Talking Points: Tally Sheets

By Mike Kesner, Deloitte Consulting LLP & Blair Jones, Semler Brossy (10/11/07)

1. Tally sheets have gained additional prominence with the new SEC disclosure rules and follow-up comments in the SEC comment letters
   1. The new SEC tables provide all the raw material for developing more customized tally sheets within a Company
   2. They also potentially create the opportunity to benchmark total remuneration opportunities across companies- BUT be cautious:
      1. the information in the proxies is backwards looking vs. forward looking, so planned changes in practices might not be captured
      2. The primary purpose of tally sheets is to make an internal evaluation, informed by external practices, but not necessarily driven by them.
   3. Several of the SEC comment letters asked for more information about how Compensation Committees and Boards used tally sheets in making compensation decisions.
      1. A large number of the letters also placed particular focus on termination scenarios (a key area of focus in tally sheets) and how benefit levels were determined for each scenario.
      2. A few asked about how tally sheets used by the Compensation Committee differ from the SEC disclosure and for more information on severance multiples in particular.
          
2. What do we mean by “tally sheets”? A “tallying up of”
   1. Comprehensive income for the year
   2. Projected values under different performance and termination scenarios
   3. Realized option and stock gains last 5 years
   4. Termination scenarios
   5. Total wealth accumulation
       
3. Uses for tally sheets:
   1. Evaluate current pay levels and mix
   2. Consider internal equity
   3. Review history, dynamics and reasonableness of past pay decisions
   4. Avoid surprises
   5. Develop wealth accumulation targets
       
4. What questions should Boards be asking?
   1. Do we understand the different components of the compensation program and how amounts are determined?
   2. How are the amounts interrelated? How do changes in one component impact other components?
   3. Are these amounts reasonable? Do they align with our compensation philosophy?
   4. Are all of our programs still necessary?
   5. Should we adjust some of the provisions in existing arrangements to avoid unintended consequences and send the appropriate messages?
       
5. What should companies consider disclosing in future proxies regarding use of tally sheets?
   1. Link tally sheet review to compensation philosophy and business context