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SEC Eases Proposed Compensation Disclosure Rules

July 27, 2006
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The Securities and Exchange Commission gave some relief to employers with its final rules on executive compensation disclosure. But the rules raised questions for their consultants, who are anxious to see the final version.

The rules, issued on July 26, addressed some, but not all, of the concerns that companies expressed to the agency over the past few months.

One major concession the agency made was to take out a requirement popularly known as "The Couric Rule," which got its name from television news anchor Katie Couric. The rule, which would have forced public companies to disclose the compensation of as many as three employees whose compensation was higher than the lowest-paid named executives, was met with fierce opposition. Entertainment and financial services companies--which often have star talent, such as Couric, who make more than their top executives--were especially opposed to the proposed rule. Disclosing the compensation of these employees would put these firms at a competitive disadvantage, the companies argued.

The SEC changed the rule to require that companies with stock market values exceeding $700 million disclose the pay and title of as many as three high-paid employees who make policy decisions. Limiting the rule to policy-makers puts it more in line with the SEC’s original intentions, says Mark Borges, a principal at Mercer Human Resource Consulting.

"I think companies will have a lot less trouble with this now," he says.

The SEC’s decision to take out a requirement that would have forced companies to include the value of executives’ pension benefits and earnings on deferred compensation in the "total compensation" table of their proxies also came as a relief to employers.

"Companies were very concerned about how they were going to calculate the change in value of pension accruals for a select cadre of people," says Steven Seelig, an executive compensation consultant at Watson Wyatt Worldwide. "Now assembling the data is going to be much easier."

But the SEC didn’t go as far as some companies had hoped.

Companies will still have to disclose perquisites and include a "Compensation Discussion and Analysis" section in their proxy statements, where they explain the metrics they used to determine compensation. This disclosure must be signed by the CEO and CFO and filed with the SEC as part of the company’s proxy statement. This provision raised concerns among employers who noted during the comment period that the CEO and CFO are not supposed to be involved in compensation discussions, and thus shouldn’t have to certify the information.

To address that concern, the SEC tweaked the final rule to say that the compensation committee has to issue the report with a statement that says it has shared its conclusions with management.

"Some companies had hoped they would have taken out the requirement altogether," Seelig says.

One major change to the rule is a requirement that companies explain how they arrived at the exercise price of their stock options if the price is lower than the value of the options on the date of the grant. This part of the rule is in direct response to the current scandals involving companies backdating their stock options, experts say.

More employers will start grant options at annual or semiannual points of the year rather than erratically throughout the year as a result of this requirement, says Alan Johnson, a compensation consultant in New York City.

"That way there won’t be any argument about what the compensation committee might have known about company events," he says.

One aspect of the rule that consultants are anxious to get clarity on is related to what companies will need to disclose regarding their relationships with consultants.

The original SEC proposal would have required companies to disclose which compensation consultants they worked with and which management members spoke with the consultants.

"If that part is in the final rule, it means compensation consultants will be viewed with a skeptical eye," says Steven Hall, a compensation consultant with Steven Hall & Partners in New York City. "What happens if I make a recommendation and the company doesn’t listen and does something egregious? We could get stigmatized with it."

Publication of the final version of the rule is expected in the next several days. It will take effect in proxies for companies whose fiscal year ends after December 14.

Jessica Marquez

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