Executive Compensation: SEC Regulations and Congressional Proposals

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Concern about shareholder value, corporate governance, and the economic and social impact of
escalating pay for corporate executives has led to a controversy regarding the practices of paying
these executives. On July 26, 2006, the Securities and Exchange Commission voted to adopt
revisions to its rules on disclosure of executive compensation. On December 22, 2006, the SEC
announced that it had adopted changes in the July 26 rules. These December 22 changes have
become somewhat controversial, with opponents saying that they obfuscate executive
compensation and with proponents saying that the changes are necessary to give a truly accurate
picture of executive compensation. Congressional proposals have been made concerning
stockholder advisory approval of executive compensation and limiting the amount of deferred ^th
compensation for tax purposes. One of the major proposals in the 110 Congress is H.R. 1257.
On March 28, 2007, the House Financial Services Committee voted to report out H.R. 1257,
which would require public companies to give their shareholders an advisory vote on executive
compensation. On April 20, 2007, the House passed H.R. 1257. On April 20, 2007, S. 1181,
which is very similar to H.R. 1257, was introduced and referred to the Senate Committee on
Banking, Housing, and Urban Affairs. On April 15, 2008, S. 2866, the Corporate Executive
Compensation Accountability and Transparency Act, was introduced and referred to the ^th
Committee on Finance. In the 110 Congress two laws containing executive compensation
provisions were enacted: P.L. 110-289, the Housing and Economic Recovery Act of 2008, and
P.L. 110-343, the Emergency Economic Stabilization Act of 2008. This report will be updated as
warranted.

oncern about shareholder value, corporate governance, and the economic and social
impact of escalating pay for corporate executives has led to a controversy regarding the
practices of paying these executives. In a stated attempt “to provide investors with a C

clearer and more complete picture of compensation to principal executive officers, principal ¹
financial officers [and] the other highest paid executive officers and directors,” the Securities and
Exchange Commission (SEC or Commission) has recently issued rules concerning the disclosure
of executive compensation. The rules, however, have created a controversy of their own.
On July 26, 2006, the SEC voted to adopt revisions to its rules concerning disclosure of executive ²
compensation. These compensation disclosure rules were particularly focused upon companies’
providing investors with details about executives’ stock-option grants and corporate stock-option
programs. The rules required companies to prepare a principles-based Compensation Discussion ³
and Analysis section in their proxy statements, annual reports, and registration statements.
In these July 26 rules, the Commission required companies “to make tabular and narrative
disclosure about all aspects of stock option grants and ... provid[e] additional guidance about the ⁴
disclosure of company stock-option practices.” The tables would have to contain such
information as the grant date fair value, the Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards Rule No. 123 (FAS 123R) grant date, the closing
market price on the grant date if the closing market price is greater than the exercise price of the
award, and the date on which the board of directors or the compensation committee took action to
grant the award if the action date is different from the grant date.
On December 22, 2006, the Commission announced that it had adopted changes in its July 26
executive and director compensation disclosure rules “to 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).” The
amendment was made in the form of interim final rules that would become effective upon ⁵
publication in the Federal Register. The Commission went on to state that:
^FA^S^123R^requⁱ^r^es^recogⁿⁱ^tⁱ^on^of^t^h^{e cos}^t^s^of^equi^t^y^a^w^ard^s^ov^{er t}^h^{e peri}^{od i}ⁿ^w^hⁱ^c^h^an
^e^m^plo^y^{ee is}^requ^{ired to prov}^id^{e s}^e^rv^{ice in}^ex^c^h^aⁿ^g^e^f^o^{r th}^{e aw}^a^r^d^.^U^sⁱⁿ^g^thⁱ^s^s^a^m^e^a^p^p^r^o^a^c^h
ⁱⁿ^t^h^{e e}^x^ecu^tiv^e^co^m^p^en^sati^oⁿ^dⁱ^sclo^s^u^r^e^w^ill^gⁱ^v^eⁱⁿ^v^e^sto^r^{s a b}^e^tter^id^{ea o}^f^th^e
^com^p^eⁿ^s^a^tⁱ^on^earn^e^{d b}^y^an^ex^ecu^tⁱ^v^e^{or di}^rect^{or du}^riⁿ^g^{a part}ⁱ^c^u^l^{ar repo}^rtⁱⁿ^g^peri^od,⁶
^coⁿ^s^is^ten^t^wⁱ^th^t^h^{e p}^rⁱⁿ^cip^l^es^uⁿ^d^er^l^yⁱⁿ^g^t^h^{e f}ⁱⁿ^aⁿ^c^{ial d}ⁱ^sclo^su^r^e^state^m^eⁿ^t.
