The NASPP Blog

July 7, 2009

SEC Proposes Changes to Disclosure of Grants in SCT

Last week, the SEC announced proposed changes to its proxy disclosure and solicitation requirements. Included in the announcement is a proposal to change the way that options and awards are disclosed in the Summary Compensation Table.

Options and Awards in the SCT

Currently, companies disclose the fair value of options and awards granted to named executive officers over the grants’ service periods–the idea behind this requirement is to bring the compensation disclosures into alignment with 123(R). Essentially, as expense is recognized for the grants, that expense is disclosed as compensation paid to the NEOs in the Summary Compensation Table.

Of course, in practice, nothing we do is ever quite that simple. The requirement raised numerous questions relating to how the grant values should actually be reported in the SCT. Forfeitures, in particular, proved to be a challenge–sometimes resulting in very unintuitive disclosures of negative amounts of compensation.  This has especially been a problem this proxy season, with so many performance plans no longer expected to pay out. 

The current requirements were implemented in a surprise ruling issued by the SEC back in 2006–read the numerous memos we posted on it in our Executive Compensation Disclosure Portal (scroll down to the memos published around December 2006). Expect to see new memos on the SEC’s proposed changes posted to the portal as we receive them.

Back to the Future

Under the SEC’s proposal, the grant date fair value of options and awards to NEOs will be disclosed in the SCT in the period that grants are issued, which is how options and awards were reported in the SCT prior to the 2006 rule change. The SEC has not yet issued the proposing release, so we don’t yet know all the details, but it sounds like this could significantly simplify these disclosures and resolve a number of concerns with the existing requirements, including:

  • Double-Reporting: Since grants that vest over several years are expensed over that same period, the same grants show up again and again in the SCT. This is confusing for investors, who don’t necessarily understand all the nuances of 123(R).
  • Forfeiture Confusion: It should also resolve the negative numbers and other confusion that results from forfeitures of options and awards.
  • More Intuitive: The proposed disclosure requirements should be significantly easier for investors to understand.

Directors, Too

The same changes are proposed for the Directors’ Compensation Table.

And More…

The SEC also proposed new or modified disclosures relating to compensation and risk, compensation consultants, and corporate governance matters. For more information on the SEC’s proposal, check out Mark Borges’s July 1 blog “SEC Proposes Changes to Disclosure Rules” on CompensationStandards.com.

NASPP Conference Workshop of the Week
This week’s session is Code Red–Tricky Tax Rules in Troubled Times and Down Markets. Declining stock prices can result in a host of tax traps for your employees, including the wash sale rule, unexpected income on ESPP dispositions, and valuation of awards for FICA purposes. This workshop will highlight just how punishing the tax rules can be and offer design techniques to soften the blow.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara