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Executive Compensation Reporting in Proxy Statements

Executive Compensation Reporting in Proxy Statements. Piecing Together All The Parts of the Puzzle. Stock Options. WHY?. WHAT?. WHO?. Retirement Plans. Executive Incentives. Perks: Flowers, Jewelry, Cars, Apartments. WHEN?. Executive Compensation Reporting in Proxy Statements.

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Executive Compensation Reporting in Proxy Statements

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  1. Executive Compensation Reporting in Proxy Statements Piecing Together All The Parts of the Puzzle

  2. Stock Options WHY? WHAT? WHO? Retirement Plans Executive Incentives Perks: Flowers, Jewelry, Cars, Apartments WHEN? Executive Compensation Reporting in Proxy Statements Piecing Together All The Parts of the Puzzle Another sponsored training program 12/21/06 U.S. SEC August 11, 2006 Final Ruling

  3. Executive Compensation in Proxy Statements Why The Change? Shareholders demanding more accountability from corporate executives. • Pay-For-Performance measurements • Transparency in reporting to prevent abuse • Better information for shareholders to consider when voting on issues at annual meeting

  4. Executive Compensation in Proxy Statements SEC’s growing irritation with companies’ failure to provide “full and fair” disclosure regarding executive compensation arrangements. Why The Change? • “Item 402 always required disclosures of all compensation even if not specifically mentioned in the rules.” • Allen Beller, SEC Director of Corporation Finance • October 2004

  5. Executive Compensation in Proxy Statements 2006 final rule makes a major statement to corporate executives that the games must STOP! Why The Change? • Requires disclosure for ALL compensation; • Includes a new Compensation Disclosure & Analysis (CD&A) which becomes part of the CEO’s and CFO’s Sarbox Certification stating that there are no material misstatements or material omissions in the disclosures.

  6. Executive Compensation in Proxy Statements 2006 final rule makes a major statement to corporate executives that the games must STOP! Why The Change? “You know what we mean by executive compensation… so don’t play games anymore…” The new requirements are “principles-based” rather than “rules-based”… “Principles matter.” – John White, SEC Director of Corporation Finance, September 2006

  7. Executive Compensation in Proxy Statements When Will You See The Changes? 2006 final rule is effective for all companies with fiscal years ending on or after 12/15/06. Proxy statements issued in 2007 will reflect the new format. Since most companies will not modify prior periods reported, it will take three years to get all the information to be on a comparable basis.

  8. Executive Compensation in Proxy Statements • What Changes Will You See? • Compensation Discussion & Analysis “CD&A” • Expanded Tabular Format

  9. Executive Compensation in Proxy Statements What Changes Will You See? Compensation Discussion & Analysis “CD&A”Replaces the Compensation Committee Report • Details the objectives of the company’s compensation programs; • What the programs are designed to reward; • • Explains each element of compensation; • Why the company chooses to pay each element; • • Discloses how the company determines the amount (ie., the formula) for each element to pay; and • Discusses how each compensation element and the company’s decisions regarding that element fit the overall compensation objectives and affect decisions regarding other elements.

  10. Which narrative document was the CD&A modeled after? Executive Compensation in Proxy Statements What Changes Will You See? Compensation Discussion & Analysis “CD&A”Replaces the Compensation Committee Report • Details the objectives of the company’s compensation programs; • What the programs are designed to reward; • • Explains each element of compensation; • Why the company chooses to pay each element; • • Discloses how the company determines the amount (ie., the formula) for each element to pay; and • Discusses how each compensation element and the company’s decisions regarding that element fit the overall compensation objectives and affect decisions regarding other elements. The MD&A in the 10-K “If it is material, it must be discussed.” .

  11. Executive Compensation in Proxy Statements What Changes Will You See? Expanded Tabular Format • Disclosure of Compensation over the last three years: • Summary Compensation Table • Disclosure of Outstanding Equity Interests: • Grants of Plan-Based Awards Table • Outstanding Equity Awards at FYE Table • Option Exercises and Stock Vested Table • Disclosure of Retirement Benefits: • Pension Benefits Table • Non-Qualified Deferred Compensation Table • Disclosure of Director Compensation and Related Party Transactions • Director Compensation Table • Related Party Transaction Narrative

  12. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE • Named Executive Officers (NEOs): • Two persons who served as PFO and PEO during the last fiscal year • • Three most highly compensated executive officers (other than PEO or PFO) who were • serving as executives at the end of the last fiscal year; and • Up to two additional executives who served during, but not at the end of, the fiscal year, with total comp higher than those executive officers described above.

