Disclosing Executive Compensation in the Proxy Statement

Proxy season is once again upon us. Compensation of management is a significant portion of any company’s proxy statement and, for most public companies, equity makes up the bulk of how management is compensated. As a stock plan administrator, you may not have the lead role in drafting the proxy statement but you likely have a key role.

Your records are often the primary, and possibly the only, source of data on the equity awards granted to and held by both executives and directors. This data is necessary to complete the required tabular disclosures and also to craft the narratives that add context to these disclosures.

In this blog entry, I summarize the required disclosures and offer tips to ensure preparation of your proxy statement goes smoothly.

What Executive Compensation Disclosures Are Required?

If it feels like proxy statements are growing, you’re not wrong. Congress and the SEC continue to expand the information on executive compensation that is disclosed in the proxy statement. Here is a current inventory of the most commonly included disclosures that relate to equity awards.

Compensation Disclosure & Analysis (CD&A): The board’s discussion of all compensation paid to the CEO and executive officers. The CD&A should describe the objectives, purpose and elements of all executive compensation programs, how the compensatory elements are interrelated, and how the board determines each component of executive pay. Stock compensation is often a centerpiece of this discussion.

Summary Compensation Table (SCT): This table provides a holistic picture of the full scope of compensation paid to executive officers over the three most recent fiscal years. You can bet that it includes a lot of data on equity awards.

Pay vs. Performance Table: One of the newest additions to the proxy statement, this table compares compensation granted and actually paid to executives to up to three performance measurements for the company. Pro tip: When it comes to equity awards, the SEC’s definition of “compensation actually paid” includes a lot of compensation that isn’t actually paid to executives. Check out my video “Pay vs. Performance: Three Things to Know.” For an in-depth look at the Pay vs. Performance table, read Terry Adamson’s guest blog entry “A Guide to the SEC’s New Pay-for-Performance Disclosures.”

Grants of Plan-Based Awards Table: A list of all equity grants and other incentive awards issued to executives over the past fiscal year. Includes grant date, number of shares granted, value, and, for performance awards, potential payout amounts.

Outstanding Equity Awards at Fiscal Year End Table: Lists all options outstanding at end of fiscal year and aggregate value of and shares underlying outstanding full value awards (unlike stock options, it is not necessary to list each award separately).

Option Exercises and Stock Vested Table: Reports aggregated shares and value acquired upon exercise of stock options and award vesting events.

Termination and Change-in-Control Payments: Reports executives’ “walk-away” number, i.e., if executives leave the company, the amount of cash and equity they take with them. Amounts must be reported for just about any possible termination scenario (e.g., resignation, retirement, cause, constructive termination, death, a change-in-control).

Option Grants Close in Time to the Release of Nonpublic Material Information: Another recent addition to the proxy statement, this table lists options granted between four business days before to one business day after the release of material nonpublic information. See the NASPP blog “Disclosure of Rule 10b5-1 Plans and Insider Trading Compliance” for more information.

CEO Pay Ratio: The ratio of CEO pay to the median employee’s pay, using the calculation of total compensation from the SCT. If the median employee receives equity, you’ll likely need to provide the data necessary to calculate his/her total compensation.

Director Compensation: Essentially an SCT for directors—provides a holistic picture of all compensation paid to directors, including equity awards.

Beneficial Ownership of Management: This table reports stock held by management (directors, officers, and principal shareholders). Includes stock that directors and officers have the ability to acquire within the next 60 days, which is where you come in.

Equity Plan Information Table: Aggregate shares outstanding and available for grant under the company’s equity plans.

New Plan Benefits: This table is included for any compensation plans that shareholders are being asked to act on. It reports the potential benefits and amounts to be paid under the plan, plan participants, and material terms and conditions of arrangements offered under the plan.

Don’t Forget the Footnotes

We often focus on the information that must be reported in the tables themselves, but the SEC also mandates that certain information be disclosed in footnotes to the tables. Make sure you know the full scope of required disclosures for equity awards, including the tabular data, footnotes, and narratives accompanying the tables.

Face Value vs. Disclosed Value

The SCT and the Grants of Plan-Based Awards Table both report the grant date fair value, as determined under ASC 718, for equity awards. This is the amount of expense the company will recognize for the awards, exclusive of forfeitures due to failures to achieve service or performance-based vesting conditions.

This value can differ from the face value of the award that is communicated to executives. Market-conditioned awards (e.g., TSR awards) are an example of a situation where this discrepancy can occur. Because the market conditions are incorporated into the fair value calculation, the fair value often differs from the grant’s face value (i.e., the target payout multiplied by the FMV at grant).

Another situation when this can occur is when company’s use a multiday average to size grants, as explained in this podcast I recorded with Amanda Benincasa Arena from Aon.

Executives may have questions when they notice that the value reported for their equity grants in the proxy statement differs from the value that was communicated to them. Make sure the board or a member of the management team understands the cause of this discrepancy and is prepared to address these questions.

Different Rules Apply to Small and Newly Public Companies 

If your company qualifies as a smaller reporting company or an emerging growth company, you are exempt from some of the disclosure requirements. Here are the key differences in how the rules apply to SRCs and EGCs:

• The CD&A is not required.
• A smaller list of named executive officers.
• SCT covers only two fiscal years and does not need to include pension values.
• Not required to include the CEO Pay Ratio, Grants of Plan-Based Awards Table, Option Exercises and Stock Vested Table, or Pension Benefits and NQDC Table.
• Quantitative disclosure is not required for termination or change-in-control payments.

A Few Tips

I’ll leave you with a few tips for a successful proxy disclosure process:

• Review last year’s proxy statement. This is a great way to refresh your memory of what information must be disclosed and can help you ensure that this year’s disclosures align with past years.
• Develop your own knowledge of the rules. Don’t rely entirely on others to tell you what disclosures are needed. Because you likely understand your company’s equity plans better than anyone, your familiarity with the disclosure requirements could help prevent a compliance failure.
• Know what is expected of you. Make sure you are part of the team responsible for drafting the proxy, are included in team meetings, and receive a copy of the project plan identifying deliverables and deadlines. This allows you to be proactive rather than always playing catch-up.
• Be prepared to explain yourself. Errors in proxy statement disclosures can have significant consequences for your company (in a worst-case scenario, shareholder votes could be invalidated). Check and double-check all your reports. In addition, make sure you know the source of each number and can explain how it was calculated.
• Leverage the tools available to you. Find out if your recordkeeping solution has built-in reports to help with the executive compensation disclosures. Some of the required calculations can be complicated (e.g., the number of shares that can be acquired within 60 days); an algorithm already developed by your solution provider could be a real time-saver.

Learn All About Equity Compensation in the Proxy Statement

The NASPP’s course “Reporting Equity Compensation in Your Proxy Statement” will help you to better understand the ins and outs of your critical role in the preparation and review of this highly visible public filing. For your convenience, each presentation in the course is offered live or on-demand. Register today!