HR's new role in executive pay: the new federal rules for disclosing executive pay and perks in "plain English" will mean a major new responsibility—and a higher profile—for HR

HR Magazine, Nov, 2006 by Eric Krell

The new federal rules requiring detailed public disclosure of top executives' compensation are putting HR professionals in the spotlight--not for the size of their paychecks but because of their important role in assembling the information.

In one of the most significant actions affecting business practices since the Sarbanes-Oxley Act of 2002, the U.S. Securities and Exchange Commission (SEC) this past summer adopted rules designed to give investors and others a clearer picture of what publicly listed companies pay their top executives and the members of their boards of directors.

While such information is available in documents such as proxy statements and annual reports issued by publicly traded companies, it's usually not easily understood by individual shareholders because it is couched in complex financial terms.

That's no longer allowed. Beginning with annual reports filed on or after Dec. 15, executive compensation information must be described in "plain English," the SEC has ruled. That mandate supports the agency's drive to "help investors keep an eye on how much of their money is being paid to the top executives who work for them," as SEC Chairman Christopher Cox explained when the disclosure regulations were proposed in January.

Ultimately, the new rules will require more effort from HR executives. But they also will play to HR's strengths, experts say, and place these executives in position to play an even larger role advising and working with boards of directors on key executive compensation issues.

The Biggest Changes

The new rules do not impose significant changes in the amount of executive compensation being disclosed, but they substantially alter the organization of information to make it much clearer.

To that end, the rules specify several key points, including the executive compensation data that must be provided in proxy statements; the executives for whom such information must be provided (typically the CEO, the CFO, the three other highest-paid executive officers and the directors); and the ways in which the information is to be set forth.

Nearly all of the compensation figures have been available in proxy statements under the old disclosure rules. But the information has been "presented in such a way that you really have to piece things together, and really dig and comb through the filings, to be able to determine what the total compensation is," says Jack Dolmat-Connell, president and co-managing partner of DolmatConnell and Partners, a compensation advisory firm in Waltham, Mass.

Once the new proxy statements begin appearing early in 2007, the compensation information should be much easier to locate, understand and compare.

The most significant of the new features now required in proxy disclosures under the SEC rules include:

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* New tables for organizing various components of current and future executive and director compensation.

* New guidelines for identifying and placing values on perquisites.

* The compensation discussion and analysis (CD & A) section, which must be written in understandable English.

The "plain English" and CD & A requirements, according to many compensation experts, will draw directly on HR executives' strengths. The purpose of the CD & A is to communicate a company's compensation strategy; the designs, policies and practices it uses to execute the strategy; and the degree to which that execution succeeds. Throughout the rule's 400-plus pages, the SEC makes it clear that the CD & A and the narratives accompanying the tabular disclosures should avoid legal jargon, boilerplate language, and highly technical business and accounting terminology.

The CD & A, which is authored by management and subject to compensation committee approval, focuses on intent. In many instances, crafting the CD & A will require soul-searching at the highest level of the organization: What have we invested in our top talent, and what is our return--and our shareholders' return--on that investment?

"It's almost as if these new rules are what HR executives should have been preparing for throughout their career," says Myrna Hellerman, senior vice president for Sibson Consulting in Chicago. "Who else but HR should know this? Who else but HR should be taking the lead role in describing the organization's compensation policies and practices?"

A Triumvirate of Tasks

Three areas of major change--the CD & A, the tabular disclosures and the perk valuations--will be major challenges for HR, according to indications from compensation, legal and HR professionals. In a webcast hosted by Buck Consultants soon after the rules were adopted, 64 percent of the 175 HR and compensation professionals who took part identified the CD & A section as the toughest facet of the new rules.

"The CD & A is already making some companies rethink their entire compensation program," says Suzanne Hanselman, a partner in the Cleveland-based law firm Baker Hostetler and a member of its securities and corporate governance practice team.