Equity Compensation Disclosure Under the New Proxy Rules
Sep 13, 2006
In this article, we discuss the new SEC proxy disclosure requirements related to equity compensation.
It's not your father's proxy any more.
On July 26, the Securities and Exchange Commission (SEC) unanimously voted to adopt a final rule on Executive Compensation and Related Person Disclosure (from here forward, we'll refer to this as proxy). In addition, the SEC re-proposed the part dealing with non-executive officers, and seek comments on that section. The SEC received more than 20,000 comment letters on its original proposal. In this article, one of a series of articles on the final rule, we'll discuss the section of the rule dealing with equity compensation. We will focus on the Outstanding Equity and Options Exercised and Stock Vested tables.
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Summary Compensation Table
Grants of Plan-Based Awards
Outstanding Equity Awards at Fiscal Year-End
Options Exercised and Stock Vested
Pension Benefits
Non-Qualified Deferred Compensation
Director Compensation
Disclosure about equity compensation is not new to the proxy disclosures. Under the old proxy disclosure requirements, information about option and stock awards were summarized in various tables. The SEC viewed that the old rule fell short in a number of ways:
- Inconsistent treatment of options versus stock awards;
- Ineffective basis for comparison of equity compensation among companies; and
- Incomplete year-end snap-shot of all equity award details.
The new rules deal with each of these issues by expanding the old option exercises and year-end values into two tables that now report both option and other equity awards. All equity awards are now quantified at grant based on their grant date fair value in the Summary Compensation Table. Lapses of stock award restrictions are now shown in the same table as option exercise. A clear and complete picture of outstanding equity awards at fiscal year-end that includes a differentiation between incentive (performance-based) and non-incentive equity awards.
The Grants of Plan-Based Awards table covers all long-term incentive awards. This table was previously discussed in our article on executive compensation disclosure.
Outstanding equity awards at fiscal year-end
The prior rules were inconsistent in their treatment of option versus stock awards, and those with performance criteria and those without. Furthermore, the old rules did not have specific requirements to disclose information about outstanding equity awards. Numerous companies still disclosed this information in a wide variety of formats. The new rules clear up this confusion by requiring an outstanding equity awards table that contains information about awards that have been granted but the ultimate outcomes of which have not yet been realized.
| Option Awards | Stock Awards | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Name | Number of Securities Underlying Unexercised 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) |
| PEO | |||||||||
| PFO | |||||||||
| A | |||||||||
| B | |||||||||
| C | |||||||||
The table is broken into two parts, one for option awards and the other for stock awards. Incentive and non-incentive awards are reported separately within each section. The disclosure for option awards includes the number exercisable, number unexercisable, exercise price, and expiration date. Each award should be reported on its own line. Incentive options have their own place holder for the number unexercisable, but will use the same exercise price and expiration date columns as non-incentive options.
The final columns relate to the number and market value of nonvested stock and equity incentive plan awards. Unlike the outstanding option awards requirement, stock awards are disclosed in aggregate. Although the nonvested stock award and market value disclosure is straightforward, the equity incentive plan awards required additional guidance from the SEC. The instructions specify that the number of awards reported (column (i)) and the payout value (column (j)) is based on achieving the threshold performance goals. If the previous fiscal year's performance has exceeded the threshold criteria, the amounts reported shall be based on the next highest performance measure. This requirement also applies to the number of incentive options reported in column (d).
Once the relevant performance condition has been satisfied, if the stock remains unvested (or the option unexercised), the awards are reported in the non-incentive columns, as appropriate.
Options exercised and stock vested
The old rules required the tabular disclosure of options exercised and the value realized during the last fiscal year. This requirement has been expanded to include the number of stock award lapses and the value realized.
| Option Awards | Stock Awards | |||
|---|---|---|---|---|
| Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) |
| (a) | (b) | (c) | (d) | (e) |
| PEO | ||||
| PFO | ||||
| A | ||||
| B | ||||
| C | ||||
Note that the original grant date fair value for these awards was reported in the Summary Compensation Table. This table is intended to provide a more complete picture of the amounts realized at the end of the award's life.
What should companies do now?
The proxy process will be much more time-consuming than it has been in the past. No longer can companies begin work on the executive compensation disclosure a day or two before the due date. Vast numbers of complex tables, containing information never before disclosed, will now be required. Further, the group of named executives may be more likely to change from year to year, as this determination will now be based on Total Compensation as opposed to just salary plus bonus. Companies may need to track compensation data for a much larger group.
The requirements for the Outstanding and Exercise tables have not changed significantly; however, the time needed to gather, prepare, and review the disclosures will be significant. In addition, investors will be scrutinizing the revised equity disclosures more carefully than ever before. It is not too early for registrants to begin their planning process with regard to these tables.
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