors with the same compensation in a single row.
     

  6. Note the Differences in the Supplemental Disclosure for Outstanding Director Equity Awards. The new rules require footnote disclosure to the director compensation table of the aggregate number of outstanding equity awards held by directors at fiscal year-end, rather than tabular disclosure as for NEOs.  This requirement differs from the tabular information required for NEOs in the following ways:
     
    • The number of all outstanding vested and unvested director stock awards must be disclosed, not just unvested stock awards as for NEOs.  The aggregate year-end value of director stock awards does not have to be disclosed as it does for NEOs.
       
    • Disclosure of the number of outstanding director options may be made on an aggregate basis.  For NEOs, each outstanding option must be disclosed on a separate line, along with the exercise price and expiration date.

"The New Corporate Governance Disclosure Section"

By David Martin, Covington & Burling and Amy Goodman, Gibson, Dunn & Crutcher

  1. Consider possible revisions to the Compensation Committee charter. The new rules will add to the role of and disclosure about the Compensation Committee.  Early in the process, the Compensation Committee should review and consider revisions to its charter to reflect these changes.
     
  2. Clarify roles in compensation determinations.  New disclosures will need to cover the roles of directors, executive officers and consultants in the process of considering and determining executive and director compensation. These roles should be clear, understood and documented.
     
  3. Revisit and inventory the activities of any compensation consultant.  A company must disclose the nature and scope of a consultant’s engagement, including whether they were engaged by the Compensation Committee.
     
  4. Take advantage of company Web site for governance requirements. Increasingly, the SEC and stock exchanges allow delivery of governance information on the Web.  Under the new rules, for instance, charters for Audit Committees can be posted rather than disclosed in proxy statement.
     
  5. Coordinate with finance personnel to monitor independence related party transactions.  Armed with a list of covered persons, the accounts payable department can help flag potential transactions for disclosure or independence consideration.

"Evolving Director Independence Determinations and Disclosures"

By Amy Goodman, Gibson, Dunn & Crutcher and David Martin, Covington & Burling

  1. Update D&O questionnaires.  Review director and officer questionnaire for direct linkage with relevant listing standard and new related party disclosure rules.
     
  2. Get the independent directors involved in their status. Consider additional techniques to elevate awareness of factors that inform independence determinations and disclosure, such as separate independence questionnaires just for outside directors, yearly break-out sessions to review independence factors, and quarterly reminders.
     
  3. Check independence policies/categorical standards for clarity and optics. Review company's independence standards to make sure that they are clear and will look reasonable when disclosed in proxy statement in terms of the categories of transactions, relationships and arrangements that will and will not be considered in making independence determinations.
     
  4. Have a plan for staying current.  Develop procedures whereby independence determinations are monitored and updated as necessary.
     
  5. Coordinate with finance personnel to monitor independence related party transactions.  Armed with a list of outside directors, the accounts payable department can help flag potential transactions for disclosure or independence consideration.

"How to Handle the New Related Person Transaction Disclosures"

By Alan Dye, Hogan & Hartson and Keith Higgins, Ropes & Gray

  1. Revise your D&O questionnaire to pick up the transactions disclosable under new Item 404(a). The annual D&O questionnaire should be updated to elicit the information necessary to determine whether any director or executive officer  had a disclosable material interest in any transaction or proposed transaction since the beginning of the last fiscal year. The questionnaire should be revised to increase the transaction threshold from $60,000 to $120,000, reflect the new definition of "immediate family member," eliminate questions relating to the safe harbors in old Instruction 8(C) and Item 404(b), and solicit information relating to director independence under Item 407.
     
  2. Review the status of compensation committee members under Rule 16b-3 and Section 162(m). The elimination of the safe harbors in Instruction 8(C) and Item 404(b) may have the effect of requiring disclosure of transactions with outside directors that were not previously disclosable under Item 404(a) or (b).  Any outside director who has a relationship with the registrant that will now have to be disclosed Item 404(a) may no longer qualify as a "non-employee director" for purposes of Rule 16b-3 or as an “outside director” for purposes of IRC Section 162(m).  At the same time, the higher dollar threshold for disclosure of related person transactions may mean that some transactions that previously were disclosable will no longer have to be disclosed.  Companies should review the status of all outside directors to determine their eligibility to serve on the compensation committee.
     
  3. Adopt a written policy for approving related person transactions. Because new Item 404(b) will require disclosure of whether the company has a policy or procedures for approving related person transactions and whether the policies or procedures are in writing, companies that don't have a written policy should consider adopting one.  The policy should take into account applicable stock exchange listing standards.
     