The SEC briefly summarized some of the important provisions of the amendment as follows:
^T^h^{e dol}^l^a^{r v}^a^l^u^{es requ}ⁱ^r^{ed t}^o^{be report}^e^{d i}ⁿ^t^h^e^S^t^ock^A^w^{ards an}^{d O}^p^tⁱ^on^A^w^ards^col^u^mⁿ^s
^of^t^h^{e S}^u^m^m^a^r^y^C^o^m^p^eⁿ^s^a^tioⁿ^T^a^{ble an}^{d th}^e^{Director C}^o^mpen^s^a^{tion T}^a^{ble are rev}ⁱ^s^e^{d to}
^dis^c^los^e^th^{e co}^m^p^ens^a^tion^co^s^t^of^th^os^{e a}^w^ards^{, bef}^o^{re re}^f^l^ectiⁿ^g^f^o^rf^eit^u^res^,^ov^{er th}^e
^requⁱ^sⁱ^t^e^s^e^rvⁱ^{ce peri}^{od, as}^des^c^ri^{bed i}ⁿ^F^A^S^123R^{. F}^o^rf^ei^t^u^r^e^s^{are requ}ⁱ^r^ed^t^o^{be des}^c^ri^be^d
ⁱⁿ^acco^m^p^anyⁱ^ng^f^ootn^o^te^s^.

¹⁷¹^Fe^{d. R}^e^g^.^78,³³^8,⁷⁸^,3^{39 (}^D^e^c^em^be^r^29,²⁰⁰⁶⁾^.
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³⁷¹^Fe^{d. R}^e^g^.^53,¹⁵^8,⁵³^,1^{64 (}^S^e^p^te^m^b^e^r^{8, 20}⁰⁶⁾^.
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^T^h^{e Gran}^ts^of^P^l^an^-^B^as^{ed A}^w^a^r^ds^T^a^{ble is}^revⁱ^s^e^{d to re}^qu^ire^dis^c^los^u^{re of}^th^{e g}^r^aⁿ^t^d^a^t^e^f^aⁱ^r
^v^a^lu^{e o}^f^eachⁱⁿ^di^vⁱ^du^a^l^equⁱ^t^y^a^w^{ard, com}^p^u^t^{ed i}ⁿ^accordaⁿ^ce^wⁱ^t^h^F^A^S^123R^{, an}^{d th}^e
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^r^e^q^u^ir^{e f}^o^o^tⁿ^o^{te d}ⁱ^sclo^s^u^r^e^o^f^th^{e sa}^m^eⁱⁿ^f^o^r^m^atioⁿ^.
