The Advisors' Blog

– Broc Romanek, CompensationStandards.com

One thing I probably don’t highlight enough is the wealth of knowledge that can be gleaned from the “Q&A Forums” on our sites. Dave Lynn recently answered this query below on the Forum on TheCorporateCounsel.net:

Question: The new proxy disclosure regulations require a description of excessive risk that may result from a company’s compensation plans for executives and non-executives. As I understand it, disclosure is only required if there is excessive risk. If a company has analyzed its compensation plans and determined there is not excess risk, then am I correct that there does not need to be disclosure about the analysis undertaken?

Even if that is correct are there other reasons why a company may want to disclose that they’ve undertaken the analysis even if it shows no risk (e.g., RiskMetrics, etc. review)?

Dave’s Answer: Actually, the standard is whether the risk is reasonably likely to have a material adverse effect on the company, as opposed to “excessive” risk. No disclosure is required if it is determined that this standard of materiality is not met. There are reasons why a company may want to disclose that it went through the process of evaluating the relationship between compensation and risk, most particularly due to investor interest in the topic (as well as interest of the proxy advisory firms).

There are really two levels of disclosure to consider – whether disclosure is required with respect to the relationship between compensation and risk for all employees pursuant to new Item 402(s) of Regulation S-K, and specifically with respect to the named executive officers pursuant to the pre-existing CD&A requirement.