As of July 26, 2006, the SEC completed the most sweeping overhaul of
executive compensation and related party transaction disclosure in fourteen
years. Executive Compensation and Related-Party Disclosure: SEC Rules
and Explanations provides timely and thorough explanations,
implications and full text of these reforms.
The revision puts in place a principles-based disclosure regime designed to
give investors the information they need on executive compensation to make
informed investment decisions and demystify any financial dealings between
executives and their companies. The new rules also enhance and consolidate
into one item director independence and related corporate governance
disclosure requirements.
The heart of the reforms is the new Summary Compensation Table and the new
Compensation Discussion and Analysis. The Summary Compensation Table is the
principal vehicle for executive compensation, showing the total compensation
for each of the named executive officers. For the first time, SEC rules
require that all elements of executive compensation must be disclosed and that
a total individual compensation number be provided for the five named
executive officers. Other tables will display post-retirement compensation and
options exercises.
The new Compensation Discussion and Analysis (CD&A) section is a narrative
principles-based overview explaining material elements of the company’s
compensation for named executive officers. It provides a company with both an
obligation and an opportunity to explain its compensation policies, focusing
on the most important factors. It will be filed and thus subject to
Sarbanes-Oxley certification. The SEC also mandated a new compensation
committee report requiring the committee to state if it has reviewed and
discussed the CD&A with management and recommended to the board that the CD&A
be included in the annual report.
