The SEC issued three new “Compliance & Disclosure Interpretations” ("C&DIs") in March 2010 interpreting Item 402(c) of Section 119 of Regulation S-K, which sets forth the requirements for disclosures of executive compensation and the inclusion of data into a “Summary Compensation Table” and a “Grants of Plan-Based Awards Table.”
Reporting of Equity Grants Subject to “Negative” Discretion
The first new C&DI, issued on March 1, 2010, relates to a hypothetical situation in which a company, in 2010, grants an executive officer an equity incentive plan award with a three-year performance period beginning 2010. The equity incentive plan allows the compensation committee to exercise its discretion to reduce the amount earned pursuant to the award. The fact that the compensation committee has the right to exercise "negative" discretion could theoretically cause the grant date of the award to be deferred until the end of the three-year performance period, after the compensation committee has determined whether to exercise its negative discretion.
The question was posed about when (i.e. in what year) and how such an award should be reported in the Summary Compensation Table. The SEC responded that although generally “the service inception date usually is the grant date,” if the equity incentive plan award is authorized but service begins before a mutual understanding of the key terms and conditions is reached, the service inception date may precede the grant date. In a situation in which the compensation committee’s right to exercise “negative” discretion may preclude, in certain circumstances, a grant date for the award during the year in which the compensation committee communicated the terms of the award and performance targets to the executive officer and in which the service inception date occurs, the award should be reported in the Summary Compensation Table and Grants of Plan-Based Awards Table as compensation for the year in which the service inception date occurs. The SEC further advised that the award should be stated at the “fair value… at the service inception date, based upon the then-probable outcome of the performance conditions.”
Refusal to Accept Non-equity Incentive Award
The second new C&DI, issued on March 12, 2010, relates to a hypothetical situation in which a company grants annual non-equity incentive plan awards to its executive officers in January 2010. The awards' performance criteria are communicated to the executives at that time and are based on the company's financial performance for the year. Executives will not know the total amount earned pursuant to the award until the end of the year, when the compensation committee can determine whether or to what extent the performance criteria have been satisfied. At that time, the amounts earned pursuant to the awards are determined and communicated to the executive officers.
The question was posed about how to report this non-equity compensation in the event that one executive refuses to accept payment pursuant to the award, and whether, under such circumstance, the award needs to be included in the executive’s total compensation for purposes of determining if the executive is a “named executive officer” for 2010. The SEC responded affirmatively on both counts, stating that the executive officer's decision not to accept payment of the award does not change the fact that award was granted in and earned for services performed during 2010.
The SEC responded that the award should be included in the Grants of Plan-Based Awards Table in 2010 and should be considered for the purposes of determining whether the executive is a “named executive officer.” The SEC further advised that the company should disclose the executive's decision not to accept payment of the award, which it can do either by adding a column to the Summary Compensation Table next to column (g), "Nonequity Incentive Plan Compensation," reporting the amount of nonequity incentive plan compensation declined, or by providing footnote disclosure to the Summary Compensation Table. Moreover, in the “Compensation Discussion and Analysis” section, the company should consider discussing the effect, if any, of the executive's decision on how the company structures and implements compensation to reflect performance.
Awards Declined Prior to their Grant
Finally, the third new C&DI, also issued on March 12, 2010, relates to a hypothetical situation in which (A) a company has a practice of granting discretionary bonuses to its executive officers, and (B) before the board of directors takes action to grant such bonuses for 2010, an executive officer advises the board that she will not accept a bonus for 2010.
The SEC advised that under those circumstances, where the executive declined the bonus before it was granted, the company should not report the compensation in the Summary Compensation Table, and should not include the amount in total compensation for purposes of determining if the executive is a named executive officer for 2010.