The SEC last month sent out roughly 300 letters to large and midsize companies, with about 50 more mailed this month, spokesman John Nester said. Those companies had 30 days to respond to questions, but some petitioned for additional time so that they could meet with their compensation committees.
Among the issues of focus for the SEC, according to several experts who have reviewed the letters, were disparities in pay between the CEO and other executives, performance benchmarks used to set compensation levels and detailed information about a company’s compensation consultant.
Rules passed last winter required companies to include both tables and a narrative explaining how executives are compensated. Some have called for more details in how companies address such issues as performance benchmarks and deferred compensation, arguing that filings aren’t written as clearly as the SEC had hoped.
However, the SEC shouldn’t prescribe how companies write up their analysis and should preserve flexibility, said Amy Goodman, a partner with Gibson Dunn who has reviewed about 20 of the letters. “This isn’t like a tax return,” she said. “Exec comp varies a whole lot from company to company.”
The SEC has asked companies for “greater specificity” in how compensation levels are set, according to people who have reviewed the letters. But by requesting detailed narratives in specific formats, the SEC may be contradicting Chairman Christopher Cox’s push for more plain-English disclosures, critics say.
Furthermore, some of the questions in the letters address issues difficult to answer in some cases, according to Suzanne Hanselman, a partner at Baker Hostetler who has also reviewed several letters. For example, she said, explaining why a CEO makes more than a CFO is an easy question to answer when the CEO has a large amount of stock options accrued over a stretch of time, but in other cases the pay disparity may be based on more subjective data and so may not be as easily explained.
Although the time frame for responding to the SEC letters is tight, especially for companies that hadn’t already planned on convening with their boards of directors and compensation committees, most targets can breathe easy because no rules are expected until next summer at the earliest. An SEC staff report expected later in the fall may serve as de facto regulation for many companies, requiring certain additional data in filings.
John White, director of the SEC’s division of corporation finance, said this summer that most of the filings reviewed by the agency were in “good shape,” but that additional revisions may be required. The SEC will not force companies to restate because of the revisions, except in a few cases, sources say.
The SEC letters and the forthcoming report may shape company filings further.
“The SEC wanted to send a broader message,” said Mark Borges, a principal at Mercer. “The SEC reaction was toned down from [earlier this year].”
A September 7 analysis by Mercer of about two dozen of the letters found that most of the questions were for future filings, and do not require immediate response to the SEC. The SEC may also focus on additional areas in its fall report, such as perks, which were largely ignored in many of the letters, Hanselman says.
Executive compensation rules, the hottest issue at the SEC last year and what Cox has called his legacy at the agency, aren’t likely to simmer down. Congress is pursuing several bills that would grant shareholders a greater say in the compensation process, and further action is expected to come from shareholder proposals in the coming proxy season.