  13. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE Effective for fiscal years ending after 12/15/06, but restatement of prior years is not required; ‘05 and ‘04 values may not be comparable

  14. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE All compensation and bonuses (valued in $), paid and deferred. Deferred compensation detail disclosed in notes

  15. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE Contrary to prior years, 2006 awards must include all dividends earned; whether paid or not. Look for material disclosures in notes.

  16. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE • Caution! • Full Grant Date Fair Value for stock awards is inconsistent with the value reported in the co.’s financial statements • YTD Compensation may seem overstated; • Not consistent with the presentation of non-equity incentive plan compensation All awards (including restricted stock, phantom stock, etc) valued at grant date fair value; cross-referenced to 10-K and FAS 123(R) discussion

  17. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE • Caution! • Full Grant Date Fair Value for stock awards is inconsistent with the value reported in the co.’s financial statements • YTD Compensation may seem overstated; • Not consistent with the presentation of non-equity incentive plan compensation Look for explanatory disclosures by companies that think these inconsistencies may mislead the users of the financial statements.

  18. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE The dollar value of all amounts earned during the fiscal year from non-equity incentive plans.

  19. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE Includes all awards from incentive plans except those that are equity-based (stock awards, option awards, etc) whether or not cash payment is actually made in that year. Reporting is based on the year that the executive was awarded the compensation – not when it was actually received

  20. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE Also includes earnings on nonqualified deferred compensation. The rate at which obligation grows annually must also be disclosed in the notes.

  21. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE • Caution! • Negative changes in actuarial value should be disclosed and discussed in the notes, but not included in the table. Aggregate increase in actuarial value of all defined benefit and actuarial plans accrued during the year. Using same measurement dates for financial reporting purposes.

  22. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE • Perquisites (Perks) and Other Personal Benefits • Not directly and integrally related to the job. • Conveys a benefit not generally available to all employees of the company. Each item included in All Other Compensation that exceeds $10,000 must be disclosed and quantified in a footnote. Includes amounts paid or accrued per termination agreement Includes company contributions to defined benefit contribution plans Includes the dollar value of any dividends paid on stock or option awards not factored into the reported grant date fair value.

  23. Executive Compensation in Proxy Statements SUMMARY COMPENSATION TABLE The sum of all values reported in columns (a) through (i).

  24. Which of these tables are completely new? Executive Compensation in Proxy Statements Other Tabular Presentations and Disclosures • Disclosure of Outstanding Equity Interests: • Grants of Plan-Based Awards Table • Outstanding Equity Awards at FYE Table • Option Exercises and Stock Vested Table • Disclosure of Retirement Benefits: • Pension Benefits Table • Non-Qualified Deferred Compensation Table • Disclosure of Director Compensation and Related Party Transactions • Director Compensation Table • Related Party Transaction Narrative All are “essentially new”... Some names are similar but definitions are new. .

  25. Estimated Future Payouts Estimated Future Payouts All Other All Other Exercise Under Non-Equity Incentive Under Equity Incentive Plan Name Grant Stock Stock or Base Plan Awards Awards Date Awards: Awards: Price of Number of Number of Option Shares of Securities Awards Stock or Underlying ($/Sh) Threshold Target Maximum Threshold Target Maximum Units Options ($) ($) ($) ($) ($) ($) (#) (#) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Principal Executive Officer Principal Financial Officer Executive A Executive B Executive C Executive Compensation in Proxy StatementsDisclosure of Outstanding Equity Interests Add’l column and footnote needed if the exercise price is less than closing market price of the underlying stock on the FAS 123(R) grant date. Grants of Plan-Based Awards Table Classifies awards as (1) an equity or non-equity award, and (2) performance incentive plan or non-incentive based (ie, tenure status). A supplemental column next to Grant Date column is required if the FAS 123R grant date is different from the grant date (the date on which the compensation committee took action).

