The SEC has issued a proposal for comment that would change proxy disclosure rules for filing companies. Among the many changes suggested is the enhanced compensation policy disclosure for individuals outside the usual group of Named Executive Officers. As part of the Risk Assessment process that should be part of every Compensation Committee¡¦s charter, the SEC has proposed that the compensation policies for this broader group of employees should be evaluated, justified, and potentially disclosed in the company¡¦s proxy statement. There is concern that there may be a ¡§disconnect¡¨ between the focus on long-term company performance and the specific pay structures that reward employees in the short-term.

The SEC is proposing this greater disclosure, not for the amounts paid to this broader group of employees, but for the compensation policies relative to how this group is paid. Situations that could trigger such disclosure include:


- A business unit of the company that carries a significant portion of the company¡¦s risk profile;
- A business unit with compensation structured differently than other units within the company;
- A business unit that is significantly more profitable than other units within the company;
- A business unit where compensation expense is a significant percentage of the unit¡¦s revenues.

Disclosures would require a detailed design philosophy as to the reasoning for such different pay structures and the company¡¦s overall Risk Assessment process.

While many companies may practice some form of Risk Assessment when designing pay-for-performance structures, it appears that very few do it formally and document their decisions with sound, independent reasoning. Questions to consider include:

- Does the company have a formal Risk Assessment process?
- Who manages and who is included in that process?
- Audit Committee
- Compensation Committee
- Governance Committee
- Do the committee charters empower them to do this job?
- Has an independent assessment been made by an outside professional?
- Does anyone in the Risk Assessment process have a potential conflict of interest?

If you have any questions or would like to discuss this issue further, please contact Josh Bewlay at jmb@compensationresources.com or call 201-934-0505 x118.

Credit Suisse recently announced a change to the compensation structure for its Directors and Managing Directors for compensation earned in 2009 and paid in 2010. According to the press release from the Company , the change is consistent with the guidelines for best practices announced by the G-20 summit.

Key Changes to the Plan:

1. The Company will shift the mix of fixed (base salary) compensation and variable (bonus) compensation to provide for a higher percentage of the total compensation to be in the form of fixed base salaries. While increasing fixed compensation costs for the company, the intent appears to be to remove some of the potential for inappropriate risk taking by limiting the upside of that variable piece of the compensation package.

2. For employees earning a variable compensation component greater than $100,000, that bonus will be split 50/50 between Scaled Incentive Share Units (SISU) and Adjustable Performance Plan Awards (APPA).

a. SISUs are share units whose value is determined by Credit Suisse’s average Return on Equity. The base share amount will vest annually over four (4) years. The previous plan vested in three (3) years. The value of these new SISUs can increase or decrease, depending on the Company’s RoE.

b. APPAs are cash-based with a notional cash value subject to a three-year, pro-rata vesting schedule. Awards may adjust upwards annually, based on the Company’s RoE in the respective year. However, if an employee’s individual business unit is not profitable, the value of the award will be adjusted downwards.

While this change in the compensation structure at Credit Suisse may be appropriate for a large bank, it is important to note that such measures cannot be applied to all situations in every company looking to address their compensation needs. At Compensation Resources, Inc. (CRI), our compensation professionals work with each of our clients one-on-one to develop a highly customized approach. Our consultants seek to first assess the current situation, review perceived needs and concerns, evaluate possible alternatives, and work collaboratively to design and develop tailor-made solutions that work for that specific client. Our clients receive the benefit of our years’ of experience in the field of compensation, while receiving the individual attention to customize cutting-edge concepts to the client’s specific needs.

www.credit-suisse.com/news/en/media_release.jsp?ns=41331

Today is the deadline for submitting comments on a host of changes proposed by the SEC regarding executive compensation, proxy disclosure, shareholder rights and compensation consultants. See the government’s link here:
http://sec.gov/rules/proposed/2009/33-9052.pdf

Of particular concern is potential for conflicts of interest where the same or affiliated consultant performs duties for management (i.e. consulting on benefits, insurance, etc.) and for the Board of Directors (i.e. consulting on management’s compensation). A 2007 House of Representatives Committee reported that compensation consultants can earn fees almost 11 times more for providing “other services” than they were paid for providing executive compensation advice. See report here:
http://oversight.house.gov/documents/20071205100928.pdf
The report goes on to purport that there appears to be a correlation between the extent of a consultant’s dual role in a company and the level of CEO pay.

Many of the larger firms that do offer “other services” besides executive compensation consulting have stated that they have built-in preventative measures that limit the potential for any conflict to occur. However, is the perception of a conflict enough to cause concern? The proposed SEC changes would require companies that hire the same or affiliated consultants to perform both functions to disclose the work performed and the fees paid in those instances.

Please tell us what you think about this issue and offer your comments.