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Speech by SEC Staff:
Where’s the Analysis?


John W. White

Director, Division of Corporation Finance
U.S. Securities and Exchange Commission

Tackling Your 2008 Compensation Disclosures:
The 2nd Annual Proxy Disclosure Conference
San Francisco, California
October 9, 2007

Good afternoon. Thank you Jesse [Brill]. I am excited to return to San Francisco to talk about executive compensation disclosure in the 2007 proxy season — the first season under the new requirements the Commission adopted just over a year ago. The staff’s observations on the first year disclosures were published this morning, and what a great forum this is to reflect on where we are in our pursuit of the “clearer and more complete picture of compensation” that the Commission sought in adopting the new rules.

In the next half hour, I plan to share with you some of my views on where the first-year disclosures have realized this goal and where they have not. The positives are substantial — and there is a wealth of new information available to investors for the first time. Investors have been provided with the most comprehensive disclosure ever regarding how much public companies pay their executives and directors. There are some very important areas, however, where work remains for next year.

As I noted, these are my views — so let me go ahead and provide you the required disclaimer — the views that I’m going to express today are solely my own and do not necessarily reflect the views of the Securities and Exchange Commission or of any members of the Commission or its staff, other than myself.

It was in this city, at this series of conferences, three years ago in 2004, that my predecessor Alan Beller started it all off with his memorable “all means all” speech.1 We have come a long way since then — 382 pages of proposals,2 almost 30,000 comment letters,3 489 pages of adopting releases,4 112 interpretations,5 a first full season of disclosures and, most recently, a staff report on the first year disclosures after 350 reviews.6 On Alan’s “all means all” point, we have made great progress — the rules are pretty clear on what compensation companies need to disclose, and what they need to quantify. The new tables and footnotes, and what companies are required to put in them, take us a long way toward our disclosure goals in this area.

The Commission made clear in adopting the new rules, however, that it is looking for more than just the value of the components of compensation and a total value of compensation. What is that “more” it is looking for? In order to provide investors with more than just tables of numbers, the Commission created the new Compensation Discussion and Analysis requirement to “put into perspective for investors the numbers and narrative that follow it.” This “overview” is very much a principles-based requirement, like the MD&A section with which we are all so familiar. In an instruction to the CD&A requirement, the Commission made clear that CD&A “should focus on the material principles underlying the registrant’s executive compensation policies and decisions and the most important factors relevant to the analysis of those policies and decisions.” My emphasis on the word “analysis” should provide you with a pretty good idea of the principal place where I believe many companies came up short — where disclosure can be improved. More on that in just a moment.

Let’s turn to the Division’s report, which was published this morning. Our report largely provides an overview of our principal areas of comment. Rather than waiting to reflect the give and take of the individual company comment process, we have published our observations as soon as initial comments were issued to all the companies. One observation: these comments reflect places where we believe companies may need to provide additional or clearer disclosure in future filings. That’s the very nature of the comment process. But we should not lose sight of the fact that implementing the new disclosure requirements, gathering the new information, and crafting the new disclosures for investors, often writing on a clean slate, was a substantial task in the first year. As a whole, company efforts were quite admirable, and investors are well-served by the new disclosures.

Principles-Based Disclosure and Materiality

For context, let me briefly go back to the principles-based regime of CD&A, to the role of examples, and to materiality. Last year as we headed into the first season, I made a series of remarks based on the idea that, in drafting first-year CD&As, companies needed to focus on using the principles-based regime outlined in the adopting release — because, “principles matter.”7 That certainly remains the case, and “principles still matter.”

Recall how principles-based disclosure works. There are overarching disclosure principles — and the Commission laid those out in the release and the rules. You’ve heard them and read them. And then there are examples — and the Commission provided 15 of them. These examples are just that. They neither encompass the universe of possible required disclosures, nor are they mandatory. Companies need not discuss each example, as disclosure is required only where material. The instructions to the CD&A provide a pretty clear mandate in this regard. Let me repeat what I just said. Disclosure is required only where material.


Now, back to our comments. Several key themes recur in our comments, one of which I want to lay out a bit more bluntly than in the report. And these are my views of course.

Far too often, meaningful analysis is missing — this is the biggest shortcoming of the first-year disclosures. Stated simply — Where’s the analysis?

I know no better way to emphasize this than to go to the very examples that the staff highlighted in the report. A good starting point, and a representative example, is disclosure of compensation philosophies and decision-making processes. We saw a great deal of detail this year, but what was missing was a discussion of how and why those philosophies and processes resulted in the numbers the company presented in its tabular disclosure. There also was a great deal of detail on individual compensation components, but little discussion of how the amounts paid or awarded under each compensation element — and how the total compensation delivered from all these elements (what some refer to as wealth accumulation) — affected the decisions that companies made regarding amounts paid or awarded under other compensation elements. That’s missing analysis.

