Risk Assessment and Compensation Policy Disclosure

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.