The federal securities laws require clear, concise disclosure about compensation paid to CEOs, CFOs, and certain other high-ranking executive officers of public companies.
Rules for executive compensation are governed by the federal securities laws. Several types of documents that a company must file regarding their executive compensation policies and practices should be organized within a company’s proxy statement, annual report on Form 10-K, within registration statements filed by the company established to register securities for sale to the public, and also should be contained within the company’s current report on Form 8-K.
In the annual proxy statement, companies must disclose information revealing the amount and type of compensation paid to its chief executive officer and the three other most highly compensated executive officers. Companies must also disclose the criteria used in reaching executive compensation decisions and the type of relationship existing between the firm’s executive compensation practices and company performance.
The cornerstone of the Security and Exchange Commission’s required discourse on executive compensation is The Summary Compensation Table (SCT). In a single location, the SCT provides a comprehensive overview of a company’s executive compensation practices. In larger multinational corporations, these can become somewhat complex in their structure, but will always bear a superficial resemblance to a flow chart. SCTs must include the total compensation paid the firm’s chief executive officer, chief financial officer, and three other most highly compensated officers for at least three previous fiscal years. The SCT is succeeded in order by other tables and precise disclosures containing increasingly detailed information about the various facets of compensation used during the most recently completed fiscal year. Essential to include are grants of stock options, stock appreciation rights, long-term incentive plan awards, pension plans, employment contracts, and related arrangements.
An additional component of a company’s executive compensation dossier is the Compensation Discussion and Analysis (CD & A). Functioning in the manner of an appendix, this section should explain all material elements of the relevant executive compensation programs not yet addressed.