The New SEC Executive Compensation Disclosure Requirements
As the shareholder community continues to push for greater transparency relating to executive compensation strategies and disclosure the SEC has implemented several prevalent amendments effective December of 2006.
One amendment worth reviewing relates to how stock options and other stock-based awards should be disclosed moving forward. The SEC now requires companies report an equity award's annual rather than full compensation cost in the Summary Compensation Table. Previously, rules required companies to treat an equity award's full value as compensation, even though the executive might never actually earn the award. The new disclosure requirements more closely align the reporting of stock options and other stock-based awards with how the rewards are actually earned.
Previous Rules
Award - CEO receives a restricted stock award vesting in three years with a grant-date fair value of $300,000
Summary Compensation Table - Company is required to report the entire $300,000 as part of the executive's compensation for the year of the grant
New Rules
Award - CEO receives a restricted stock award vesting in three years with a grant-date fair value of $300,000
Summary Compensation Table - Company is required to disclose $100,000 (one-third) as compensation each year over the award's three-year vesting period
The revised rules shift reporting of the full grant-date fair value of a stock option or other stock-based award from the Summary Compensation Table to a new table, the Grants of Plan-Based Awards Table where amounts should be presented on a grant-by-grant basis. This table will also provide other important disclosures about awards including the award's grant date, the number of shares subject to or underlying the award and in the case of options the exercise or base price.
For more detailed information on this and other SEC revisions you can go to http://www.sec.gov/rules/final/2006/33-8765.pdf.
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