The SEC

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The SECs Disclosure Proposals for Executive
Compensation

• February 17, 2006

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Todays Speakers
Mark Borges Principal Mercer Human Resource
Consulting Cathy Creech Partner Benefits Group
of Davis 7 Harman LLP Lynn Dudley Vice President
American Benefits Council John
McGuiness Principal Groom Law Group
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Agenda

• Overview
• Summary of Executive Compensation Proposals
• Individuals Covered
• Compensation Discussion and Analysis
• Summary Compensation Table
• Outstanding Equity Awards and Realized Gains
• Post-Employment Payments and Benefits
• Director Compensation
• Preparing for Next Years Disclosure
• Questions

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Overview

• Proposals issued by SEC on January 27, 2006
• First significant revision in 14 years
• What happens next?
• 60-day comment period ends April 10, 2006
• SEC staff will evaluate comments and formulate
  final recommendations
• Commission will consider and adopt final rules
  later this year
• Effective dates new rules will apply to
• Proxy statements filed 90 days or more after
  publication of final rules
• Annual reports for fiscal years ending 60 days or
  more after publication
• Forms 8-K filed for triggering events occurring
  60 days or more after publication
• Registration statements that become effective 120
  days or more after publication

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Summary of Executive Compensation Proposals
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Individuals Covered

• Named executive officers
• Any person who during the last fiscal year served
  (at any time) as
• principal executive officer
• principal financial officer, PLUS
• Three most highly-compensated executive officers
  (other than the PEO and PFO) who were serving as
  executive officers at end of last fiscal year,
  PLUS
• Based on total compensation
• Disclosure not required if total compensation
  does not exceed 100,000
• Up to two additional individuals who would have
  been among the top three most highly-compensated
  executive officers except they were no longer
  serving as executive officers at end of last
  fiscal year

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Compensation Discussion and Analysis

• Replaces Board Compensation Committee Report and
  Performance Graph
• Overview of executive compensation program
• Summary of each program element
• Provides context for tabular disclosure
• Must discuss six specific items
• Program objectives
• Behaviors that program is designed to reward and
  not reward
• Elements of compensation
• Rationale for each element
• Methodology (including formula) used to determine
  amount for each element
• How each element and decisions regarding that
  element fit into overall compensation objectives
  and affect decisions regarding other elements

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Compensation Discussion and Analysis

• Considered company, rather than compensation
  committee, disclosure
• Will be considered filed with, rather than
  furnished to, the SEC
• Subjects CDA to full liability under the federal
  securities laws
• Covered by SOX Section 302 CEO and CFO
  certifications to the extent incorporated into an
  Securities Exchange Act periodic report (for
  example, Form 10-K)
• Need not disclose performance target levels, or
  factors/criteria involving confidential
  commercial or business information

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Summary Compensation Table
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Summary Compensation Table All Other
Compensation

• Any compensation item that is not properly
  reported in any other column
• Perquisites and other personal benefits
• Earnings on NQDC arrangements (including defined
  contribution plans)
• Tax gross-ups and reimbursements
• Discount stock purchases (unless arrangement is
  broadly available)
• Amounts paid or accrued under severance or
  change-in-control arrangements
• Company contributions to qualified defined
  contribution plans
• Aggregate increase in actuarial value of defined
  benefit pension plans
• Value of insurance premiums paid by company for
  NEO life insurance
• Item must be identified and quantified if amount
  exceeds 10,000

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Perquisites

• While not defined, proposals provide analytical
  framework for determining
• An item
• Is not a perquisite if integrally and directly
  related to the performance of the executives
  duties
• Is a perquisite if confers a direct or indirect
  benefit that has a personal aspect, without
  regard to whether it may be provided for some
  business reason or for the convenience of the
  company
• Proposed disclosure requirements
• Must be disclosed if aggregate value perquisites
  is 10,000 or more
• If disclosed, must be individually identified
• Must be quantified only if individual item has
  value in excess of greater of
• 25,000 or
• 10 of total perquisites

