SEC Staff Issues Interpretations on New Executive Compensation Disclosure Rules

January 25, 2007


Yesterday, the Division of Corporation Finance (“Staff”) at the Securities and Exchange Commission issued 18 pages of interpretations on its new executive and director compensation disclosure rules, which are applicable for 2007 proxy filings by companies with fiscal years ending on or after December 15, 2006. The interpretations are in two parts: a series of questions and answers on common interpretive questions that have arisen under the new rules, and a series of interpretations that largely reaffirm and/or update prior Staff “telephone interpretations” that were originally issued under the former executive compensation disclosure rules. The format of the interpretations reflect the Staff’s intention to periodically provide additional interpretive guidance. The interpretations are available on the SEC’s website at

On the whole, the interpretations provide helpful advice that generally reinforces a plain-English reading of the rules and does not set traps for the unwary. A number of the points covered in the interpretations are addressed below. 

Performance-Based Arrangements

  • The Staff reiterated the standards for reporting performance-based payments in the Summary Compensation Table as “non-equity incentive plan compensation” instead of as “bonuses.” The amounts must be provided under an arrangement that is not subject to SFAS 123(R) and that is “intended to serve as incentive for performance,” the performance standards must be communicated in advance to the executive and the outcome must be “substantially uncertain” at the time the performance target is established. Amounts paid under arrangements that satisfy these criteria are reportable as “non-equity incentive plan compensation” even if negative discretion is used to determine the amount actually paid. If discretion is used to increase the amount paid above the amount that otherwise would be determined through operation of the performance standards, the increase is reported in the “bonus” column. 

  • In the Grants of Plan-Based Awards Table, it is not necessary to include “threshold” column for arrangements that do not have a theoretical minimum benefit above zero or $1, and it is not necessary to include a “maximum” column for arrangements that do not have an actual cap on payments. 

Equity Awards

  • The Staff confirmed that equity awards granted in one fiscal year based upon performance during the prior fiscal year or as part of the prior year’s bonus are not included in the Summary Compensation Table and are not required to be reported in the Grants of Plan-Based Awards Table for the fiscal year unless the SFAS 123(R) measurement date for the awards occurred in the prior fiscal year. However, these types of awards should be discussed in the Compensation Discussion and Analysis to the extent material to understanding compensation for the covered fiscal year.

  • To the extent material, the timing of equity awards in addition to stock options should be discussed in the Compensation Discussion and Analysis. 

  • The Option Exercises and Stock Vested Table should report the “gross” number of shares subject to stock appreciation rights and net-settled options that were exercised during the year and the “gross” number of shares subject to restricted stock awards that vested during the year, not just the “net” number of shares actually issued to an executive. 

  • Unvested dividend-equivalent accruals and other in-kind earnings on stock awards should be included in the number of shares reported in the Outstanding Equity Awards at Fiscal Year-End Table. 

Deferred Compensation Plans

  • The Staff confirmed that amounts paid or distributed under tax-qualified and non-qualified deferred compensation plans are not reportable in the Summary Compensation Table.

  • The Staff confirmed a long-standing interpretation that earnings accrued under non-qualified “excess” deferred compensation plans are not reported in the Summary Compensation Table as “above-market or preferential earnings” if they mirror the performance of investment alternatives available under a qualified plan. While this interpretation states that it may not be available for other types of non-qualified deferred compensation arrangements such as SERPs and “top hat” plans that do not operate in tandem with a tax-qualified plan, this caveat also was contained in the Staff’s telephone interpretations under its former executive compensation disclosure rules. Thus, we believe that this interpretation is available for deferred compensation returns that exactly track company stock-equivalent returns or returns available under publicly available and externally managed investment funds such as mutual funds. 


  • The Staff stated that “zero-cost” benefits (for example, where an executive fully reimburses the company for the cost of the benefit) are not treated as perquisites and therefore are not reportable.

Pension Calculations

  • The Staff confirmed an interpretation – not readily apparent under the rules – that the actuarial present value of an executive’s accumulated pension benefit reported in the Pension Benefits Table should be based upon the amounts payable at the earliest age at which the executive can retire without a reduction in his or her benefits, regardless of whether a different “normal” retirement age is stated in the plan. 

Directors Compensation

  • Compensation should be reported in the Director Compensation Table for each non-executive director who served at any time during the covered fiscal year. 

Severance Benefits

  • As noted above, the Staff also continues to address interpretive issues in other forums. Recently, a senior member of the Staff stated on a webcast that severance benefits should be considered “accrued” and therefore reportable as “all other compensation” in the Summary Compensation Table only if their payment is not subject to any further conditions other than the passage of time. In contrast, payments that are contingent upon a terminated executive providing further services or not competing against the company are not treated as “accrued.” 

While companies will continue to encounter questions as they prepare disclosures under the new rules, these interpretations and other efforts by the Staff are helping to promote clear, uniform and appropriate disclosures.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or
John F. Olson (202-955-8522, [email protected]), Ronald O. Mueller (202-955-8671, [email protected]), Brian J. Lane (202-887-3646, [email protected]), or Amy L. Goodman (202-955-8653, [email protected]) in the firm’s Washington, D.C. office, Stephen W. Fackler (650-849-5385, [email protected]) in the Palo Alto office, or James J. Moloney (949-451-4343, [email protected]) in the Orange County office.

© 2007 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.