SEC Proxy Rules

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SEC Proxy Rules

• 2007 EA Meeting
• March 26, 2007
• Session 303
• John Lowell
• Max Schwartz

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What Happened

• 1992 SEC added rules for Executive Compensation
  and Related Party Transactions
• Growing disenchantment with those rules by
  shareholder activists
• New Rule, Fall 2006, and first proxy statements
  are now out

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Whats So Much Better Aboutthe New Final Rule?

• Its all a matter of opinion, but the SEC would
  tell you
• Compensation Discussion and Analysis (CDA) an
  explanation of how were earned
• More tables and one with a Total Compensation
  number
• Disclosure of what was previously impossible to
  figure out deferred compensation, pensions,
  termination payments
• More comparability
• Basically, more information
• But still, there will be much confusion about
  what the CEO and others were actually paid for
  the year.
• The morass how to deal with the myriad types of
  stock-based awards and other long term
  compensation programs

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CDA

• Goals
• Philosophies
• Overview of types of compensation programs
  considered and which are used
• Why?
• Actual programs are expected to conform to this
  discussion
• How is compensation determined?
• How are consultants involved?
• How does management interact with the
  Compensation Committee?

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CDA, an Example

• GE Proxy is good example
• Very comprehensive
• Detailed explanation for all decisions
• Ties compensation to achievement of fairly broad
  and measurable set of goals

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CDA, Some GE Excerpts

• Key elements of compensation that depend upon the
  named executives performance include
• A discretionary cash bonus that is based on an
  assessment of his performance against
  pre-determined quantitative and qualitative
  measures within the context of the companys
  overall performance
• Equity incentive compensation in the form of
  stock options, restricted stock units (RSUs) and
  performance share units (PSUs), the value of
  which is contingent upon the performance of the
  GE share price or other performance criteria, and
  subject to vesting schedules that require
  continued service with the company and
• A long-term performance award program (LTPA) that
  is contingent upon achieving four specific
  financial goals for the overall company, over a
  three-year period.
• Base salary and bonus are designed to reward
  annual achievements and be commensurate with the
  executives scope of responsibilities,
  demonstrated leadership abilities, and management
  experience and effectiveness. Our other elements
  of compensation focus on motivating and
  challenging the executive to achieve superior,
  longer-term, sustained results.

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Example of Alignment
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Alignment, continued
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The Tables

• Summary Compensation Table
• All other Compensation Table
• Other Benefits Table
• Grants of Plan-Based Awards Table
• Outstanding Equity Awards at Fiscal Year-end
• Option Exercises and Stock Vested
• Pension Benefits Table
• Nonqualified Deferred Compensation Table
• Potential Payments Upon Termination (which are
  not yet required to be set-out in a table)

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Which Tables Are of Particular Interest to
Actuaries?

• Summary Compensation Table
• Grants of Plan-Based Awards Table
• Pension Benefits Table
• Nonqualified Deferred Compensation Table
• Potential Payments Upon Termination

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Summary Compensation TableWhats Interesting to
Actuaries?

• Stock awards (123R expense)
• Option awards (123R expense)
• Change in pension value and Nonqualified deferred
  compensation earnings
• Change in ABO (generally assuming retirement at
  earliest unreduced age and no other preretirement
  decrements)
• Preferential earnings on NQDC

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Grants of Plan-Based Awards TableWhats
Interesting to Actuaries?

• Grant date fair value is a FAS 123R calculation
• Also, note that LTPA awards vary depending on
  corporate performance

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Pension Benefits Table

• Includes all qualified and nonqualified DB plans
• List separately
• ABO (FAS 87 economic assumptions, retirement at
  earliest unreduced age, no preretirement
  decrements)
• Show years of credited service under each plan

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Nonqualified Deferred Compensation Table

• Amount deferred in year
• Amount contributed by company in year
• Earnings
• Payouts during year
• Account balance
• Vested amounts
• Plus any non-vested amounts

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Potential Payments Upon Termination

• In specific case of GE, they are not so
  interesting
• No severance
• No parachutes
• No employment agreements
• For actuaries, typically most interesting if
  C-I-C agreements
• Amount to be paid out may vary depending upon
  ratio of parachute payments to base amount
• May be cut back due to tax effect of gross-up
  versus not
• Calculations tend to involve pension parachutes

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Questions
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