^T^h^{e Gran}^ts^of^P^l^an^-^B^as^{ed Awards}^T^a^{ble is}^revⁱ^s^e^{d t}^o^requⁱ^r^{e di}^s^c^l^o^s^u^{re of}^any^optⁱ^oⁿ^or
^s^t^ock^appreci^atⁱ^{on ri}^gh^t^t^h^at^w^a^s^re-^p^ri^{ced or ot}^h^e^r^wⁱ^s^e^m^a^t^e^ri^al^l^y^m^odi^fⁱ^ed^du^ri^ng^t^h^e^l^a^s^t
^com^p^leted^fⁱ^s^cal^y^{ear, i}ⁿ^cl^u^d^ing^t^h^eⁱⁿ^cre^m^ental^f^a^ir^v^a^l^u^{e, co}^m^p^u^t^{ed a}^s^o^f^t^h^e^re-^p^{ricing or}
^m^odi^fⁱ^cat^ion^{date i}ⁿ^accordance^w^{ith F}^A^S^123R^{, an}^d^th^e^{Director C}^o^m^p^ens^a^{tion T}^a^ble
^requⁱ^r^{ed u}ⁿ^d^{er It}^em^{402 of}^R^e^g^u^l^a^tⁱ^oⁿ^S-^Kⁱ^s^revⁱ^s^e^{d t}^o^req^uⁱ^{re f}^ootⁿ^o^t^e^di^s^c^l^o^su^{re of}^t^h^e⁷
^sa^m^eⁱⁿ^cr^e^m^eⁿ^tal^f^a^ir^v^a^lu^{e i}ⁿ^f^o^r^m^atioⁿ^.
These December 22 amendments have resulted in criticism by some investor groups. Investor
groups’ criticism has focused on what they believe to be the obfuscation of executive pay
packages. An example given is the following:
^S^a^y^t^h^{e Ch}ⁱ^e^f^ex^ec^u^tⁱ^v^{e of}^A^m^eri^can^Wi^dg^et^g^e^t^s^{a $24 m}ⁱ^l^lⁱ^oⁿ^optⁱ^oⁿ^g^r^an^t^oⁿ^D^ece^m^b^{er 1}
^o^f^t^hⁱ^s^ye^a^r^,^wⁱ^t^h^t^h^e^o^p^tⁱ^o^{ns ve}^stⁱⁿ^g—^me^aⁿⁱ^{ng t}^h^e^y^ma^y^b^e^e^x^e^r^cⁱ^se^d^—^o^v^e^r^fo^ur^y^ears^.^H^e
^isⁿ^o^{t eli}^g^{ible f}^o^{r retire}^m^eⁿ^{t, p}^e^rh^aps^becau^s^e^h^e^j^oⁱⁿ^{ed th}^{e c}^o^m^p^aⁿ^y^oⁿ^l^y^a^f^e^w^y^ears^a^g^o,
^{or perh}^aps^becau^s^e^h^e^h^a^sⁿ^o^t^reach^{ed th}^{e co}^m^p^any^’^s^mⁱⁿⁱ^mum^retire^m^eⁿ^{t ag}^{e o}^f^60.
^In^th^{e s}^u^m^m^a^r^y^{table, th}^{e v}^a^l^u^{e of}^th^{at option}^w^{ill be s}^h^o^wⁿ^a^s^$500,⁰⁰⁰^.^T^h^{at is}^becau^s^e^h^e
^ha^s^w^o^r^k^e^d^j^u^s^t^oⁿ^e^mo^nt^h^o^f^t^h^e⁴⁸^m^o^nt^hsⁿ^{eeded f}^o^r^th^{e optio}ⁿ^to^b^eco^m^e^f^u^ll^y
^ex^ercis^a^ble.
^Ov^{er at}^Nation^a^l^Wⁱ^dg^et,^Am^e^r^ican^’s^m^aⁱⁿ^co^m^p^et^{itor, th}^e^c^h^ie^f^e^x^ecu^tⁱ^v^e^g^e^t^s^aⁿⁱⁿ^f^e^rior
^o^p^tioⁿ^s^p^ack^ag^{e o}ⁿ^t^h^{e sa}^m^e^d^a^y^.^I^t^is^w^o^r^t^h^$⁵^m^illioⁿ^,^w^ith^th^{e sa}^m^e^f^o^u^r^-^y^ear^sc^h^e^d^u^le.
