Page 169 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 155

company performance and the executive pay package must be explained. The committee
report is expected to be specific and not general and vague in its writings. It should fairly
report what one would have heard if present at the committee meetings. If any of the incen-
tives are not excluded from the million-dollar cap of Section 162(m), the committee should
report that fact.
In 2003 the SEC ruled that companies listed on the New York Stock Exchange and
NASDAQ must get shareholder approval before granting stock options or stock awards.
They must also receive similar approval for any material modifications, including repricing
of stock options.
In January of 2006, the SEC proposed rule changes to these requirements; in August
2006 they issued a 436-page adopting release describing the new disclosure requirements for
executive and director compensation.
The release introduced the requirement for a Compensation Discussion and Analysis
(CD&A) report. It is considered to be similar to the Management Discussion and Analysis
(MD&A) found in the company’s 10K. The CD&A is a filed document and is to be certified
by the principal executive officer and the principal financial officer.
The release continued the requirement for a compensation committee report but
stated that it was a “furnished,” not a “filed” document. The report must state whether it
reviewed and discussed the newly required Compensation Discussion and Analysis
(CD&A) document with management and whether it recommended it be included in
the proxy statement and the company 10K. The stock performance graph could also be
continued, but it too would be a “furnished” not a “filed” document and would be moved
to the company’s annual report.
The CD&A is to be in plain English, with an emphasis on principles rather than process.
The objective of the CD&A is to provide investors with a view of the company’s executive
compensation program and the reasons behind the numbers in the various compensation
tables found in the proxy. It is expected to answer the following questions:

1. What are the objectives of the company’s compensation programs?
2. What is the compensation program designed to reward?
3. What is each element of compensation?
4. Why does the company choose to pay each element?
5. How does the company determine the amount (and, where applicable, the formula) for
each element?
6. How do each element and the company’s decisions regarding that element fit into
the company’s overall compensation objectives and affect decisions regarding other
elements?
This information might be formatted in a manner similar to Table 4-31, namely, major
headings for objectives, design, and pay elements. Note also that a section has been included
for director compensation, following the same format as for executive compensation
The SEC also gave examples of the type of issues that would be appropriate to address
in the CD&A, most of which would probably be placed in one of the compensation element
sections. The SEC list included the following:

1. The policies for allocating between long-term and currently paid-out compensation.
2. The policies for allocating between cash and noncash compensation, and among
different forms of noncash compensation.