A few more examples where analysis was missing include disclosures with respect to benchmarks, differences in compensation policies and decisions among executive officers, and change-in-control arrangements. I don’t plan to go through these today — they are discussed in the report if you’d like more detail. I will instead take you through one additional example — performance targets. I’m spending a bit of extra time on this area for a couple reasons. It was one of the most commented on areas in the first-year disclosures and it also brings together not only the missing analysis theme, but also the concepts of principles and materiality as the foundation for your disclosure decisions.

As we all know, and as I just noted, the new rules include 15 examples of items that may be material elements of a company’s compensation policies and decisions, and therefore require CD&A disclosure. Two of these examples go to what items of corporate performance are used in setting compensation and how they are used. Discussion of performance targets comes up in the context of these examples.

In reviewing the first year disclosures on performance targets, we were disappointed to find that, though a significant number of companies apparently use performance goals or targets, far too often an analysis of how the targets were used in setting compensation was missing.  In our comment process, we approached these disclosures from the starting point of materiality — as we all know, the CD&A rules require disclosure with respect to an example only where material. So, just to say it another way, depending on whether the CD&A examples that relate to corporate performance are material for your company, performance targets are a disclosure point that may or may not need to be addressed.

What did we ask for?  You guessed it — for more analysis.  We often found it difficult to understand how companies used targets or considered qualitative individual performance to set compensation and make decisions.  Our comments were not intended to suggest that every CD&A must necessarily address disclosure regarding targets for the year in question, or any other year.  In the first instance, a company needs to determine whether use of corporate performance items is material, and for which years, and to address disclosure and confidentiality accordingly.  Where targets appeared to be material based on what was disclosed, but the company did not disclose specific targets, we asked that the company either disclose the targets or demonstrate why doing so would cause competitive harm.  In those instances where a target is properly omitted based on the competitive harm standard, the company must discuss, in a meaningful way, how difficult it will be for the executive or how likely it will be for the company to achieve that target.

Just to expand briefly on one last related point — my references to the years for which disclosure must be addressed. This takes us back to principles (as well as to an instruction in the rules).8 As we know, CD&A must cover the last fiscal year, but depending on materiality, there are a number of situations where a company may also find it necessary to discuss targets for either prior years, the current year, or later years, to place their disclosure in context or “affect a fair understanding” of a named executive officer’s compensation. This might occur with a multi-year compensation plan or where targets varied materially from year-to-year.

So, I hope that gives perspective on where many of our comments fell regarding analysis. In looking at disclosures and staff comment letters on those disclosures, you certainly can come up with more. But I think that if you look at the areas I’ve mentioned, you will understand where the Division feels companies can improve their analysis in the coming proxy season.


With that, I’m going to take you briefly through a second key area of our comments on the first-year disclosures — manner of presentation. Put simply, “presentation matters.” The revised rules require companies to disclose a great deal of information — and that information goes to the heart of how it compensates its executive officers. How a company provides that information is, in many ways, as important as its content.

Manner of presentation is not limited to plain English principles, although our requests for clearer and more understandable disclosure constitute a significant portion of our comments in this area. The Commission specifically affirmed its support for plain English principles in the adopting release for the new rules, noting that “[c]learer, more concise presentation of executive and director compensation … can facilitate more informed investing and voting decisions in the face of complex information about these important areas.” And I think that we can all agree that with executive compensation we often are dealing with complex information.

Chairman Cox, who is particularly focused on the importance of clear, concise, and understandable disclosure in all Commission initiatives, will be speaking later this week on plain English principles at a symposium on plain language in Washington DC,9 so I am going to leave the real message on manner of presentation for him. But I will mention a couple things I’d like you to focus on.

Disclosure can fail in either of two different ways — it can be presented clearly and understandably without being meaningful or responsive to disclosure requirements or, conversely, it can be responsive in content without being clear and understandable. The first of these failures takes us back to analysis. Although companies generally appear to have made a good faith effort to provide clear and understandable disclosure, we found that many omitted critical information — largely the “how” and “why” of their executive compensation decisions. This is where we asked for enhanced disclosure most often. Where we ask companies to add or enhance their analysis, this does not mean that we are trying to undermine efforts at plain English-compliant disclosure. Our requests for improved analysis need not lengthen disclosure. Rather, with careful drafting, I believe companies can achieve a succinct and effective discussion that provides the required disclosure and embraces plain English principles.