  26. Option Awards Stock Awards Equity Number of Number of Option Option Number of Market Equity Incentive Plan Name Securities Securities Equity Exercise Exercise Shares or Value of shares or Incentive Awards: Underlying Underlying Incentive s or Price Date Units of Plan Awards: Market or Unexercised Unexercised Plan Awards: ($) Stock Units of Number of Payout Value Options Options Number of That Have Stock Unearned of Unearned (#) (#) Securities Not That Have Shares, Units Shares, Units Exercisable Unexerc. Underlying Vested Not or Other or Other Unexercised (#) Vested Rights That Rights That Unearned ($) Have Not Have Not Options Vested Vested (#) (#) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Principal Executive Officer Principal Financial Officer Executive A Executive B Executive C mmm Executive Compensation in Proxy StatementsDisclosure of Outstanding Equity Interests Outstanding Equity Awards at Fiscal Year-End Instead of disclosing awards on an aggregate basis, allawards held by NEOs must be reported. Multiple awards are aggregated only when the expiration date and the exercise price are identical. Options must be presented on a grant-by-grant basis. The aggregate value and the number of shares subject to outstanding stock awards and Equity Incentive Plan Awards may be reported on a single line.

  27. Option Awards Stock Awards Equity Number of Number of Option Option Number of Market Equity Incentive Plan Name Securities Securities Equity Exercise Exercise Shares or Value of Incentive Awards: Underlying Underlying Incentive s or Price Date Units of Plan Awards: Market or Unexercised Unexercised Plan Awards: ($) Stock Units of Number of Payout Value Options Options Number of That Have Stock Unearned of Unearned (#) (#) Securities Not That Have Shares, Units Shares, Units Exercisable Unexerc. Underlying Vested Not or Other or Other Unexercised (#) Vested Rights That Rights That Unearned ($) Have Not Have Not Options Vested Vested (#) (#) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Principal Executive Officer Principal Financial Officer Executive A Executive B Executive C mmm Executive Compensation in Proxy StatementsDisclosure of Outstanding Equity Interests Outstanding Equity Awards at Fiscal Year-End Specific footnote disclosure is required: (1) Explain the vesting dates for options, other stock awards (such as restricted stock) and awards under incentive plans; (2) Explain the nature of a transfer when an award is transferred by the NEO other than “for value”.

  28. Executive Compensation in Proxy StatementsDisclosure of Outstanding Equity Interests Option Exercises and Stock Vested Table Discloses each NEO’s options exercised and other types of equity awards that vested during the year (restricted stock, or restricted stock units). Footnotes to this table must include the values and the terms of any amount deferred upon exercise of an option or vesting of a stock award. Shows amounts realized on equity compensation during the last fiscal year.

  29. Executive Compensation in Proxy StatementsDisclosure of Retirement Benefits Pension Benefits includes Supplemental Executive Retirement Plans (SERPS) in addition to traditional pension plans, but does not require disclosure of defined contribution plans, such as 401(k) plans. The values are computed as of the pension plan measurement date, for financial statement reporting purposes, of the company’s last completed fiscal year. Pension Benefits Table A separate row must be included in the table for each different plan in which the NEO participates.

  30. Executive Compensation in Proxy StatementsDisclosure of Retirement Benefits Non-Qualified Deferred Compensation In some cases, portions of “contributions” and “earnings” may also be reported on the same year’s Summary Compensation Table. In these cases, a footnote is required. Similarly, a footnote is required for portions of the “aggregate balance” entry that had been reported on the Summary Compensation Table for the NEO in prior years. Additional footnotes are required to explain the nature of certain deferred compensation arrangements.

  31. Executive Compensation in Proxy StatementsDisclosure of Director Compensation and Related Party Transactions Director Compensation Table • “All Other Compensation” example: • Perks and personal benefits (for aggregate greater than $10,000) • Consulting fees • Director legacy programs and charitable awards • Only compensation for last fiscal year is required • Directors may be listed in single row if all elements of compensation are identical • Footnote for each director required showing aggregate number of stock awards and aggregate number of option awards outstanding at FYE

  32. What do these two men have in common? Both have brought “music to the ears” of analysts who are wrestling with the puzzle of executive compensation Both are wearing red ties Both are wearing white shirts and black jackets Both have high foreheads and strong chins Both have great looking hair... 2007... A different look to the proxies... So many new parts of the puzzle to study... A reason for investors to celebrate...

  33. Stock Options Retirement Plans Executive Incentives Perks: Flowers, Jewelry, Cars, Apartments Ludwig van Beethoven German Composer 1770-1827 Christopher Cox US SEC Chairman “Celebrating the harmony and melodies of financial reporting” Executive Compensation Reporting in Proxy Statements U.S. SEC August 11, 2006 Final Ruling

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