The Advisors' Blog

– Robert Kohl and Jonathan Weiner, Katten Muchin Rosenman

In a November 9th speech at the “4th Annual Proxy Disclosure Conference: Tackling Your 2010 Compensation Disclosure,” Shelley Parratt, Deputy Director of the Securities and Exchange Commission’s Division of Corporation Finance, outlined the SEC staff’s expectations for companies’ executive compensation disclosure for the 2010 proxy season.

Against the backdrop of intense public scrutiny of executive compensation, Deputy Director Parratt urged public companies to enhance their executive compensation disclosure, particularly with respect to their compensation disclosure and analysis (CD&A). She noted that, too often, companies fail to include sufficient analysis of their compensation decisions in their CD&A disclosure. According to Ms. Parratt, a detailed discussion of the process used to determine executive compensation is inadequate to satisfy the requirements of CD&A absent a meaningful analysis of why named executive officers were compensated in a particular manner or amount. Although Ms. Parratt believes process-oriented disclosure of the framework in which compensation decisions are made may provide investors with important context for CD&A, disclosure should focus on how the company applied such framework, including any qualitative factors considered by the company, to determine the amount and structure of executive compensation. However, she added, “If a committee’s pay determinations were simply subjective decisions, the company should say that.”

She also stressed the need to enhance disclosure with respect to performance targets (benchmarks) used to make compensation decisions (i.e., “pay for performance”). According to Ms. Parratt, the staff issues “more comments on performance targets than any other executive compensation disclosure item.”

Applicable rules require companies to disclose performance targets that are material to compensation policies and decisions, unless such information is confidential and disclosure would result in competitive harm to the registrant. As a threshold matter, Ms. Parratt suggested that a company should consider whether performance targets are in fact a material element of compensation policies and decisions, especially where such targets may be disregarded at the company’s discretion or performance-based compensation may otherwise be awarded even if performance targets are not achieved. She said that “when a company states that it determined a material element of compensation [is] based on the achievement of performance targets, [the staff] will ask for specific disclosure of the targets and the actual achievement level against the targets, or for the company to provide [the staff] with an explanation of how such disclosure would cause it competitive harm.” A company claiming that such disclosure would result in competitive harm should nonetheless provide meaningful and specific disclosure regarding how difficult or likely it would be for the undisclosed performance target to be achieved, she said.

Ms. Parratt stressed the need for issuers to be more proactive in updating their CD&A disclosure to reflect staff interpretations expressed in publicly available comment letters and other guidance regarding CD&A. According to Ms. Parratt, “after three years of [staff comments that are applicable only to companies’ future filings, the staff] expects companies and their advisors to understand [the SEC’s] rules and apply them thoroughly. So, any company that waits until it receives staff comments to comply with the disclosure requirements should be prepared to amend its filings if it does not materially comply with the rules.”