New Uncharted Territory - the SEC's CD&A Requirement

by Jolie Kahn and Stan Hirschman, BoardComp, LLC

The Securities and Exchange Commission recently began requiring public company annual reports, proxy statements and registration statements to include a new Executive Compensation Disclosures and Analysis. Known as the "CD&A", this section requires a significantly greater level of detail, new tabular presentations and the development of an individualized compensation philosophy. The CD&A, developed by Management, but requiring the approval of the Compensation Committee of the Board of Directors, is a microscopic review of each company's compensation practices and is required in annual reports, proxy statements and registration statements. The new rules also had greatly enhanced disclosure as to compensatory arrangements for executive officers under Item 5.02 of Form 8-K.

While the rules still contemplate use of a tabular approach which aids in clear and concise formatting and ease of comparison, numerous disclosure requirements have been added. These include:

• Addition of a total compensation column to the Summary Compensation Table
• More complete disclosure on severance and change of control compensation
• Increased disclosure of director compensation arrangements, both tabular and narrative
• Additional compensation categories
• Addition of several new tables for supplemental information on equity and non-equity incentive compensation, retirement benefits and other deferred compensation arrangements
• Requirement of inclusion of narrative to explain tabular data
• Addition of disclosure on option grant timing and processes
• Requirement of clear definition of compensation philosophy, with Compensation Committee endorsement and Board acceptance.

The lynchpin of the new requirements is the CD&A, acronym for "Compensation Disclosure and Analysis", which requires a narrative which discusses and analyzes the issuer's compensation policies and practices as well as decisionmaking behind the data in the various tables.

The CD&A is a full blown discussion of the issuer's compensation program. The disclosure is required to be both tabular and narrative in nature, and is "filed" with the Commission, which means it is certified by both the CEO and the CFO.

Various overall points to be included are:

• Objectives of issuer's compensation program
• Specific compensation elements and how and why each is selected
• What compensation components are intended to reward
• How the amount of each award element is determined
• How the individual elements fit into the issuer's compensation program as a whole

More specific elements include:

• What role executive officers play in compensation determination
• Issuer stock ownership guidelines and policies regarding hedging risks of ownership
• How prior equity award gains are considered in setting other compensation elements
• Identification and components of any benchmarking practices
• Factors in material increases or decreases of compensation
• What corporate performance items are taken into account in making policies and decisions for compensation
• Allocation between long term and current compensation, cash and non cash compensation and different types of non cash compensation
• Basis for allocation of each form of award
• Structure and implementation of different forms of compensation to executive's and issuer's performance
• Basis for selecting trigger events for compensation

The new rules cover other areas, including:

• Enhanced related party transaction disclosures
• Non-qualified deferred compensation
• Director compensation
• Performance graph
• Disclosure of pledged securities
• Description of relationships not otherwise disclosed which are considered in determining independence of directors and nominees and disclosure of certain committee members which are not independent

These new rules radically change the existing landscape for disclosure on executive and director compensation. Certainly, issuers and boards are already feeling the impact of these new rules in their compensation decisionmaking. Therefore, sound advice and good drafting is required to ensure compliance.

BoardComp, LLC (www.boardcomp.com) is a Plano, Texas based consulting firm that specializes in assisting management personnel with public company requirements including executive compensation disclosure. Its partners, Stan Hirschman and Jolie Kahn, bring over 25 years of experience in working in the public company arena to the aid of smaller public companies looking for top level assistance without retaining "Wall Street" consultants. Contact information for BoardComp, LLC is: (214) 283-8495 (ph) or info@boardcomp.com (email).

This article is intended as a brief summary; however, it is not a full review nor is it intended to take the place of advice from your auditors and legal counsel. This does not constitute legal or accounting advice and you may not rely on the information in this summary as advice.


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