In this regard, I refer you to the Division’s report, where we have described a few of the ways we have suggested companies can improve the content of their disclosure without compromising plain English principles. Where companies include boilerplate discussions of individual performance, they should instead provide specific analysis of how they considered and used individual performance to determine each individual’s compensation. Where a company has simply repeated in its CD&A information that it also presents in the required compensation tables, it should replace the redundant disclosure with a clear and concise analysis of that information. Where disclosure has been (or appears to have been) lifted directly from the technical language of a compensation plan or employment agreement, the company should redraft that disclosure in a more clear, concise, and understandable manner.

I think that if companies and their disclosure counsel embrace this guidance, and make changes consistent with the spirit of the guidance, it will quickly become apparent that you can be responsive to both staff requests for additional analysis and the plain English requirements.

One final thought in this area, one that intersects both the topics of presentation and analysis, and that appears in the report in our discussion of performance targets. We have heard concerns expressed by company executives and disclosure counsel that the staff, in its comment process, may be asking for quantitative explanations of decisions that may in fact be subjective assessments of individual performance. Let me assure you — that is not our intent. We are simply asking these companies to present how these decisions were made — as the report phrases it, “to clearly lay out the way that qualitative inputs are ultimately translated into objective pay determinations.” In talking to company executives and disclosure counsel in the past couple of months, we frequently have been provided with very clear, straightforward explanations of this. That is exactly what we are looking for — in the filing.

Second Year Disclosure

After all that, I know that many will now say, “Show us the good examples.” However, even with my disclaimer, I feel constrained from highlighting individual company disclosures — good or bad. I also don’t want to see everyone coming back with identical boilerplate disclosure next year. But I will say, there are good disclosures out there — they will be discussed at this and other conferences I’m sure — and I would challenge you all to consider those examples as you draft disclosure tailored to reflect the individual circumstances of your company, and next year to aspire to become one of those examples — if you are not one already. Don’t let this coming year’s disclosures be just a mark-up of the first year. Instead step back and ask some very important questions.

  • What is material to my shareholders, to my investors, as they examine the compensation of our executives and make their voting decisions for our board of directors and investment decisions with respect to our company?
  • What are the material elements of individual executive and corporate performance that are considered in setting executive compensation?
  • What is the relationship between the objectives of our compensation program and the different elements of compensation?
  • What are the material factors that relate to our compensation decision-making process?

Then, sit down and focus on two very important aspects of your disclosure:

Analysis. Focus on how and why you reached the compensation decisions you made in your CD&A. Don’t provide a laundry list of facts. Discuss and analyze the elements of your decision-making. Some have suggested that the way to ensure proper emphasis of analysis is to require companies to provide a separate section titled “Analysis” in the CD&A. This suggestion is one of many good ideas. I will leave it to you, however, to determine how best to highlight the analysis.

Presentation matters. Focus on being clear, concise and understandable. Our rules require you to provide substantial amounts of information. Consider ways to present your information in a manner that helps people understand it. Consider presenting layered disclosure. Consider using tables and charts to present complex information. Continue your innovative efforts to use these tools to illustrate the relationship between compensation objectives and different forms of pay.

So, going forward, the question becomes — where do you, and we at the SEC, fit into this process?

Disclosure Counsel. Let’s start with you — disclosure counsel and other advisors. What is your role in improving second-year disclosures? Alan Beller said it in 2004, I’ve said it in the past, and I will keep saying it. You must not lose sight of who your client is — the company. Not the CEO. Not the CFO. Not any other member of management. And, not the board. It is troublesome, to say the least, when I hear the suggestion that some have lost sight of their role in this very sensitive area. Executive compensation disclosure must be guided by counsel acting for the company. The information the company’s shareholders seek and need should guide your disclosure advice, and the company’s disclosure decisions. A company’s shareholders want to see what executive compensation decisions a company makes and how it makes them. That is your audience. That is your client.

SEC Staff. Those of us on the SEC staff, where do we fit in? In our future reviews of executive compensation disclosures, we will have the benefit of what we learned and continue to learn in the first year. We will certainly expect to see the results of our call for more and better analysis and clearer, more concise disclosure. In issuing comments this year, we realized that each company was faced with an entirely new disclosure regime for executive compensation. We took into account each company’s learning curve. We issued a lot of comments in which we asked companies to revise their future disclosure, not their current disclosure. We asked a lot of questions so we could better understand why companies made the disclosure they did.

As we enter the second season, we will expect companies to have taken our guidance to heart, and I anticipate that you will see that heightened expectation reflected in the type and focus of our comments and reactions next year.

With that, I want to close with one thought, which is really quite simple, and you have no doubt heard it before — step back next year and start with a clean slate, a blank sheet of paper. Now when I listen to that, it sounds like pretty dull jargon — a nice platitude. You’ll no doubt nod, and then go on.