^B^u^{t th}^{at e}^x^ec^u^tⁱ^v^{e is eli}^g^ib^le^to^r^e^tir^{e, alth}^o^u^g^h^h^e^h^a^sⁿ^oⁱⁿ^ten^t^ioⁿ^o^f^d^oⁱⁿ^g^so^{. T}^h^e
^co^m^p^eⁿ^satⁱ^oⁿ^s^u^m^m^a^r^y^w^ill^s^h^o^w^h^e^g^o^{t a $}⁵^m^ill^ioⁿ^o^p^tioⁿ^.
^T^h^{e r}^eality^{is t}^h^{at o}ⁿ^e^m^aⁿ^r^e^c^e^iv^ed^o^p^tioⁿ^s^w^o^r^t^hⁿ^ear^l^y^fⁱ^v^e^ti^m^e^s^w^h^a^t^th^{e o}^t^h^e^r^oⁿ^e^w^a^s⁸
^a^w^{arded. T}^h^{e appea}^r^an^{ce is}^very^di^ff^eren^t.
On the other hand, some business groups claimed that the executive compensation disclosure
requirements as originally proposed by the SEC needed to be revised because they did not ⁹
provide a completely accurate picture of actual annual executive compensation.
Congressional proposals concerning executive compensation may be classified into two broad
categories: additional disclosure of executive compensation to shareholders and limiting for tax
purposes the amounts deferred under a nonqualified deferred compensation plan.
An example of additional disclosure is H.R. 4291, 109^th Congress. This bill would have amended ¹⁰
section 16 of the Securities Exchange Act of 1934 to require that each reporting issuer must
include in the annual report and in any proxy solicitation a comprehensive statement of the
issuer’s compensation plan for the principal executive officers, including any type of

⁷^htt^p^://se^c^.^g^o^v^/^ne^w^s^/^p^re^ss/20^06/²⁰⁰⁶^-2^19.^htm^.
⁸^Flo^y^d^No^{rris, “Do}^e^{s S}^.^E.C.^Kn^o^w^W^h^{at It Is Do}ⁱⁿ^g^?”^{New Yo}^{rk T}ⁱ^mes^{, D}^e^c^e^m^b^e^r^{29, 2}⁰⁰⁶^{, a}^t^C¹^.
⁹^S^ee,^e.^g^.^{, c}^o^m^m^eⁿ^{ts subm}^itte^{d to}^the^SEC^by^Ste^v^e^Odla^{nd, C}^h^aⁱ^rm^aⁿ^a^{nd CEO,}^Offⁱ^c^e^De^{pot, Inc}^.^{, a}^{nd C}^h^aⁱ^rm^aⁿ^,
^C^o^r^p^o^r^a^t^e^G^o^v^e^rⁿ^aⁿ^c^e^T^a^sk^For^c^e^,^B^u^sⁱ^ne^s^s^R^o^un^dta^b^le^{, W}^a^s^h^ing^t^on,^D^C⁽^A^pr^{il 1}⁰^,²⁰⁰⁶⁾^.
¹⁰^{15 U}^.^S.C^.^§⁷⁸^n.

compensation, the short- and long-term performance measures that the issuer uses for
determining compensation, and the policy of the issuer concerning other specified measures of
compensation. The proxy solicitation materials would have been required to have a separate
shareholder vote to approve the compensation plan. The bill would also have required the
disclosure of golden parachute compensation in any proxy solicitation material concerning an
acquisition, merger, consolidation, or proposed sale.
In the 110^th Congress H.R. 1257, the Shareholder Vote on Executive Compensation Act, referred
to the House Committee on Financial Services, would amend section 14 of the Securities ¹¹
Exchange Act of 1934 to add a new subsection which would require a separate shareholder vote
in any proxy or consent or authorization for an annual meeting to approve the compensation of
executives as disclosed in accordance with the SEC’s compensation disclosure rules. The
shareholder vote would not be binding on the board of directors and could not be construed as
overruling a decision by the board. The bill would also require the disclosure of golden parachute
compensation in any proxy solicitation material concerning an acquisition, merger, consolidation,
sale, or other disposition. Hearings were held on H.R. 1257 on March 8, 2007. The House
Financial Services Committee voted on March 28, 2007, to report out the bill, and the committee
issued H.Rept. 110-88. On April 20, 2007 the House passed H.R. 1257. On April 23, 2007, the
bill was received in the Senate and referred to the Senate Committee on Banking, Housing, and ^th
Urban Affairs. Also in the 110 Congress there is a proposal which would affect the tax
consequences of executive compensation. Section 206 of S. 349, the Small Business and Work
Opportunity Act of 2007, reported to the Senate and accompanied by Report 110-1 on January 22,
2007, would add an additional requirement to rules governing income inclusion of amounts
deferred under a nonqualified deferred compensation plan. Under this proposal, an executive who
receives deferrable income such as stock options could not in many cases defer from includible
gross income an amount more than the lesser of $1,000,000 or the individual’s annualized
includible compensation. Another bill, S. 1181, was introduced on April 20, 2007, and referred to
the Senate Committee on Banking, Housing, and Urban Affairs. It is very similar to H.R. 1257.
Also in the 110^th Congress, S. 2866, the Corporate Executive Compensation Accountability and
Transparency Act, was introduced on April 15, 2008, and referred to the Committee on Finance.
This bill would amend the Internal Revenue Code to place an annual limitation on aggregate
amounts that may be deferred under nonqualified deferred compensation arrangements. It would ¹²
amend section 304 of the Sarbanes-Oxley Act of 2002 to provide for a longer look-back period
for reimbursement of compensation for misconduct by an executive to the issuer. It would amend
the Securities Exchange Act of 1934 to provide during an annual meeting for a nonbinding
shareholder vote on executive compensation. It would also amend the Federal Property and ¹³
Administrative Services Act of 1949 to require federal contractors to disclose their executive
compensation structures.
In the 110^th Congress two laws containing executive compensation provisions applicable to
executives of specific types of businesses were enacted: P.L. 110-289, the Housing and Economic
Recovery Act of 2008, and P.L. 110-343, the Emergency Economic Stabilization Act of 2008.

¹¹^{15 U}^.^S.C^.^§⁷⁸^n.
¹²^{15 U}^.^S.C^.^§⁷²⁴³^.
¹³⁴¹^U^.^S^.^C^.^§§²⁵¹^et^seq^.

Sections of P.L. 110-289 concern restrictions on compensation for executives of federal home
loan banks, Fannie Mae, and Freddie Mac. Section 1117 allows the Secretary of the Treasury, in
exercising temporary authority to purchase obligations issued by any federal home loan bank,
Fannie Mae, and Freddie Mac, to consider limitations on the payment of executive compensation.
Sections 1113 and 1114 allow the Director of the Federal Housing Finance Agency to prohibit and
withhold executive compensation from executives of federal home loan banks, Fannie Mae, and
Freddie Mac if wrongdoing has occurred. There is also authority for limiting golden parachute
payments to these executives.
Section 302 of P.L. 110-343 prohibits the tax deduction of excessive employee remuneration.
Section 111 of P.L. 110-343 allows the Secretary of the Treasury to require that financial
institutions whose troubled assets are purchased meet appropriate standards for executive
compensation. These standards are required to include limits on incentive-based compensation for
unnecessary and excessive risks, recovery of bonuses and incentive compensation based on
criteria later proven to be materially inaccurate, and a prohibition on golden parachutes.
^Mich^{ael V. Seitz}^ing^e^r
^L^e^gⁱ^s^l^at^iv^{e A}^t^torn^e^y
^m^s^ei^t^zⁱⁿ^g^e^r^@^crs^.^l^o^c.g^o^v^,^7-⁷⁸⁹⁵