On Thursday, by a 4 to 1 vote, the SEC approved a series of changes to the way companies have to disclose compensation on those pesky proxy statements which have become something of a rite of spring in the investing world.For anyone who already dreads the idea of trying to sift through a 20-page Compensation Discussion and Analysis section, the new rules are unlikely to make the task any easier. Everyone familiar with these sections of proxy statements already knows they're infamous for being jammed with long strings of words that still manage to say next-to-nothing. Need evidence of that? Here's a snippet from the proxy that Cisco Systems (CSCO) filed back in late September:

"The three major elements of Cisco's executive officer compensation in fiscal 2009 continued to be:

  • base salary;
  • variable cash incentive awards;
  • and long-term, equity-based incentive awards.

Among the information technology companies in the Updated Peer Group, according to a FWC report dated May 28, 2009, Cisco's revenues, net income and market capitalization were all around or above the 75th percentile, and both one-and three-year annualized total shareholder returns through April 30, 2009 were at the 63rd percentile. For fiscal 2009, for named executive officers other than the Chief Executive Officer and Robert W. Lloyd (who became an executive officer in the fourth quarter of fiscal 2009), the Compensation Committee decided that it would continue to target individual base salaries and at-target cash incentive awards with reference to the 50th percentile of the Initial Peer Group and total value of long-term, equity-based incentive awards with reference to the 75th percentile of the Initial Peer Group, which results in overall total target compensation for these three components at approximately the 65th percentile of the Initial Peer Group. For Cisco's Chief Executive Officer, the Compensation Committee set his base salary significantly below the 50th percentile of the Initial Peer Group and his at-target cash incentive award and target long-term equity-based incentive award with reference to the 50th percentile of the Initial Peer Group. As noted below, all target percentiles are subject to the Compensation Committee's discretion to pay below or above the stated percentiles based on the factors identified herein."

Anything that forces companies to improve upon the current disclosure format would be a much-needed improvement. The SEC made these changes because it was believed that the recent financial crisis occurred in part because investors didn't have enough information about risky business practices that were largely driven by compensation. According to the SEC's press release announcing the changes -- the full documentation of the new rules is over 120 pages -- the key new elements of the section will be:

  • The background and qualifications of directors and nominees.
  • Legal actions involving a company's executive officers, directors and nominees.
  • The consideration of diversity in the process by which candidates for director are considered for nomination.
  • Board leadership structure and the board's role in risk oversight.
  • Stock and option awards to company executives and directors.
  • Potential conflicts of interests of compensation consultants.


Investors should be particularly excited about the enhanced information on directors. Given that it's not uncommon for some directors to sit on three or four boards (director compensation averages $213,000 a year at S&P 500 companies), anything that sheds more light on the people responsible for setting the compensation of the CEO and other top executives (among other things) would be much welcomed. One other new rule change is the requirement that companies disclose any enforcement actions from the SEC that a particular director has faced in the past decade, which seems like something that should have been required years ago.


Also, the current stock option disclosure in the summary compensation chart doesn't present a real picture of total compensation because of the odd way the SEC requires options to be counted as an accounting expense. That changes come March 1. The Center on Executive Compensation, a lobbying group that represents large companies on issues of pay, was generally supportive of the changes, but thought that more should be done to differentiate current compensation from long-term compensation.


The new rules are set to take place on March 1, just in time for the traditional start of proxy season. Companies with a fiscal year that matches the calendar year typically start filing their proxies in March, and the surge continues through early May. But given some of these changes, one has to wonder: Will some companies try to rush their proxies out early to avoid the new disclosure rules? Because the SEC set a calendar cut-off as opposed to a cut-off based on the end of a company's fiscal year, it's certainly a real possibility. While companies that are on a calendar year normally have until early May to submit their proxy statements, some may be tempted to get them in by Feb. 28 to avoid having to make the additional disclosure.


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