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Fun With Numbers - Equity Awards Under the New Proxy Disclosure Amendments

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

January 22, 2010

At our last seminar on the new proxy disclosure amendments, the attendees expressed interest in the change in reporting equity compensation awards in the Summary Compensation Table. I’ve included a modified version below of the example we included in the course materials (PDF), to highlight the difference between the old rules and the new rules.

Our example involved a CEO named Favre (consistent with our football theme). He received stock options in most of the past several years, but in 2008 he received a sizable restricted stock grant in lieu of an option grant:

Stock Options (3 Year Vesting)
Year Shares Grant Date Fair Value Expense/Year from the Grant
2009 50,000 $200,000 $66,667
2008 0 - -
2007 25,000 $90,000 $30,000
2006 100,000 $300,000 $100,000

Restricted Stock (5 Year Vesting)

Year Shares Grant Date Fair Value Expense/Year From the Grant
2009 0 - -
2008 50,000 $250,000 $50,000
2007 0 - -
2006 0 - -

The right hand column above represents the financial statement expense the company would recognize during each year of vesting. Under the old rules, the reported equity compensation amount for Mr. Favre in each year would have reflected the amount expensed in that year for all of the officer’s awards:

Summary Compensation Tables - Old Rules
Year Stock Awards Option Awards
Brett Favre, CEO 2009 $50,000 $96,667
2008 $50,000 $130,000
2007 $0 $130,000

The dollar amounts reported in the table reflect portions of awards granted in multiple years, and therefore the impact of individual grants is smoothed out. For example, the “Option Awards” amount for 2008 ($130,000) reflects portions of the value of the options granted in 2006 and 2007.
By contrast, see the treatment under the new rules of the same awards to our intrepid CEO. The amounts reported for each year reflect the full grant date fair value of the awards granted in that year:

Summary Compensation Table - New Rules
Stock Awards Option Awards
Brett Favre, CEO 2009 $0 $200,000
2008 $250,000 $0
2007 $0 $90,000

Note that the smoothing out effect is gone – the impact of a large grant will be magnified in the year of grant. Therefore, a big equity grant will cause compensation levels for that individual to “bounce” in the year of grant. Companies need to plan for the possibility that there may be more changes in the “roster” of NEOs from year to year than under the old rules. Also, note that the amendments require that the previous years (2008 and 2007) be restated from the way they were reported in the proxy statement in previous years.

There are some other interesting aspects of the new reporting method, which I’ll describe in a future post.

New SEC Interpretations

The SEC staff just provided some interpretive guidance on some of the new proxy amendments to its Compliance & Disclosure Interpretations on Regulation S-K. Questions 116.05, 116.06, 117.04, 119.20, 128A.01, 133.10 and 133.11 relate to the new rules. For example, Question 117.04 relates to the Summary Compensation Table: if a named executive receives a grant in a particular year but forfeits the award in the same year, the grant date fair value of the award is still reported for that year.

The staff also added new questions on the the Form 8-K amendments to Compliance & Disclosure Interpretations on transition issues – see Questions 6 and 7.


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