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Deferred Compensation Arrangements

  1. The SEC’s New Disclosure Requirements for Deferred Compensation
  2. Essential Practice Tips: "The New Retirement Pay Tables"
  3. Disclosing Deferred Compensation
  4. Sample Disclosures of Above-Market Interest Paid to CEOs in Recent Proxy Statements
  5. Practice Pointers
  6. Media Articles
  7. JOBS Act - Firm Memos and Other Information
  8. Subsequent Guidance to JOBS Act
  1. 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.  

  2. 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

    1. 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.
    2. 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.
    3. 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.
    4. 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

    1. 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.
    2. 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

    1. 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.
    2. 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
    3. 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.
    4. 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.

  3. 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.

  4. Sample Disclosures of Above-Market Interest Paid to CEOs in Recent Proxy Statements
  5. Practice Pointers

  6. Media Articles

  7. JOBS Act - Firm Memos and Other Information

  8. Subsequent Guidance to JOBS Act  



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