  4. Make sure that all compensation of non-named executive officers is approved by the compensation committee.   Compensation paid to executive officers who are not NEOs is not disclosable under Item 402, but may be disclosable under Item 404(a) if not approved (or recommended for approval) by the compensation committee or a group of independent directors performing that function.  Stock exchange listing requirements generally require compensation committee approval (or recommendation) of compensation paid to all executive officers, but companies should make sure that all elements of  compensation paid to non-named executive officers (or at least those elements exceeding $120,000) have been identified and approved by the compensation committee.

"How to Adjust Your Disclosure Controls & Procedures"

By John J. Huber, Latham & Watkins, Alan Beller, Cleary Gottlieb Steen & Hamilton and David Martin, Covington & Burling

Rules of the Road: Disclosure Controls & Procedures

  1. Follow a familiar game plan — such as when you set up disclosure controls and procedures or implemented Section 404.  Use the same structures — a subcommittee of the disclosure committee or a separate task force.  Use the same type of  procedures, such as access to all sections of the company.  Use the same determination — we have to get it done by the time of the proxy statement — that we used the last time.
     
  2. Start with what you have.  Identify existing disclosure controls and procedures that apply to the new rules, compare those to what the new rules require and then bridge the gap between the two with new controls and procedures.

    3.  
  3. While much of this may look similar to what you did to implement Section 404, there is one big difference — disclosure here is very personal to senior management.  This will add a new color to the dynamics of preparing and presenting the required information, particularly when it comes to bonuses, perks and related party transactions.
     
  4. To paraphrase the sign in Bill Clinton’s campaign War Room — "It’s the spirit, stupid."  It’s not just the letter of the rule, but the spirit of it.  So you should plan and design your revised disclosure controls to implement the spirit as well as the letter of the rule in your next proxy statement.
     
  5. The CD&A is new and different and, like MD&A, may take years to develop into the kind of disclosure the SEC may want to see. As with MD&A, this will be an iterative process, one in which each year CD&A will improve. We need to try to do the best we can this year. A good CD&A depends on the information generated to prepare the charts that accompany the CD&A in the proxy statement. Don’t focus on one to the exclusion of the other.
     
  6. If your disclosure committee doesn’t already have a representative from HR, consider adding one, as well as a lawyer in the company who knows executive compensation and will learn all the new rules.  If you don’t have a lawyer with such specialized skills, consider using outside counsel this year and train an in-house lawyer to do the job on an ongoing basis.  This is a very multi-disciplinary exercise.  For example, the benefits lawyer may not be able to analyze the securities law issues or vice versa.
     
  7. Coordinate with your outside auditor.  While the outside auditor can’t be responsible for implementing these new systems, it should be involved in the process.  The outside auditor can evaluate, review and express its views on what is being done on a real-time basis.  It’s better to know sooner, rather than later, what the outside auditor’s views are.
     
  8. Coordinate with your existing disclosure controls and procedures using these three steps:  First, have a clear understanding of the relationship between internal control over financial reporting, including the substantial overlap between internal control over financial reporting, on the one hand, and disclosure controls and procedures, on the other hand.  Second, recognize that one size doesn’t fit all — don’t adopt disclosure controls and procedures that won’t be followed or are not understood.  Third, implement training as a component of the process with ongoing monitoring of compliance to ensure that, after the new systems are tested and implemented, they are used effectively by the company’s management and employees.
     
  9. Keep the compensation committee informed of what you are doing.  The policies and procedures for the compensation committee should be reviewed and revised to comply with the new rules.

    10.  
  10. These are big changes in disclosure and analysis of executive compensation and related party transactions.  The time to start is now.  Nobody has done enough to get ready for this thus far.  So don’t listen to others saying you don’t have to get going.  Unlike Section 404, these rules won’t be delayed in terms of deferring their effectiveness.

"Form 8-Ks: The Latest Guidance"

By Keith Higgins, Ropes & Gray and Alan Dye, Hogan & Hartson

  1. Fine tune whom your Item 1.01 disclosure controls and procedures pick up. The revisions to Form 8-K no longer require current disclosure when you enter into compensatory arrangements with your directors. You can stand down on your current vigilance.  But don’t fall asleep altogether and just leave it to the annual D&O questionnaire.  Compensatory arrangements with directors, and any amendments to them whether or not material, must be filed with the periodic report for the period during which they were entered into.
     
  2. Calibrate whom your Item 5.02 disclosure controls and procedures pick up. The revisions to Form 8-K now require that any retirement, resignation, termination of employment of a "named executive officer" be disclosed currently.  Previously, only the "principal officers" or directors were covered.  Because an Item 5.02 disclosure is one that carries real consequences if you miss it (i.e., loss of Form S-3 eligibility, no liability safe harbor), make sure these are picked up.  The SEC has not provided any more guidance since its 8-K FAQs about the point at which consideration of, or a discussion about, a resignation ripens to a disclosable event.
     
