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January 31, 2006
SEC Unveils 370-Page Proposal for Executive Compensation

The Securities and Exchange Commission has published a 370-page proposal with new rules governing the disclosure of executive and director compensation.

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The SEC is calling for companies to provide a clearer and more complete picture of the compensation earned by their chief executive officer, chief financial officer, three other highest paid executive officers, and members of their board of directors.

The proposal would require companies to disclose executive compensation in plain English. Under the proposal, compensation disclosure would begin with a narrative providing a general overview and an analysis with the reasoning underlying compensation policies and decisions.

Next, executive-compensation disclosure would be organized into three broad categories: compensation over the last three years; holdings of outstanding equity-related interests received as compensation that are the source of future gains; and retirement plans and other post-employment payments and benefits.

  • A reorganized Summary Compensation Table would be the principal vehicle for showing three-year compensation and would include additional information.
    • A new column would report total compensation.
    • A dollar value will be shown for all stock-based awards, including stock and stock options, measured at grant date fair value, computed pursuant to Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, to provide a more complete picture of compensation and facilitate reporting total compensation.
    • The "All Other Compensation" column would include the aggregate increase in actuarial value of pension plans accrued during the year and all earnings on deferred compensation that is not tax-qualified.
    • The threshold for disclosing perquisites would be reduced to $10,000 and interpretive guidance is provided for determining what is a perquisite.
    • Two supplemental tables would report Grants of Performance-Based Awards and Grants of All Other Equity Awards.
  • Disclosure regarding outstanding equity interests would include
    • the Outstanding Equity Awards at Fiscal Year-End Table, which would show outstanding awards representing potential amounts that may be received in the future; and
    • the Option Exercises and Stock Vested Table, which would show amounts realized on equity compensation during the last year.
  • Retirement plan and post-employment disclosure would include
    • the Retirement Plan Potential Annual Payments and Benefits Table, which would disclose annual benefits payable to each named executive officer;
    • the Nonqualified Defined Contribution and Other Deferred Compensation Plans Table, which would disclose year-end balance, and executive contributions, company contributions, earnings and withdrawals for the year; and
    • disclosure of payments and benefits (including perquisites) payable on termination or change in control, including quantification of these potential payments and benefits.

The public has 60 days from publication in the Federal Register to comment on the proposal.

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