How to Score with the SEC
from March/April 2008
by Peter Galuszka
Attention, directors: The Securities and Exchange Commission wants to see clearer writing and analysis in 10-Ks that recount the pay packages companies hand out to top executives. Good charts and tables will help too. The SEC is making these recommendations after reviewing comments it solicited from 350 companies, including Coca-Cola, General Electric, and Motorola, on how they’ve been meeting the commission’s new transparency requirements for executive compensation.
Since late 2006, the SEC has required 10-Ks to include a compensation discussion and analysis (CD&A) that lays out the company’s goals and how remuneration is linked to them. “But there wasn’t that much guidance from the SEC staff about how companies were to do that,” says Mark Borges, a principal in the Washington, D.C., office of management consulting firm Compensia. So the SEC reviewed the way a sample of businesses handled the issue in their 2007 reports, asking a variety of questions to find out, for example, how companies benchmark performance.
The responses formed the basis of the “hows and whys” report the SEC has now released as guidance for completing 10-Ks in time for the coming proxy season. “The manner of presentation matters—in particular, using plain English and organizing tabular and graphical information in a way that helps the reader understand a company’s disclosure,” the SEC advises. Last year’s 10-Ks saw haphazard presentation of data documenting whether officials met strictly financial targets such as earnings per share, EBITDA, or sales growth and whether they achieved strategic goals like enlarging market share. “We often found it difficult to understand how companies used these performance targets or considered qualitative individual performance to set compensation policies and make compensation decisions,” the report says.
On the other hand, the SEC was impressed with the graphic-arts talents of certain companies. Some voluntarily included useful charts showing how potential payments would be triggered if, say, a key person got fired, and the commission would like more of the same. Alas, the SEC did not include any examples of how to do graphics right.
As always, neatness is a plus.
