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Deferred Compensation Arrangements
- The SEC’s New Disclosure Requirements for Deferred Compensation
- Essential Practice Tips: "The New Retirement Pay Tables"
- Disclosing Deferred Compensation
- Sample Disclosures of Above-Market Interest Paid to CEOs in Recent Proxy Statements
- Practice Pointers
- Media Articles
- JOBS Act - Firm Memos and Other Information
- Subsequent Guidance to JOBS Act
- The SEC’s New Disclosure Requirements for Deferred Compensation
In 2006, the SEC revised Item 402 of Regulation S-K so that it captures deferred compensation
earned by named executive officers (NEOs) in more than one way.
First, companies must disclose in the Summary Compensation Table
(column h) (Item 402(c) of Regulation S-K) the aggregate
increase in the actuarial value of any defined benefit pension plan
with respect to both tax-qualified defined benefit plans and non-tax-
qualified supplemental executive retirement plans.
Companies must also include any above-market earnings on nonqualified deferred
compensation from plans that are not defined benefit plans. This
disclosure may be limited to only the above-market or preferential
portion. Additionally, companies must provide related footnote
disclosure separately identifying and quantifying these amounts.
Furthermore, Item 402(i) of Reg S-K requires a tabular presentation
of each NEO's contributions, a company's contributions, all
earnings, withdrawals and distributions made under any non-qualified
defined contribution plans and nonqualified deferred compensation
plans in the Non-Qualified Deferred Compensation table. Column (f) of
this table requires companies to disclose the last FYE balance for
each NEO. In response to concerns raised by commenters regarding
"double counting" of NEOs' compensation, a footnote to the table must
explain the amounts reported in this table and the amounts disclosed
in the Summary Compensation Table regarding nonqualified defined contribution plans
and above-market or preferential earnings.
The Non-Qualified Deferred Compensation table must be accompanied by
narrative disclosure regarding the material information necessary to
understand the table, including such matters as the types of
compensation that may be deferred and any limitation(s) on deferral,
the method for calculating and quantifying interest rates and other
earnings measures, and material terms with respect to payouts,
withdrawals and distributions.
Additionally, companies may be required to discuss these plans and
amounts in the Compensation Discussion and Analysis as needed to
provide investors with the context for understanding this information
and how it relates to the company's compensation policies, programs
and practices.
- Essential Practice Tips: "The New Retirement Pay Tables"
Below are tips from our Conference, "Implementing the SEC's New Executive
Compensation Disclosures: What You Need to Do Now!:"
By Pamela Baker, Sonnenschein Nath & Rosenthal
- Get started early on the new pension disclosures. The tables are
radically different from prior disclosures and preparation of the new
disclosures will require the coordination of HR, the actuaries and the
accountants, at a minimum. In addition for some companies, different
departments are responsible for the records on qualified plans and
nonqualified plans, thereby requiring even more coordination. The SEC
instructions permit incorporation of various assumptions by cross-reference
to the discussion of assumptions in the company’s financial statements or
the MD&A but the financial statements are not uniform in which assumptions
they state, so don’t count on being able to incorporate by reference.
- The Company should consider streamlining the number and variety of
actuarial or defined benefit plans it offers to NEOs in order to simplify
disclosure and avoid some of the costs of recalculating benefits from year
to year and explaining shifts in benefit amounts that may occur among plans
for technical reasons when the overall benefit is unchanged. For example, a
company with a traditional pension plan and an excess benefit plan and a
SERP, where the benefit under the excess plan is offset by the benefit under
the qualified plan and the benefit under the SERP is offset by both the
benefit under the qualified plan and the benefit under the excess plan may
want to eliminate the NEOs from the excess plan and simply cover them under
the SERP, with the SERP benefit offset by the qualified plan benefit.
