Two Step's Private Company Equity Management Blog

As the 2008 proxy statement season approaches, John W. White, Director, Division of Corporation Finance of the U.S. Securities and Exchange, looked back and commented on executive compensation disclosures in the 2007 proxy season at last month’s Annual Proxy Disclosure Conference in San Francisco on October 9th. His speech is very helpful in guiding companies to two areas they should focus on in 2008 and where the Staff will be looking to comment in the 2nd year under the new requirements. The new disclosure requirements were effective for proxy statements filed on or after Dec. 15, 2006.

In his summary thoughts from the speech “Tackling Your 2008 Compensation Disclosures,” he commented on a Staff report by the Division of Corporate Finance (released in early October based on their review of the Compensation, Disclosure and Analysis section of 350 filings), as follows:

The Commission made clear in adopting the new rules, however, that it is looking for more than just the value of the components of compensation and a total value of compensation. What is that “more” it is looking for? In order to provide investors with more than just tables of numbers, the Commission created the new Compensation Discussion and Analysis requirement to “put into perspective for investors the numbers and narrative that follow it.” This “overview” is very much a principles-based requirement, like the MD&A section with which we are all so familiar.

… When looking at first-year disclosures, we often found it difficult to understand how companies used targets or considered qualitative individual performance to set compensation and make decisions. …

… Far too often, meaningful analysis is missing — this is the biggest shortcoming of the first-year disclosures. Stated simply — Where’s the analysis?

He then went on to present his recommendations for 2008 proxy disclosures:

… Don’t let this coming year’s disclosures be just a mark-up of the first year. Instead step back and ask some very important questions.

• What is material to my shareholders, to my investors, as they examine the compensation of our executives and make their voting decisions for our board of directors and investment decisions with respect to our company?
• What are the material elements of individual executive and corporate performance that are considered in setting executive compensation?
• What is the relationship between the objectives of our compensation program and the different elements of compensation?
• What are the material factors that relate to our compensation decision-making process?

Then, sit down and focus on two very important aspects of your disclosure:

Analysis. Focus on how and why you reached the compensation decisions you made in your CD&A. Don’t provide a laundry list of facts. Discuss and analyze the elements of your decision-making. Some have suggested that the way to ensure proper emphasis of analysis is to require companies to provide a separate section titled “Analysis” in the CD&A. This suggestion is one of many good ideas. I will leave it to you, however, to determine how best to highlight the analysis.

Presentation matters. Focus on being clear, concise and understandable. Our rules require you to provide substantial amounts of information. Consider ways to present your information in a manner that helps people understand it. Consider presenting layered disclosure. Consider using tables and charts to present complex information. Continue your innovative efforts to use these tools to illustrate the relationship between compensation objectives and different forms of pay.

Read the entire speech at: http://www.sec.gov/news/speech/2007/spch100907jww.htm

Last month, I brought to your attention an alert issued from Cooley Godward Kronish LLP regarding IRS Notice 2007-78 (Sept. 10, 2007) which gave taxpayers until Dec. 31, 2007 to bring nonqualified deferred compensation plans into documentary compliance with Section 409A of the Internal Revenue Code and the final regulations issued there under.

However, on Oct. 22nd, the IRS issued Notice 2007-86 that generally extends to Dec. 31, 2008 the transition relief that was scheduled to expire on Dec. 31, 2007. Specifically, “this transition relief revokes and supersedes the transition relief provided in § III of Notice 2007-78, 2007-41 IRB 780, and modifies the relief provided in § IV of Notice 2007-78 related to employment agreements, as described below.” However, there are other aspects of Notice 2007-78 that are not modified by Notice 2007-86, so a careful read of the latest Notice is still required.

The IRS explained the change, issued only a few weeks after its previous notice, as follows: “Commentators stated that although the Notice 2007-78 transition relief was helpful, the transition relief in that notice did not adequately address the need for additional time for service recipients and service providers to analyze all of their plans and make informed and reasoned decisions regarding the changes that would be necessary to bring existing arrangements into compliance with the final regulations.” Clearly, cooler heads prevailed and this is great news for everyone rushing to make very difficult decisions that required extensive document reviews.

What does it mean for you? A sigh of relief and an easier 4th quarter. You have an additional year to take advantage of the transition rules and bring certain aspects of existing plans into compliance with the provisions of Section 409A.

But just because you have the additional year, don’t wait. Find, collect, centralize, and put online every possible document that could relate to “deferred compensation” under Sec. 409A. Use the extra time to set things up properly now and avoid a last-minute crunch a year from now. Your lawyers, accountants and tax advisors are not going charge less next year …