Order Code RS22583
January 26, 2007
Executive Compensation: SEC Regulations
and Congressional Proposals
Michael V. Seitzinger
Legislative Attorney
American Law Division
Summary
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 concerning executive pay have thus far not
focused on the SEC rules. Instead, proposals have been made concerning additional
disclosure of executive compensation and limiting the amount of deferred compensation
for tax purposes. This report will be updated as warranted.
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. In a stated attempt “to provide investors with a
clearer and more complete picture of compensation to principal executive officers,
principal financial officers [and] the other highest paid executive officers and directors,”1
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 compensation.2 These compensation disclosure rules were particularly
focused upon companies’ providing investors with details about executives’ stock-option
1 71 Fed. Reg. 78,338, 78,339 (Dec. 29, 2006).
2 71 Fed. Reg. 53,158 (Sept. 8, 2006), amending 17 C.F.R. Parts 228, 229, 232, 239, 240, 245,
249, and 274.

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grants and corporate stock-option programs. The rules required companies to prepare a
principles-based Compensation Discussion and Analysis section in their proxy statements,
annual reports, and registration statements.3
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 disclosure of company stock-option practices.”4 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).”5 The amendment was made in the form of interim final rules
that would become effective upon publication in the Federal Register.6 The Commission
went on to state that:
FAS 123R requires recognition of the costs of equity awards over the period in which
an employee is required to provide service in exchange for the award. Using this
same approach in the executive compensation disclosure will give investors a better
idea of the compensation earned by an executive or director during a particular
reporting period, consistent with the principles underlying the financial disclosure
statement.7
The SEC briefly summarized some of the important provisions of the amendment
as follows:
The dollar values required to be reported in the Stock Awards and Option Awards
columns of the Summary Compensation Table and the Director Compensation Table
are revised to disclose the compensation cost of those awards, before reflecting
forfeitures, over the requisite service period, as described in FAS 123R. Forfeitures
are required to be described in accompanying footnotes.
The Grants of Plan-Based Awards Table is revised to require disclosure of the grant
date fair value of each individual equity award, computed in accordance with FAS
3 71 Fed. Reg. 53,158, 53,164 (Sept. 8, 2006).
4 BNA, Daily Report for Executives, July 28, 2006, at G-7.
5 [http://sec.gov/news/press/2006/2006-219.htm]. For a copy of the text of FAS 123R, see
[http://fasb.org/pdf/fas123R.pdf].
6 The interim final rules were published in the December 29, 2006, Federal Register at 71 Fed.
Reg. 78,338.
7 Id.

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123R, and the Director Compensation Table required under Item 402 of Regulation
S-K is revised to require footnote disclosure of the same information.
The Grants of Plan-Based Awards Table is revised to require disclosure of any option
or stock appreciation right that was repriced or otherwise materially modified during
the last completed fiscal year, including the incremental fair value, computed as of the
repricing or modification date in accordance with FAS 123R, and the Director
Compensation Table required under Item 402 of Regulation S-K is revised to require
footnote disclosure of the same incremental fair value information.8
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:
Say the Chief executive of American Widget gets a $24 million option grant on Dec.
1 of this year, with the options vesting — meaning they may be exercised — over four
years. He is not eligible for retirement, perhaps because he joined the company only
a few years ago, or perhaps because he has not reached the company’s minimum
retirement age of 60.
In the summary table, the value of that option will be shown as $500,000. That is
because he has worked just one month of the 48 months needed for the option to
become fully exercisable.
Over at National Widget, American’s main competitor, the chief executive gets an
inferior options package on the same day. It is worth $5 million, with the same four-
year schedule. But that executive is eligible to retire, although he has no intention of
doing so. The compensation summary will show he got a $5 million option.
The reality is that one man received options worth nearly five times what the other
one was awarded. The appearance is very different.9
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 provide a completely accurate picture of actual annual executive
compensation.10
Congressional proposals concerning executive compensation thus far appear not to
have focused on the SEC rules. Instead, congressional proposals 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.
8 [http://sec.gov/news/press/2006/2006-219.htm].
9 Floyd Norris, "Does S.E.C. Know What It Is Doing?" New York Times, Dec. 29, 2006, at C1.
10 See, e.g., comments submitted to the SEC by Steve Odland, Chairman and CEO, Office Depot,
Inc., and Chairman, Corporate Governance Task Force, Business Roundtable, Washington, DC
(April 10, 2006).

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An example of additional disclosure is H.R. 4291, 109th Congress. This bill would
have amended section 16 of the Securities Exchange Act of 193411 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 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. At this time a similar bill does not appear to have been
introduced in the 110th Congress.
In the 110th Congress there is a proposal which would affect the tax consequences
of executive compensation. In the Description of the Chairman’s Modification of the
Provisions of the Small Business and Work Opportunity Act of 2007,12 there is a
provision which would add an additional requirement to rules governing income inclusion
of amounts deferred under a nonqualified deferred compensation plan. Under the
proposal, an executive who receives deferrable income such as stock options in many
cases may not defer from includible gross income an amount more than the lesser of
$1,000,000 or the individual’s annualized includible compensation.13
11 15 U.S.C. § 78n.
12 Joint Committee on Taxation, JCX-5-07 (Jan. 17, 2007).
13 Id. at 25.