  3. Who the NEOs are is now absolutely clear. In response to commenters, the SEC has clarified in Instruction 4 to Item 5.02 that the named executive officers are those who were the NEOs in the most recent filing that required Item 402(c) disclosure.  To the extent there was confusion about whether someone became an NEO any sooner than that (e.g., after the end of the year but before the proxy statement was filed), that has been resolved.
     
  4. Don't worry about agreements with non-named executive officers. Agreements with executive officers who are not NEOs will not – for Form 8-K purposes - even have to be considered for purposes of determining whether they are "immaterial in amount or significance."  Remember, though, they still need to be considered when determining which exhibits to file with periodic reports.
     
  5. Cash plans and equity plans are on equal footing. Under the FAQs that applied to the former rules, options awarded to NEOs that were pursuant to plans and award agreements previously disclosed did not require separate disclosure on Form 8-K.  The FAQs were silent as to cash awards.  Under the new rules, awards of either cash or equity that are materially consistent with previously disclosed terms need not be separately disclosed provided they are disclosed under Item 402(b) when required.
     
  6. Don't think that disclosure of arrangements with NEOs are a thing of the past. Although the new rules negate the Item 601(b) presumption that any contract or arrangement with an NEO is material, you are still required to disclose the entry into any "material" arrangement with an NEO, and any material amendment to an existing arrangement.  Materiality determinations will still need to be made, and it is likely that prudence will dictate disclosure in any close cases.
     
  7. Report on Form 8-K any salary or bonus for an NEO that was not determinable when the Summary Compensation Table was last filed. If an NEO's salary or bonus for the most recent fiscal year has not yet been determined when the company files its proxy statement (or Form 10-K), the company must say so in a footnote to the Summary Compensation Table and later, when the omitted amount is determined, file an 8-K to update the affected columns of the table (including the "total compensation" column).   So, when salary or bonus information is omitted from the Summary Compensation Table, make sure controls and procedures are in place to get an 8-K filed once the amounts are finalized.

"How to Document Your Compensation Decisions"

By Michael Kesner, Deloitte Consulting

  1. Work backwards!  First draft the CD&A, then highlight all the statements that you need to support and document.
     
  2. Since some policies or plans have been around for a long time, you may have to go back several years to identify when a policy or plan was first adopted.  If you are lucky there were minutes or the adopting resolutions provide the rationale for the program.
     
  3. Conduct a clean slate review of the existing policies and plans with the Compensation Committee.  Evaluate if the existing programs, peer group, survey methodology, competitive benchmarks, etc., should be continued or modified to fit the new environment.
     
  4. "Run the numbers." Be able to back up your decisions with quantitative as well as qualitative information.
     
  5. Develop a Board of Director/Compensation Committee "handbook" that details the various programs, the rationale for the programs and the methodologies used to, for example, calculate long term incentive values or benchmark pay.  Make sure the handbook is updated annually and make it available to new Board members.

"Avoiding Liability for Executive Compensation Disclosures"

By Dixie Johnson, Fried, Frank, Harris, Shriver & Jacobson

  1. Avoiding Liability – Ask not whether to disclose, but how to disclose. The SEC’s release makes clear that one of the guiding principles of the new rules is to ensure that all compensation is disclosed.  Under the old rules, some believed that compensation that did not squarely fit within a table column did not need to be disclosed, or that some benefits to corporate executives were not technically compensation.  With the new rules, the SEC has stressed that the "All Other Compensation" column on the Summary Compensation Table must include all compensation that does not fit within the other columns.  Disclose compensation even if it does not fall squarely within a "box."
     
  2. Avoiding Liability – Be especially careful when describing expenses as "travel and entertainment."  In the entire 436 page executive compensation release, only two enforcement actions are cited, both involving perquisites and personal expenses.  In both cases, the SEC took action against companies that included substantial perks to executives that were classed as "travel and entertainment" such as housekeeping, car maintenance and family vacations.  The SEC’s release states that proper disclosure of perks should be approached "thoughtfully," and that "travel and entertainment" cannot be used as a catch-all category to avoid disclosure of individual benefits.
     
  3. Avoiding Liability – Pay special attention to the characterization of stock options.  Recent scandals regarding option backdating were very much in the minds of the Commission when it enacted the new rules.  As a result, the rules emphasize proper disclosure of options practices, particularly those relating to option grant dates and exercise prices.  In a speech delivered the day the rules became final, Commissioner Atkins specifically noted that deliberately mischaracterizing option practices to avoid tax or accounting consequences will result in enforcement actions.  While it was comforting to hear Commissioner Atkins’ confirmation that the enforcement staff will attempt to distinguish between "nefarious" and "innocuous" options practices, many companies are currently spending significant time and energy dealing with investigations of what may ultimately be deemed at most to have been "innocuous" errors.  Particularly in this environment, erring on the side of caution in disclosing option practices is advised.
     