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SCT Supplemental TableGrants of
Performance-Based Awards Table
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SCT Supplemental TablesGrants of All Other
Equity Awards Table
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SCT Supplemental Narrative

• Must discuss any material factors required to
  make presentation in SCT and supplemental tables
  understandable
• Materials terms of NEO employment agreements
• Description of any option repricing or material
  modification of outstanding equity award
• Material terms of performance-based awards
• Assumptions underlying calculation of defined
  benefit pension plans actuarial value
• Narrative must also include total compensation
  and job description for up to three non-executive
  employees whose total compensation exceeded that
  of any NEO

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Outstanding Equity Awards at Fiscal Year-End
Table
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Option Exercises and Stock Vested Table
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Post-Employment Payments and Benefits

• Proposals would require individualized disclosure
  for each NEO
• Retirement Plan Potential Annual Payments and
  Benefits Table
• Nonqualified Defined Contribution and Other
  Deferred Compensation Plans Table
• Potential payments upon termination or
  change-in-control
• Narrative, rather than tabular, disclosure
• Must quantify amount payable to each NEO
• Must disclose assumptions

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Retirement Plan Potential Annual Payments and
Benefits Table
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Nonqualified Defined Contribution and Other
Deferred Compensation Plans Table
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Potential Payments Upon termination or
Change-in-Control

• Covers any contract, agreement, plan, or
  arrangement (whether or not in writing) providing
  for payments at, following, or in connection with
  any termination of employment, including
• Resignation
• Retirement
• Termination without cause (including a
  constructive termination)
• Termination with cause
• Change-in-control
• Covers any payments and other benefits (including
  perquisites) payable upon the occurrence of any
  of these events

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Director Compensation
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Preparing for Next Years Disclosure
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Implications for Next Years Disclosure

• Although probably not effective until 2007,
  current compensation decisions are affected
• Should assess current disclosure practices under
  proposals
• Are improvements needed?
• Are shareholders requesting disclosure not
  covered in proposals?
• Consider how current program will be described
  under proposals
• What more is needed to explain the numbers?
• Can compensation philosophy be explained
  thoroughly and succinctly?
• Consider presentation formats that are easy to
  understand
• Look for potential double counting pitfalls

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Implications for 2007 Disclosure

• CDA will require significantly more detailed
  disclosure
• Provides a broad framework, but companies must
  tell their own story
• Proposals emphasize the how and why as much
  as the how much
• Requires greater demonstration of
  pay-for-performance relationship
• Putting policies and decisions in writing may be
  a daunting task
• Can you tell a compelling story?
• Identify compensation elements that will comprise
  Total Compensation figure
• Develop internal tally sheets
• Review benchmark data and process and validate
  what is competitive pay
• Decide whether certain program elements should be
  revised or eliminated
• Will need to monitor all executive officers to
  identify NEOs

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Implications for 2007 Disclosure

• Determine appropriate and consistent valuation
  methods
• Equity valuation
• Nonqualified deferred compensation earnings
• Defined benefit pension plan actuarial values
• Perquisites
• Examine impact of new disclosure values and
  calculations
• Post-employment payments and benefits
  arrangements may generate numbers that may never
  be realized
• Defined benefit pension plan calculation likely
  to be complex and confusing
• Disclosure of NQDC arrangements will duplicate
  aspects of the SCT
• Severance and change-in-control disclosure to be
  continued hot button
• Model various termination scenarios to select
  appropriate disclosure
• Select reasonable assumptions

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Implications for 2007 Disclosure

• Items to remember
• Quality not quantity, is key
• Use plain English in narrative discussions
• Consider using charts and bullets
• The Performance Graph (which charts TSR), not the
  discussion of TSR, is being eliminated
• Disclosure is not limited to the proxy statement
• Consider using websites and other venues
• Bottom line Begin planning now!

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Questions