A brief on the SEC's new rules.

• Author: Schwartz, Michael A.

Many changes for the better were made last fall when the Securities and Exchange Commission adopted its new executive compensation rules. Compensation data will now be presented in a standard, coherent fashion, and all sources of compensation will have to be disclosed. However, other significant changes to the executive compensation rules are likely to affect the process itself and may impel boards to rethink the way executives are rewarded.

The most controversial step taken by the SEC is its new requirement that a report of the board's compensation committee be included in all proxy and information statements relating to annual or special meetings at which directors are to be elected. The report must discuss the factors and criteria upon which the chief executive officer's compensation for the last fiscal year was based, including a discussion of the specific relationship of corporate performance to compensation.

The report must also address the compensation committee's policies applicable to the company's other executive officers, both in general terms and specifically as those policies relate to corporate performance.

In addressing the factors and criteria affecting compensation decisions, both qualitative and quantitative measures considered by the compensation committee must be described. Specific factors on which compensation was based - such as sales, earnings, or return on capital or assets - must be identified. However, specific benchmarks or target levels for performance do not have to be reported nor do any criteria involving confidential commercial or business information where disclosure would have an adverse effect on the company.

Over the Names

The compensation committee's report must appear over the names of each member of the compensation committee or, if the board does not have a compensation committee, over the names of each member of the board of directors. If the board materially modifies or rejects any action or recommendation of its compensation committee, the report must disclose that fact, explain the reasons for the board's actions, and appear over the names of all members of the board.

Although not a part of the compensation committee's report, the SEC has also adopted a requirement that companies present, along with the report, a "performance graph" comparing the company's five-year total return to common shareholders with the total return of a broad equity market index and either a published industry index or a...