- The footnote disclosure under the non-qualified deferred compensation
table (identifying what portion of the amounts shown have previously been
reported as compensation in the SCT) may not paint the picture the company
wants to paint. For various reasons (e.g., mergers, promotions to NEO
status) amounts electively deferred may not have been previously reported in
the SCT (or elsewhere). Companies should consider whether supplemental
disclosure would be appropriate, showing what portion of the total aggregate
account balance represents amounts the executive could have taken in cash
but electively deferred.
- The new tabular and footnote disclosures (e.g., actuarial assumptions)
are subject to the disclosure controls and procedures leading to the
required CEO and CFO certifications. New controls will need to be designed
or existing controls will need to be modified to capture this new data.
Advance planning is needed to avoid this becoming a last-minute problem.
By Mark Borges, Mercer Human Resource Consulting
- When faced with a choice between alternative approaches for
disclosing estimated benefits under a defined benefit pension plan, consider
showing the larger amount if its receipt is not subject to a material
contingency. Given the variations in features of defined benefit pension
plans, it is possible that a plan may present payment alternatives or
situations that are not explicitly addressed by the new rules. In an
instance where this occurs and technical compliance with the rules would
lead to the disclosure of the smaller payment amount, consider disclosing
the larger amount with appropriate footnote disclosure highlighting the
alternatives and explaining the reasons for the potential differences in the
payment amounts. This will avoid confusion and any potential issues about
misleading disclosure.
- Establish procedures for tracking compensation amounts reported in
the Summary Compensation Table that are deferred into nonqualified defined
contribution plans and nonqualified deferred compensation arrangements.
To minimize doubled-counting, the instructions to the Nonqualified Deferred
Compensation Table require a company to identify amounts reported in the
Table that have previously been reported as compensation in the Summary
Compensation Table. Most companies do not have existing systems that easily
lend themselves to tracking this information. Consider setting up an
internal system that will record on an annual basis each item (and amount)
of annual and long-term compensation that is subsequently deferred by a
named executive officer so that this information can be presented as
required to supplement the information in the table.
By Michael Kesner, Deloitte Consulting
- Prepare "dry run" before yearend and review the results with the
Compensation Committee. Determine if corrective action should be taken to
eliminate or modify arrangements that are inconsistent with the compensation
philosophy or pay environment.
- Coordinate the disclosures required by this section with the CD&A. If
appropriate, have the Compensation Committee revisit certain aspects of the
retirement and deferred compensation arrangements:
- Purpose of each plan or program
- Definition of covered compensation
- Rationale for SERP
- Investment alternatives
- Develop list of key assumptions and data requirements that need to be
made to complete the required calculations as of yearend, and coordinate
approval of such assumptions by corporate accounting and outside actuaries
to ensure consistency with the financial statement reporting.
- Consider terminating the nonqualified deferred compensation plan(s) and
paying out the existing balances under the Section 409A transition rules to
eliminate the cost of such programs and the disclosure of the program.
- Disclosing Deferred Compensation - from Mark Borges' Blog (8/18/06)
Nonqualified deferred compensation is given considerable attention under the
new rules. As you know, there’s an entire table devoted to the subject - the
Nonqualified Deferred Compensation Table (which is a bit of a misnomer since the
Table also covers nonqualified defined contribution plans, but then I guess
that, technically, it’s all NQDC). This Table requires disclosure of:
- Aggregate named executive officer contributions for the year;
- Aggregate company contributions for the year;
- Aggregate interest or other earnings accrued during the year;
- Aggregate withdrawals by, and distributions to, the NEO during the year; and
- The NEO’s total account balance as of the end of the year.
Additional rules for deferred compensation are scattered throughout the
rules. In the case of the Summary Compensation Table, compensation that is
earned during a fiscal year, whether cash or equity, is reportable in the Table
for the year earned, even if deferred. Interestingly, the SEC dropped the
proposal that amounts deferred be disclosed via footnote to the appropriate
compensation column; ostensibly, because of double counting concerns. To
facilitate investor understanding (and, perhaps more importantly, to simplify
some of the supplemental disclosure to the NQDC Table), I expect some companies
to provide this information anyway.
