0. Panelists: Mark Borges and Ron Mueller
The SEC's Executive Compensation Disclosure Rules: Results in the First Year
EXECUTIVE COMPENSATION: Strategy, Design, and Implementation ALI-ABA New York, NY June 21-22, 2007
Panelists: Mark Borges and Ron Mueller

1. Early Expectations for New Executive Compensation Disclosures
Disclosures will be long:
United Health: 105-page proxy, 60 pages of executive compensation, 25-page CD&A
Average length of compensation disclosures: 29 pages
Almost 51% of proxy statement
Focus on new “total compensation” number:
Instead, lots of variety in how that number is viewed
New insights on perquisites, post-employment compensation and change in control arrangements
Extensive new disclosures resulting in ISS withhold vote recommendations
NY Times Article: “More Pieces. Still a Puzzle.” (4/8/07)

2. Compensation Discussion & Analysis
Early reactions:
Chairman Cox: “overlawyered” and “disappointed with the lack of clarity”
John White: laments lack of “analysis” but notes, “Even if plain English principles are faithfully applied, under the new rules there may very well be substantially more disclosure required overall.”
Little feedback to date from institutional investors
Reaction of individual stockholders: What happened to the five-year stock performance graph?

3. Compensation Discussion & Analysis
Six key aspects of named executive officer compensation to be described:
The objectives of the registrant’s compensation programs;
What the compensation program is designed to reward;
Each element of compensation;
Why the registrant chooses to pay each element;
How the registrant determines the amount (and, where applicable, the formula) for each element; and
How each compensation element and the registrant’s decisions regarding that element fit into the registrant’s overall compensation objectives and affect decisions regarding other elements of compensation.

4. Compensation Discussion & Analysis
Companies struggled with:
Length of the CD&A: some SEC staff compared it to the MD&A, others compared it to the “Overview” section of an MD&A
How to format the CD&A: Q&A format; use of charts and tables
Whether (and how) to explain differences from the SCT
How much context to provide on the operation of compensation plans and grants: CD&A vs. narrative following SCT vs. other tables’ footnotes and text
How much to describe process: CD&A vs. Item 407(e) disclosure vs. Compensation Committee report

5. Compensation Discussion & Analysis
Companies struggled with:
Discussion of performance targets
Discussion of role of the CEO
How the amount and mix of compensation elements was determined
How to describe benchmarking and use of peer groups
Reasons for retirement programs, severance, and change-in-control arrangements

6. Compensation Discussion & Analysis
New Compensation Committee Report:
Compensation Committees were more involved in the disclosure process than in past years
What did the Compensation Committee discuss with management
Will the second year be different?
What was the role of the Audit Committee and the Board?

7. Impact on NEOs
One survey indicated that the average number of NEOs was 5.8; some companies had 7 or 8.
CFOs were frequently not otherwise among the highest paid executives.
Recent Section 162(m) interpretive guidance excluding CFOs in most cases.
Future effects: variability in NEOs and disclosure of severance arrangements.

8. Summary Compensation Table
Name and Principal Position
Year
Salary ($)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
NEOs
Difficult Issues:
Bonus vs. Non-Equity Incentive Plan Compensation
Annual incentives vs. long-term incentives

9. Summary Compensation Table
Name and Principal Position
Year
Salary ($)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
NEOs
Difficult Issues:
What is treated as a Stock Award or Option Award
How to reference assumptions used for FAS 123(R) calculations
How to describe the amounts appearing in the equity award columns

10. Summary Compensation Table
Name and Principal Position
Year
Salary ($)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
NEOs
Difficult Issues:
What types of severance payments are reported as All Other Compensation
What goes into footnotes vs. what goes into narrative disclosure

11. Disclosure of Performance Criteria
Arrangements treated as Non-Equity Incentive Plan Compensation rather than Bonuses if:
Intended to serve as incentive for performance to occur over a specified period;
Outcome with respect to performance targets substantially uncertain when established; and
Target communicated to executive.
Wide variety in practice on how to describe and categorize incentive and bonus arrangements, reflecting wide variety of practice on the manner in which performance criteria are applied

12. Disclosure of Performance Criteria
CD&A and tables must disclose criteria and specific target levels for quantitative or qualitative performance factors unless the criteria or factors involve confidential trade secrets or confidential commercial or financial information.
Standard for confidentiality is the same as applies for confidential treatment requests, but no need to file a CTR.
If criteria or targets are not disclosed, must discuss how difficult or how likely achievement of the targets will be.
John White has singled this out as one area of review.

13. Summary Compensation Table All Other Compensation Column
Name
Perquisites ($)
Tax Reimbursements ($)
Insurance Premiums ($)
Company Contributions to DC Plans ($)
Severance Payments/Accruals ($)
Change in Control Payments/ Accruals ($)
NEOs
Table not required but may be helpful.

