On January 27th, the SEC issued a 370 page release covering proposed rules (http://www.sec.gov/rules/proposed/33-8655.pdf) that, if adopted, will mandate significant changes in the format and scope of disclosure of executive and director compensation.  As has been the case in the past, the SEC’s proposed rules are intended to improve the "clarity of presentation" of executive and director compensation, without making judgments as to the appropriate amount of compensation. 

The SEC has provided for a 60-day comment period, which will end on April 10, 2006.  Given the length of this comment period, the number of expected comments from the public, and the typical 90‑day "grace period" before effectiveness after the final rules are published, the new rules certainly will not apply until the 2007 proxy season for calendar-year companies.  Companies whose fiscal years end during 2006 may, depending on the date of their fiscal year-end, be required to comply with the final disclosure rules in their next proxy statement.  Depending upon the timing of adoption, the new rules may also apply to companies that file a registration statement in 2006 for an initial public offering, or other types of offerings.

Companies Should Carefully Consider Certain of the New Rules Even Before Effectiveness 

The final rules are not expected to be effective until the Summer of 2006, at the earliest, and will not immediately affect calendar-year companies.  However, a number of the proposed rules do suggest that management and compensation committees of boards of directors should look ahead to anticipate how a company’s current or proposed executive compensation policies, plans or programs would be presented to the public under the new rules.

• Compensation Discussion and Analysis:  A proposed new "Compensation Discussion and Analysis" ("CD&A") would replace the current Compensation Committee Report and is intended, in the spirit of the now‑familiar "Management’s Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), to give shareholders greater insight into executive compensation policies, plans and programs as seen through the eyes of the Compensation Committee.  Thus, Compensation Committees might want to consider how a compensation-driven "CD&A," drafted in the manner and style of a financials-driven MD&A, could make a company’s compensation policies and procedures look very different from the way they have historically been described in the Compensation Committee Report.  The new CD&A will be required to address the objectives of the company’s compensation policies and to analyze each element of compensation and how the amount of each element was determined.  In addition, the CD&A will be deemed "filed" with the SEC, not just "furnished," thus making it subject to the liability provisions (and the CEO and CFO certification requirements) of the Securities Act of 1933 and the Securities Exchange Act of 1934.  Although the CD&A, like the other proposed changes, would not apply to compensation disclosures this year, decisions made in 2006 would have to be described in next year’s proxy statement. Accordingly, Compensation Committees should be thinking about how the decisions they make this year will be described in a CD&A, and potential shareholder reactions to those disclosures. 
• Named Executive Officer:  A proposed new definition of "named executive officer" ("NEO") will require detailed compensation information about the chief financial officer ("CFO"), even if the CFO is not one of the five highest‑paid officers in the company.  Because in most companies the CFO is already one of the five highest paid officers, this change should have a minimal impact. 
• Perquisites:  The de minimis level for disclosure of executive perquisites is proposed to be reduced from $50,000 to $10,000.  A company may, after a review of all current executive perquisites, conclude that this new, more highly‑detailed disclosure of perquisites could raise new or different investor-relations issues than they merit or than they did in the past.  As a result, a company may decide to eliminate or replace perquisites with cash payments as part of an executive’s salary.  The Release also clarifies the SEC’s view of what a perquisite is and emphasizes the SEC’s view that the value of perquisites for tax purposes is not necessarily the cost for proxy statement disclosure.  These interpretations/clarifications of existing perquisite disclosure requirements should be considered in connection with this year’s proxy statement disclosures. 
• Director Compensation Table:  An entirely new table disclosing director compensation will highlight all director compensation, whether cash, stock awards, stock options, or other less‑direct forms of remuneration.  Thus, director compensation will, for the first time, be highlighted and prominently set forth in tabular form.  This suggests that consideration be given now to how a company’s director compensation program and individual director compensation would appear to the public when it is presented in an easily‑read tabular form, rather than through the current more laborious and often decentralized narrative discussions.   
• New "Total Compensation" Column:  The proposed new Summary Compensation Table will be rearranged with, for the first time, the "total" of all compensation deemed received by each of the NEOs during the year.  In the past, it was left to shareholders to assemble all of the elements of compensation and to derive the arithmetic total.  Because the value of equity compensation will be calculated and reported in the year awarded, not in the year in which it vests using FAS123(R).  Consideration might be given now to how to structure the vesting of equity awards and how to best explain the difference between accelerated reporting of equity compensation under the new compensation rules and deferred financial reporting of that compensation under FAS123(R). 
• Dollar Value of Equity Compensation:  In a change from the current "number of shares" method of disclosure of equity awards, the proposed Summary Compensation Table will require presentation of the "dollar value" of all stock options, stock appreciation rights, and stock awards using the FAS123(R) valuation model which the company uses for its financial statements.  This new disclosure may affect, for example, a compensation committee’s decision about whether or not to make a company’s executive compensation levels based more on cash payments and less on stock awards. 
• Restricted Stock Awards:  In a change from their current footnote disclosure, restricted stock awards will now be presented in a separate table.  With the growing trend toward use of restricted stock awards, companies should be aware that these will now be shown prominently on the face of one of the new compensation tables. 
• Gains (Realized or Not) on Equity Awards:  The dollar amount of annual increases in the value of equity awards will now be prominently displayed.  The proposed disclosure of these gains, together with the new deferred equity compensation disclosure and the inherent skewing of timing between proxy statement and financial statement disclosures of compensation, may result in some double counting of the total value of equity compensation which will need to be carefully explained in the CD&A. 
• Compensation Consultants:  For the first time, the use of compensation consultants will be required to be disclosed, including a disclosure of the name of the consultant and whether the consultant is responsible to management or the compensation committee, or both.  Companies should now carefully consider the possible negative perception of the use of the company’s regular compensation consultants to advise the compensation committee. 
• Performance Graph:  The stock performance graph showing the company’s stock price performance, comparable companies’ stock price performance, and stock index stock price performance will be eliminated.  The intent is to have the CD&A (described above) supplant the performance graph measure of management effectiveness. 
• Directors’ Share Ownership:  The stock ownership of directors and any requirement that directors own "qualifying shares" will be required to be disclosed.  Because this will require disclosure of actual stock ownership by directors, in addition to beneficial ownership through options, companies may wish to consider how the disclosure of the board’s stock ownership will appear, particularly if a company requires "qualifying shares."
• Non-executive Officer Compensation:  Companies will be required to disclose the compensation and position of up to three non-executive officer employees whose total compensation exceeds that of any NEO.  While the names of these non-executive officers will not be required to be disclosed, in many instances the identity of these individuals will be easily deduced by people familiar with the company, so compensation committees will need to be aware of the impact that this disclosure will have on overall compensation programs.
• Early Adoption:  Unlike many other SEC releases, early adoption of the new compensation tables could be tricky.  The SEC has said that a company may add new columns (such as a FAS 123(R) grant date fair value for options) or new tables (such as a director compensation table) to its 2006 proxy statement, but it must continue to present all the information and tables required by the SEC’s existing rules and required tables. 

Comments: Any company or person wishing to comment on any of the proposed new rules may do so by following the SEC’s instructions in the release.