The Option Exercise and Stock Vested Table has its own deferred compensation
disclosure requirement. The Instruction to Item 402(g)(2) states that where the
amount realized upon an option exercise or from the vesting of a stock award is
deferred, the amount deferred and the terms of the deferral must be quantified
in a footnote to the Table. Given the fact that deferral features on stock
options and restricted stock awards will subject them to Section 409A, I wonder
whether this requirement will ever come into play.
To me, the most significant disclosure requirement for deferred compensation
is contained in the Instruction to the NQDC Table itself. A company must
quantify the extent to which the amounts reported in the Contributions and
Earnings columns are reported as compensation in the last completed fiscal year
in the Summary Compensation Table and the amounts reported in the Aggregate
Account Balance column were reported as compensation to the NEO in previous
SCTs. That disclosure could be significant - particularly if the deferral
arrangements goes back several years. I haven’t seen anything suggesting that a
company wouldn’t have to show amounts reported in the SCT before 2006, so,
presumably, to the extent that the Aggregate Account Balance column reflects
amounts deferred since 1992 (when the SCT was introduced) those amounts would
have to be disclosed and possible broken out on a year-by-year basis.
It seems to me that a table would be a logical way to present this
information if it has to be itemized. If it doesn’t, then a couple of sentences
will probably do the trick. Either way, companies will need to track this data
each year. That’s where a footnote to the SCT showing each year’s deferral
amounts is likely to come in handy.
- Sample Disclosures of Above-Market Interest Paid to CEOs in Recent Proxy
Statements
- Practice Pointers
- Media Articles
- "As Workers' Pensions Wither, Those for Executives Flourish Companies Run Up Big IOUs, Mostly Obscured, to Grant Bosses a Lucrative Benefit,"
Ellen E. Schultz and Theo Francis, Wall Street Journal (6/23/06) (subscription required)
- "Deferring Compensation Also Creates A Company Debt to Executives," Theo Francis and Ellen E. Schultz, Wall Street Journal (6/23/06) (subscription required)
- "A' Holy Cow' Moment in Payland," NY Times (2/19/06)
- " 'Phantom' Accounts for CEOs Draw Scrutiny," Theo Francis, Wall Street Journal (6/13/05) (subscription required)
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"Tyco Deferred Bonuses to Cut Size of Pay on Proxy Statement," Chad Bray, Wall Street Journal (3/16/05) (subscription required)
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"Tax Bill Targets Executive Pay Perk - Rule Would Stiffen Penalties for
Tapping 'Deferred Compensation' Plans Early," Ruth Simon, Wall
Street Journal (10/13/04) (subscription required)
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"Buried Treasure: Well Hidden Perk Means Big Money for Top Executive,"
Ellen E. Schultz and Theo Francis, Wall Street Journal (10/11/02)
(finds growth of deferred compensation accounts has been largely
overlooked as rich salaries, sweetheart loans and generous stock options
have prompted scrutiny of executive compensation)
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"Executive Pay; Hiding Behind Small Print," Gretchen Morgenson,
N.Y. Times (2/8/04) (paid subscribers)
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"Equity-Based Deferred Compensation Plans," The Corporate Counsel
(Sept.-Oct. 2003)
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"Pigging Out?: Special retirement plans for top executives are becoming
a target for other stakeholders," (discussing the interests of
Delta's retired officers vs. current officers) Ronald Fink, CFO.com
(7/1/03)
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"Re-Examining Deferred Compensation," The Corporate Executive
September-October 1987
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Stealth Compensation - Retirement Benefits
—Lucian Bebchuk and Jesse Fried
-
Stealth Compensation - Post-Retirement Plans and Consulting Contracts
—Lucian Bebchuk and Jesse Fried
- JOBS Act - Firm Memos and Other Information
- Subsequent Guidance to JOBS Act
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