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01/08/07 |
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Revisions to the Reporting of Equity Awards Under the SEC's Executive Compensation Disclosure Requirements
Penny Somer-Greif
Frank C. Bonaventure
On December 22, 2006, the Securities and Exchange Commission ("SEC") adopted amendments to the revised executive compensation disclosure rules it had adopted on July 26, 2006. We discussed the revised disclosure rules in our client memoranda dated September 2006 and (for small business issuers) December 2006. This Alert discusses the changes resulting from the amendments adopted on December 22. According to the SEC, the amendments "more closely conform the reporting of stock and option awards to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (FAS 123R)." 1 Overview For other than small business issuers,3 who are not required to include the table, the full value of each equity award, as well as the incremental value of any repriced or materially modified option, SAR and similar award, will be disclosed on an award-by-award basis in the Grants of Plan-Based Awards Table. This means that pursuant to the amendments, small business issuers will not disclose the full grant date fair value of equity awards in the year they are granted or the incremental fair value for repriced or materially modified awards in either the Summary Compensation Table or Director Compensation Table. As was the case prior to the amendments, small business issuers will still be required to describe any repricing or other material modification in the narrative to the Summary Compensation Table, if material to an understanding of the information disclosed in the table, pursuant to Item 402(c)(2) of Regulation S-B.4 Summary Compensation Table and Director Compensation Table — All Issuers In other words, the amount reflected in the stock award and option award columns of the Summary Compensation and Director Compensation Tables will generally be the amount of compensation cost that the company recognizes for accounting purposes for equity awards for the applicable officer or director during that year. Therefore, unlike prior to the amendments, equity awards granted, for example, in 2007 based on 2006 performance generally will not be reflected in the Summary Compensation Table or Director Compensation Table for 2006 since a company generally would not recognize any compensation cost for financial statement purposes in 2006 for such awards. However, for other than small business issuers, the full grant date fair value of such awards would be reflected in the Grants of Plan-Based Awards Table for 2006, as further discussed below. The amendments also require footnote disclosure to the Summary Compensation Table and Director Compensation Table of any equity awards forfeited during the year. While the value of awards forfeited related to service-based vesting conditions will be included (as a negative number) in the appropriate column of the Summary Compensation Table and Director Compensation Table when actually forfeited, unlike for financial reporting expense purposes, companies will not include an estimate of forfeitures related to service-based vesting conditions in determining the amounts included in the stock awards and option awards columns of the Summary Compensation Table and Director Compensation Table. Therefore, the amounts reported in the stock awards and option awards columns of the Summary Compensation Table and Director Compensation Table won’t necessarily match the amounts expensed in the company’s financial statements. Further, the instructions to the tables have been amended to provide that amounts of salary or bonus that a named executive officer or director has elected to forgo in order to receive stock, equity-based or other forms of non-cash compensation instead should still be included in the salary or bonus column, as applicable. The receipt of such non-cash compensation in lieu of salary or bonus must now be disclosed in a footnote to the appropriate column, with a cross reference, where applicable, to any disclosure in (for small business issuers) the narrative to the Summary Compensation Table where the material terms of such stock, option or non-equity incentive plan award elected by the officer or director is reported or (for other issuers) to the Grants of Plan-Based Awards Table where the elected stock, option or non-equity incentive plan award is reported. Prior to the amendments, amounts forgone pursuant to a company program under which stock, equity-based or other forms of non-cash compensation could be received in lieu of a portion of salary or bonus were disclosed in the stock awards, option awards or all other compensation columns (or via footnote if made pursuant to a non-equity incentive plan and therefore not reportable in the Summary Compensation Table), and not in the salary or bonus columns. Grants of Plan-Based Awards Table and Director Compensation Table — Issuers Other Than Small Business Issuers Similarly, the instructions to the Director Compensation Table under Item 402(k) of Regulation S-K have been amended to require footnote disclosure of the grant date fair value of each stock and option award granted to directors, in addition to the aggregate number of stock awards and option awards outstanding at the end of the fiscal year as already required under the revised disclosure rules. In addition, under the amendments options, SARs and similar option-like instruments granted in connection with a repricing or other material modification will be disclosed in the Grants of Plan-Based Awards Table on a grant-by-grant basis, with the incremental fair value of such repricing or other modification, computed pursuant to FAS 123R as of the date of the repricing or modification, disclosed in the new column (l). The Director Compensation Table under Item 402(k) of Regulation S-K has been amended to require footnote disclosure of the same information with respect to directors. However, as is the case with the description of any such repricing or material modification required in the narrative to the Summary Compensation Table or Grants of Plan-Based Awards Table pursuant to Item 402(e)(ii) of Regulation S-K, no disclosure is required for any repricing or other material modification that occurs pursuant to a pre-existing formula or mechanism in the plan or award that results in the periodic adjustment of the option or SAR exercise or base price, an antidilution provision in a plan or award, or a recapitalization or similar transaction equally affecting all holders of the class of securities underlying the options or SARs. The amendments will be effective upon publication in the Federal Register and as such will generally be applicable for disclosure of compensation for years ending on or after December 15, 2006 in most companies' upcoming Annual Report on Form 10-K or 10-KSB or upcoming proxy statement. The amendments were adopted as interim final rules so that they will apply to companies' first year of compliance with the revised executive compensation rules even as the SEC solicits comments on the amendments. Therefore, it is possible that additional revisions will be implemented at a later date based on comments received on the amendments. You can access the SEC's adopting release with respect to the amendments at http://www.sec.gov/rules/final/2006/33-8765.pdf. This Client Alert contains only a general summary of the amendments to the SEC's executive and director compensation requirements and should not be construed as providing legal advice. If you have any questions about the information in this Client Alert, please contact Frank C. Bonaventure at 410-347-7305 or Penny Somer-Greif at 410-347-7341. NOTES |
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Ober, Kaler, Grimes & Shriver
Maryland Washington, D.C. Virginia |
