Complying with the SEC's Compensation Discussion and Analysis Requirements

CPA Journal, The, Sep 2008 by Grant, Gerry

* Include only total amounts related to potential payments in specific circumstances.

* When presenting an alternate summary compensation table due to specific company situations:

* Clearly label tables as supplementary, explaining that the alternate summary table is not a substitute for the required table.

* Present the alternate table in the same format, using the same calculations as in the required table.

* Explain the differences in amounts presented in the alternate table with those in the required tables.

Don't:

* Include lengthy and complex discussions of compensation program mechanics-focus on how and why decisions were made.

* Include details of amounts related to potential payments in specific circumstances-present only total amounts.

* Decrease font sizes in tables-present tables in an easy-to-read, concise format.

* Needlessly repeat information presented in the required compensation tables-use footnotes for important explanations.

In addition, the SEC's review paid close attention to companies' compliance with the required use of "plain English." In an October 2007 speech, "Plain Language and Good Business," SEC Chairman Christopher Cox contended that disclosure information that is concise and clearly written is a key factor in improving the readability and usefulness-as well as the quality-of disclosures (www.sec.gov/news/speech/2007/spchl01207cc.htm). The SEC staff noted several instances where clarity of the CD&A and proxy disclosures could be improved. In particular, the CD&A should provide the top layer of context, followed by tables and graphs to provide users with a clear, visual presentation of disclosure information.

Suggestions to Improve Clarity of Presentations

Do:

* Provide clear and concise discussion of the facts and circumstances of the compensation agreement.

* Emphasize the CD&A narrative overview by placing it before the required tables.

* Include graphs, charts, and tables that clarify the overall presentation.

* Include hyperlinks in the online CD&A to related graphs and tables.

Don't:

* Include complex legal terms found in compensation agreements-present the information in plain English.

By far, the most common comment made by the SEC dealt with vague performance targets and unclear disclosures about how performance targets are used to set compensation levels. For example, Prudential Financials, Inc., in its 2007 Proxy Statement, presented this vague disclosure of annual incentive awards:

Annual incentives for executives are paid through an incentive pool, whose initial size is the aggregate of the funding amounts for each participant established in the previous year. The initial pool is then adjusted based on the average of performance relative to the prior year and relative to the Board-approved financial plan for the current year.

We currently use the change in the following four financial measures for determining the adjustment to the incentive pool for executive officers:

* pre-tax AOI-30% weighting;

* ROE-30% weighting;

* operating revenues (AOI basis)-15% weighting; and