The SEC's New Rules on Executive Compensation
Yeaton, Kathryn, The CPA Journal
Illuminating the Disclosure Requirements
Executive compensation has come under intense scrutiny in recent years, with numerous controversies over compensation, retirement, and severance packages. In response to investors' criticisms of inadequate and confusing executive compensation information, the sec has been pushing toward increased transparency and disclosure of crucial elements of executive compensation packages. On July 26, 2006, the sec adopted new rules addressing "Executive Compensation and Related Person Disclosure." As of the date of the sec vote, the sec had received in excess of 20,000 comments on the proposed changes. According to sec Press Release 2006-123, this is the greatest interest shown in any sec revision in the commission's 72-year history. The amended rules provide for disclosures that incorporate the changing trends in executive compensation, and provide a clearer executive-compensation picture for the investing public. Since the changes were adopted in July 2006, however, the sec has continued to examine compensation issues and, as a result, adopted interim final rules in December 2006 that amended the July 2006 rules.
While executive and director compensation disclosures have been required since 1933, prior to July 2006 the last substantial revision to the rules was made in 1992. The 436-page document approved in July 2006 made sweeping changes to the existing executive compensation disclosure requirements. Those amendments substantially adopt the rules that the sec proposed to the public on January 27, 2006, with modifications in certain areas to address concerns raised in the comment process. The July amendments became effective November 7,2006 (the rule was published in the Federal Register on September 8, 2006, and became effective 60 days after publication), and apply to disclosures required in proxy and information statements, periodic reports, current reports, and other related sec filings. As finalized, the rules are effective for Forms 10-K and 10-KSB for fiscal years ending on or after December 15, 2006, and for Form 8-Ks filed for triggering events that occurred on or after November 7, 2006.
The most recent amendments adopted in December 2006 became effective on December 29, 2006, with compliance required for proxy statements, information statements, and registration statements filed on or after December 15, 2006, as well as for Forms 10-K and 10-KSB filed for fiscal years ending on or after December 15, 2006.
Overall, the July 2006 amendments require that companies prepare a thorough discussion and analysis on compensation, broaden the scope of required narratives, and provide additional quantitative compensation information. Perhaps most significant, these amended rules require that certifications under the Sarbanes-Oxley Act of 2002 (SOX) apply to the information presented in the disclosures. These certifications place increased responsibility for compensation disclosures on corporate officers.
The disclosures required under the previous rules did not adequately reflect how executive compensation packages have evolved and increased in complexity over time. The amended rules are intended to better disclose these new forms of compensation and provide sufficient flexibility to address additional forms and types of compensation as developed in the future. Exhibit I provides an overview and comparison of the most significant rule changes.
Compensation Discussion and Analysis
The amended rules eliminate the Board Compensation Committee Report on Executive Compensation, replacing it with the more comprehensive Compensation Discussion and Analysis (CD&A) and the new Compensation Committee Report. In response to concerns voiced by commenters on the proposed rules, the sec adopted a Compensation Committee Report similar to the Audit Committee Report already required. The Compensation Committee Report is deemed "furnished" by the compensation committee rather than "filed" by the company and, as such, is not subject to the civil liabilities imposed under section 18 of the securities Exchange Act of 1934. …