Executive and Director Compensation Disclosure Toolkit

Practical Law Toolkit w-024-6512 (Approx. 6 pages)

Executive and Director Compensation Disclosure Toolkit

by Practical Law Employee Benefits & Executive Compensation

Maintained • USA (National/Federal)

Resources to assist reporting companies in preparing their executive and director compensation disclosures for their proxy statements, annual reports on Form 10-K, certain registration statements, and other periodic filings.

Item 402 of Regulation S-K (17 C.F.R. §229.402) requires reporting companies to disclose the compensation of their named executive officers (NEOs) and directors in the company's proxy statement and annual report on Form 10-K for the company's annual meeting of shareholders.

This compensation disclosure may also be required in the registration statement for a securities offering registered under the Securities Act of 1933 (for example, in a Form S-1 related to an initial public offering).

Since July 2006, when the Securities and Exchange Commission (SEC) overhauled its executive compensation disclosure rules, companies have been required to present a multitude of compensation information in their filings, including:

A principles-based overview of the company's compensation policies and objectives, called the compensation discussion and analysis (CD&A) section.
A comprehensive summary compensation table setting out all elements of compensation, including robust disclosure of perquisites.
Compensation tables and narrative disclosure regarding equity and incentive compensation, retirement benefits, deferred compensation, and amounts potentially payable on an NEO's termination of employment or a change in control of the company.
A discussion of the relationship between the company's compensation policies and practices for all employees and how they relate to its risks and risk management if the risks arising from those policies and practices are reasonably likely to have a material adverse effect on the company.
A compensation table and related narrative disclosure setting out the compensation paid to the company's directors, including disclosure of perquisites.

It is best practice to include an executive summary or overview section at the beginning of the CD&A which may include information such as:

A description of any recent changes to the company's compensation policies and practices and the rationale behind them.
A discussion of any stockholder engagement on executive compensation, including whether such engagement has resulted in the adoption of environmental, social and governance (ESG) performance metrics.
A summary of how and why the company selected the members of its peer group for purposes of benchmarking executive compensation.

Changes to federal securities rules and regulations over the past several years have increasingly focused on enabling stockholders to make more informed voting decisions. Reporting companies must now also disclose the following information:

The median of the annual total compensation of all employees other than the chief executive officer (CEO), the CEO's total annual compensation, and the ratio between the two (pay ratio disclosure) (17 C.F.R. §229.402(u)).
Whether employees or members of the board of directors are permitted to engage in transactions to hedge or offset any decrease in the market value of equity securities (hedging disclosure) (17 C.F.R. §229.407(i)).
In any proxy or information statement for which Item 402 disclosure is required:
- disclosure in tabular format of certain executive compensation and financial performance measures for the company's five most recently completed fiscal years; and
- clear descriptions of the relationship between the executive compensation actually paid to the CEO and, on average, the other NEOS, and the company's cumulative total shareholder return (TSR), net income, and other company-selected measure; and the relationship between the company's TSR and that of the company's peer group (pay versus performance disclosure) (17 C.F.R. §229.402(v)).
Their Dodd-Frank clawback policies (as an exhibit to certain securities filings) and any actions they have taken pursuant to their clawback policies (this disclosure is not limited to NEOs), and any amounts that have been recovered from an NEO for a particular fiscal year (by updating the Summary Compensation Table to reflect the reduced compensation).

This information is scrutinized by proxy advisory firms, such as Institutional Shareholder Services Inc. (ISS), and institutional investors and by shareholders with the right to vote on the compensation of the NEOs at least once every three years in a non-binding "say on pay" vote.

As part of the 2006 rule changes, the SEC also made changes to Form 8-K, adopting enhanced disclosure requirements in Item 5.02, which requires disclosure generally within four business days of:

Elections of new directors.
Appointments of certain executive officers.
Departures of directors or certain executive officers.
The adoption of a new material compensation plan or agreement or a material amendment of an existing plan or agreement.

This Toolkit contains continuously maintained resources designed to help companies draft executive and director compensation disclosures that both:

Executive and Director Compensation Disclosure Toolkit | Practical Law