SEC Heightens Scrutiny and Enforcement of Compensation Disclosure

The SEC has issued new regulations and guidance with respect to the scrutiny (and enforcement) of disclosure matters concerning executive compensation. These new requirements will apply to most public companies for the 2010 proxy season. Compensation committees will have to address them while they are drafting their proxy statement disclosure. Aggressive enforcement of the rules has already begun and we expect this scrutiny to intensify in 2010 and beyond.

The SEC has repeatedly stressed the importance of fully complying with the SEC disclosure rules regarding executive compensation and have stated that many companies’ disclosure is inadequate. We have already assisted several companies in responding to SEC comments letters requiring more detailed disclosure of compensation paid to their executive officers. In a recent speech, a representative of the SEC announced that, in addition to responding to these comment letters, companies may be required to amend materially deficient filings.

Because of the expected increased scrutiny, companies should immediately prepare for revising their proxy disclosure to:

  • Discuss “WHY” the named executive officers are compensated as they are. If applicable, discuss “HOW” the compensation committee uses tally sheets or peer group performance in setting executive compensation.
  • Specifically identify any peer group used for benchmarking purposes and discuss why they were selected and where the named executive officers’ compensation fell with respect to such peer group.
  • Specifically identify qualitative performance measures used in determining incentive compensation and how these measures are translated into pay determinations.
  • “Bite the bullet” and fully disclose material objective performance-based targets. Although many companies seek to avoid disclosure of theses targets due to the risk of competitive harm, the SEC has determined that this actually will be the case in only highly unusual circumstances, especially since, for most companies, the targets are tied to publicly disclosed financial results.

For More Information

For information on how increased SEC scrutiny and enforcement may affect your proxy statement disclosures, contact Charles F. Harenza at 610.478.2091 or the Stevens & Lee attorney with whom you regularly speak.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.