So let me try a simple, more practical suggestion. One that perhaps will show up in those lists of practice points many of you develop.

This fall. Before anyone starts drafting your CD&A.  Ask every key participant (from the compensation committee chair on down) to turn in one page — no more than a page — perhaps even with the caption “Analysis.” Hand them a copy of our just-issued staff report so that they see our concerns about missing analysis. Then ask for bullets. Those bullets should reflect what he or she sees, from their perspective, as the key “hows” and “whys,” including, as appropriate

  • the key analytic tools used by the compensation committee,
  • the findings that emerged from the analysis, and
  • the resulting actions taken impacting executive compensation in the last year.

In short, the key points of analysis.  The next step for the drafting team is obvious.  Call this process collecting the “clean slate” lists.  Consider building it into your procedures.  Follow up on getting the lists.

So, that’s it. Thank you for inviting me, and I look forward to seeing your disclosures next year.

1 “Remarks Before Conference of the NASPP, the Corporate Counsel and the Corporate Executive,” Alan L. Beller, Director, Division of Corporation Finance, October 20, 2004, available at /news/speech/spch102004alb.htm.

2 SEC Release No. 33-8655, “Executive Compensation and Related Party Disclosure,” January 27, 2006, available at http://www.sec.gov/rules/proposed/33-8655.pdf; SEC Release No. 33-8735, “Executive Compensation Disclosure,” August 29, 2006, available at http://www.sec.gov/rules/proposed/2006/33-8735.pdf.

3 Comment File No. S7-03-06, available at http://www.sec.gov/rules/proposed/s70306.shtml.

4 SEC Release No. 33-8732A, “Executive Compensation and Related Person Disclosure (conforming amendments),” August 29, 2006, available at http://www.sec.gov/rules/final/2006/33-8732a.pdf; SEC Release No. 33-8765, “Executive Compensation Disclosure,” December 22, 2006, available at http://www.sec.gov/rules/final/2006/33-8765.pdf.

5 Division of Corporation Finance Disclosure and Compliance Interpretations, available at http://www.sec.gov/divisions/corpfin/cfguidance.shtml#regs-k.

6 “Staff Observations in the Review of Executive Compensation Disclosure, Division of Corporation Finance,” available at http://www.sec.gov/divisions/corpfin/guidance/execcompdisclosure.htm.

7 “Principles Matter,” John W. White, Director, Division of Corporation Finance, September 6, 2006, available at http://www.sec.gov/news/speech/2006/spch090606jww.htm; “The Principles Matter: Options Disclosure,” John W. White, Director, Division of Corporation Finance, September 11, 2006, available at http://www.sec.gov/news/speech/2006/spch091106jww.htm; “Principles Matter: Related Person Transactions Disclosure and Disclosure Controls and Procedures,” John W. White, Director, Division of Corporation Finance, October 12, 2006, available at http://www.sec.gov/news/speech/2006/spch101206jww.htm.

8 Instruction 2 to Item 402(b) of Regulation S-K states:

The Compensation Discussion and Analysis should be of the information contained in the tables and otherwise disclosed pursuant to this Item. The Compensation Discussion and Analysis should also cover actions regarding executive compensation that were taken after the registrant’s last fiscal year’s end. Actions that should be addressed might include, as examples only, the adoption or implementation of new or modified programs and policies or specific decisions that were made or steps that were taken that could affect a fair understanding of the named executive officer’s compensation for the last fiscal year. Moreover, in some situations it may be necessary to discuss prior years in order to give context to the disclosure provided.

See also, SEC Release No. 8732A, “Executive Compensation and Related Person Disclosure (conforming amendments),” August 29, 2006 (“Commenters also requested clarification as to whether Compensation Discussion and Analysis is limited to compensation for the last fiscal year, like the former Board Compensation Committee Report on Executive Compensation that was required prior to these amendments. While the Compensation Discussion and Analysis must cover this subject, the Compensation Discussion and Analysis may also require discussion of post-termination compensation arrangements, on-going compensation arrangements, and policies that the company will apply on a going-forward basis. Compensation Discussion and Analysis should also cover actions regarding executive compensation that were taken after the last fiscal year’s end. Actions that should be addressed might include, as examples only, the adoption or implementation of new or modified programs and policies or specific decisions that were made or steps that were taken that could affect a fair understanding of the named executive officer’s compensation for the last fiscal year. Moreover, in some situations it may be necessary to discuss prior years in order to give context to the disclosure provided.”).

9 Symposium on Plain Language: Public Policy and Good Business, Center for Plain Language, October 12, 2007.



Modified: 10/09/2007