14. Perquisites Two part test:
Not a perquisite if integrally & directly related to performance of duties;
Does it confer a direct or indirect benefit that has a personal aspect and is not generally available to all employees on a non-discriminatory basis.
Staff interpretation distinguishes between perquisites where incremental cost is reimbursed vs. perquisites where total cost is reimbursed
Obligation to describe incremental cost technique applies whenever a perquisite is required to be quantified
Debate on how to treat perquisites’ tax impact on company

15. Grants of Plan-Based Awards Table Grant of Plan- Based Awards in Fiscal Year 200x
Estimated Future Payouts Under Non-Equity Incentive Plan Awards
Non- Equity Rights (#)
Estimated Future Payouts Under Equity Incentive Plan Awards
All Other Stock Awards: Number of Shares of Stock or Units (#)
All Other Option Awards: Number of Securities Under-lying Options (#)
Exercise or Base Price of Option Awards ($/Sh)
Market Price on Grant Date ($)
Grant Date Fair Value of Stock and Option Awards
Name
Grant Date
Approval Date
Threshold ($)
Target ($)
Maximum ($)
Threshold (#)
Target (#)
Maximum (#)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
NEOs
Separate line for each grant; Importance of identifying types of awards/arrangements appearing in different rows
Timing issues: reporting annual arrangements that also appear in SCT and reporting equity grants based on FAS 123(R) standard
Format does not accommodate pure “formula” arrangements well

16. Outstanding Equity Awards at Fiscal Year End Table Outstanding Equity Awards at 200x Fiscal Year End
Option Awards
Stock Awards
Name
Number of Securities Underlying Options (#) Exercisable
Number of Securities Underlying Unexercised Options(#)
Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
Option Exercise Price ($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested (#)
Market Value of Shares or Units of Stock That Have Not Vested ($)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
NEOs
Grant by grant reporting for options; aggregate reporting for each type of other awards
Lengthy tables and even longer footnotes to disclose vesting schedules
Did not include most sought-after information: intrinsic value of options

17. Option Exercises and Stock Vested Table Option Exercises and Stock Vested in Fiscal Year 200x
Option Awards
Stock Awards
Name
Number of Shares Acquired on Exercise (#)
Value Realized Upon Exercise($)
Number of Shares Acquired upon Vesting (#)
Value realized upon Vesting ($)
(a)
(b)
(c)
(d)
(e)
NEOs
Report gross, not net, number of shares exercised or vested
Stock awards includes more than just service-based restricted stock
Complications from dividend equivalent shares on RSUs and share deferrals

18. Pension Benefits Table Pension Benefits for the 200x Fiscal Year
Name
Plan Name
Number of Years of Credited Service (#)
Present Value of Accumulated Benefit ($)
Payments During Last Fiscal Year ($)
(a)
(b)
(c)
(d)
(e)
NEOs
Wide variety in extent of discussion of benefit formula
Difficult issues with cash balance plans
Confusing presentations due to requirement of a separate row for each plan and variations in available forms of distribution
Many plan descriptions were not “succinct”

19. Nonqualified Deferred Compensation Table Nonqualified Deferred Compensation for the 200x Fiscal Year
Name
Executive Contributions in last fiscal year ($)
Registrant Contributions in last fiscal year ($)
Aggregate Earnings in last fiscal year ($)
Aggregate Withdrawals/ Distributions ($)
Aggregate Balance at last fiscal year end ($)
(a)
(b)
(c)
(d)
(e)
(f)
NEOs
Variety of practice on whether table is presented on an accrual basis (to tie to the SCT) or on a cash basis
Complications on reporting RSUs and dividend accruals
Some companies provided detail on investment funds and rates of return

20. Termination/Change in Control Payments
Tedious and time-consuming preparation
Often the longest or (after CD&A) second-longest disclosure section
JC. Penney – 28 pages (1/3 of proxy), 11 tables, 100+ footnotes
Wide variety of formats:
– separate presentation for each NEO
– separate presentation for each triggering event
– separate presentation for each type of benefit

21. Termination/Change in Control Payments
Interpretive questions:
How to report equity values
intrinsic value
Black-Scholes value
unexpensed 123(R) value)
Does the post-termination term to exercise options get valued
Disclosure of retirement benefits
What can be excluded as a broad-based arrangement

22. Termination/Change in Control Payments
Extensive disclaimers and descriptions on what is and is not included in the presentation
Not much discussion on assumptions used in calculating golden parachute payments
Not many proxy statements presented a range of amounts payable
Variety on extent of disclosures provided for “non-controversial” triggers: retirement, death, etc.

23. Director Compensation Table Director Compensation in Fiscal 200x
Name
Fees Earned or Paid in Cash ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Change in Pension Value and Nonqualified Deferred Compensation Earnings
All Other Compensation ($)
Total ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Directors
Each director on a separate row unless all elements/amounts identical
Footnote disclosure of aggregate number of stock awards and aggregate number of option awards outstanding at fiscal year end
Some companies included an additional table describing standard compensation arrangements
Some companies included a “mini-CD&A”