SEC Targets Boards Performance Goal Disclosures

One area of the SEC’s new compensation disclosure rules that appears ripe for revision is the disclosure of performance targets. With some estimates saying that less than half of reporting companies are properly reporting their executives’ performance goals, the SEC is giving the rule provision a hard look.

John White, director of the SEC’s Division of Corporation Finance, said his division has earmarked disclosure of performance targets as an area for review and that they are taking it seriously. “I think it’s possible we could consider whether it would be appropriate to recommend rulemaking on this one to recalibrate the rules,” he said.

White made his comments in a speech at Northwestern University earlier this month reviewing companies’ disclosures under the new rule’s first year. The SEC is planning to issue a comprehensive review of the new disclosures in the fall.

When it adopted its new compensation disclosure rules, the SEC expected boards to disclose the performance targets they use to award top executives’ incentive pay. So far that has not happened to a large degree.

Indeed, a study of 100 large public companies conducted by Watson Wyatt found that nearly 45% failed to disclose the performance targets they use to determine their executives’ incentive pay. The breakdown of companies that properly disclosed their performance targets follows no discernible pattern and is not particular to industry categories or companies of a certain size. General Electric, for instance, disclosed its performance goals, while Alcoa did not.

“The staff has heard an almost unanimous chorus from investors — confirmed privately by many in-house and law firm counsel — that companies are not providing required disclosure about performance targets in some cases,” White said.

The rule clearly shows a gap between SEC expectations and companies' understanding of the rules. Some of that disconnect is likely due to the fact that this is the first year in which companies have had to adhere to the new compensation disclosure rules. Paul Dorf, a compensation consultant with Compensation Resources, says he suspects the SEC will issue additional guidance to address any confusion.

Other experts say that some companies are testing the SEC in the rule’s first year. Confusion or lack of clarity about when companies could use the confidentiality exclusion of performance targets may have inadvertently encouraged companies to test that provision, they say.

A Pattern of Compensation Disclosure Shortfalls

In his May 4 speech, John White outlined some of the more common complaints regarding companies’ compensation disclosures.

In addition to companies’ failing to disclose performance targets, the list includes:
Lack of Analysis

The “A” in CD&A is all too often being ignored, according to White. Companies are not providing the necessary context in their Compensation Discussion & Analysis sections to help investors understand how the company determined each executives’ compensation was at an appropriate level.
Negative Numbers

The reporting of negative numbers in the new tables required under the rule has generated complaints. Negative numbers occur from a drop in actuarial value of pension plans or certain calculations that are needed to determine compensation costs associated with equity awards, like expensing options. Complaints have arisen regarding the SEC’s rules on how to address negative numbers in the calculation of compensation.

CEO’s Role in Setting Comp

The new disclosure rules ask companies to disclose what the CEO’s role is in setting compensation. Companies, however, are not always doing this. The SEC wants to know details like the CEO’s level of involvement in calling or attending compensation committee meetings, involvement with compensation consultants and any input they may have had in creating compensation packages.