  4. Avoiding Liability – Remember that the Compensation Discussion and Analysis is "filed" with the SEC.  Under the new rules, the CD&A section is marketing material that is "filed" with the Commission.  This means that statements in the CD&A are subject to all of the liability provisions of the Securities Exchange Act of 1934, and when included or incorporated in a registration statement, the Securities Act of 1933.  This is especially important given that the scope of the CD&A is not limited to compensation within the last fiscal year.  Rather, it may be necessary to include discussion of compensation in prior years, post-termination compensation agreements, on-going compensation agreements, and policies that apply on a going-forward basis. While forward looking information in the CD&A will receive the protections of the statutory safe harbor for forward-looking statements, all disclosures in the CD&A should be written with great care.
     
  5. Avoiding Liability – Certify with care.  Commissioner Atkins also pointed out that by requiring the CEO and CFO to certify the CD&A section, the new rules have the curious effect of requiring them to certify the discussion of the policies and decisions regarding their own compensation.  Certifying officers should ensure that the file supporting their certifications includes confirmation from the Compensation Committee that the disclosures accurately reflect the policies and decisions as they implemented them when deciding the senior executives’ pay.

"State Law Issues: How to Document Your Compensation Decisions (and Avoid Liability)"

By John Grossbauer, Potter Anderson & Corroon
 
Delaware Law Issue Practice Tips
1.   Board/Committee Approval

 
  • When approving option grants at meetings:

    --  Approve a list of specific grants whenever possible.

    --  Consider ratifying any grants not made by the board or a committee at the next regular meeting.  Note however, the ratification should be of a list of specific grants, not a generic "bless anything that moves" ratification.
     

  • When approving option grants by Unanimous Written Consent:

    -- "As of" dating is not effective (except perhaps as evidence of intent to ratify earlier-dated grants).  Board/Committee consents are not effective until signed by all members and delivered to the corporation.

    --  Consider use of email consents (but make sure your bylaws permit this practice) to facilitate the prompt collection of consents and to provide evidence of the date of their transmission to the corporation.
2.   Delegation to CEO of Authority to Grant Options
  • Consider making the CEO a single-member board committee.  This eliminates many of the Delaware law concerns about the authority of the CEO to issue options (and, as described below, is required to permit the CEO to make awards of restricted stock and, possibly, SSARs and RSUs)

    --  Make sure the corporation’s certificate of incorporation and bylaws permit single-member committees.

    --  Make sure the delegation to the CEO complies with the terms of all applicable plans.

    -- If the company was incorporated before July 1, 1996 and has not opted into DGCL §141(c)(2), make sure the committee authority expressly contemplates the issuance of stock and options.

    -- The full board ought to approve the appointment of the CEO as a committee to eliminate any doubt about whether the compensation committee had the authority to create committees.  Remember, the "CEO Committee" is not a subcommittee of the Compensation Committee unless the CEO is a member.

    --  The CEO as a committee may not delegate his/her authority to approve grants.

    --  The compensation committee should oversee the CEO’s exercise of delegated authority.
3.   Delegation to one or more officers (or a "management committee") of the authority to issue options raises several Delaware issues that must be kept in mind in designing the delegation and approval process.
  • DGCL § 157(c) requires that there be an overall cap on the number of option shares the officers may issue.  Caps on grants to individual employees are not enough.
     
  • Officer authority to grant options may only extend to determining (a) who gets options and (b) how many each person gets. Thus, all other terms must be fixed by the Board or by a duly authorized committee, including price.  However, formula pricing (e.g. market price on grant date) is permitted.
     
  • A delegation to multiple officers should make clear how the officers may evidence approvals.  For example, must a "management committee" meet and act as a group, or can one or more individuals approve grants (and if so, by what process?)
     

  • There should be continued oversight by the compensation committee of the grants made pursuant to delegated authority through periodic reporting.
     

  • CAUTION:  Delaware law does not permit officers to make awards of restricted stock.  The board or a duly authorized committee must approve all restricted stock awards.

    --  This restriction should not apply to SARs but may apply to stock-settled SARs depending on the terms of the plan.

    --  RSUs need to be carefully drafted so that the shares are not deemed "issued" on the date of grant but rather constitute a "right" to receive stock in the future.

    --  Use of a board committee (including a single-member committee) to grant SSARs and RSUs can eliminate these issues.