Executive Compensation and Related Person Disclosure

Federal RegisterSep 8, 2006

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229, 232, 239, 240, 245, 249 and 274

[Release Nos. 33-8732A; 34-54302A; IC-27444A; File No. S7-03-06]

RIN 3235-AI80

Executive Compensation and Related Person Disclosure

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission is adopting amendments to the disclosure requirements for executive and director compensation, related person transactions, director independence and other corporate governance matters and security ownership of officers and directors. These amendments apply to disclosure in proxy and information statements, periodic reports, current reports and other filings under the Securities Exchange Act of 1934 and to registration statements under the Exchange Act and the Securities Act of 1933. We are also adopting a requirement that disclosure under the amended items generally be provided in plain English. The amendments are intended to make proxy and information statements, reports and registration statements easier to understand. They are also intended to provide investors with a clearer and more complete picture of the compensation earned by a company's principal executive officer, principal financial officer and highest paid executive officers and members of its board of directors. In addition, they are intended to provide better information about key financial relationships among companies and their executive officers, directors, significant shareholders and their respective immediate family members. In Release No. 33-8735, published elsewhere in the proposed rules section of this issue of the

Federal Register,

we also request additional comments regarding the proposal to require compensation disclosure for three additional highly compensated employees.

DATES:

Effective Date:

November 7, 2006.

Comment Date:

Comments regarding the request for comment in Section II.C.3.b. of this document should be received on or before October 23, 2006.

Compliance Dates:

Companies must comply with these disclosure requirements in Forms 8-K for triggering events that occur on or after November 7, 2006 and in Forms 10-K and 10-KSB for fiscal years ending on or after December 15, 2006. Companies other than registered investment companies must comply with these disclosure requirements in Securities Act registration statements and Exchange Act registration statements (including pre-effective and post-effective amendments), and in any proxy or information statements filed on or after December 15, 2006 that are required to include Item 402 and 404 disclosure for fiscal years ending on or after December 15, 2006. Registered investment companies must comply with these disclosure requirements in initial registration statements and post-effective amendments that are annual updates to effective registration statements on Forms N-1A, N-2 (except those filed by business development companies) and N-3, and in any new proxy or information statements, filed with the Commission on or after December 15, 2006.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/final.shtml

): or

• Send an e-mail to

rule-comments@sec.gov.

Please include File Number S7-03-06 on the subject line; or

• Use the Federal Rulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington DC 20549-1090.

All submissions should refer to File Number S7-03-06. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (

http://www.sec.gov/rules/final/shtml

). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC, 20549. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT:

Anne Krauskopf, Carolyn Sherman, or Daniel Greenspan, at (202) 551-3500, in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3010 or, with respect to questions regarding investment companies, Kieran Brown in the Division of Investment Management, at (202) 551-6784.

SUPPLEMENTARY INFORMATION:

We are amending: Items 201,

306,

401,

402,

403

and 404

of Regulations S-K

and S-B,

Item 601

of Regulation S-K, Item 1107

of Regulation AB,

Item 304

of Regulation S-T,

and Rule 100

of Regulation BTR.

We are also adding new Item 407 to Regulations S-K and S-B. In addition, we are amending Rules 13a-11,

14a-3,

14a-6,

14c-5,

15d-11

and 16b-3

under the Securities Exchange Act of 1934.

We are adding Rules 13a-20 and 15d-20 under the Exchange Act. We are further amending Schedule 14A

under the Exchange Act, as well as Exchange Act Forms 8-K,

10,

10SB,

10-Q,

10-QSB,

10-K,

10-KSB

and 20-F.

Finally, we are amending Forms SB-2,

S-1,

S-3,

S-4

and S-11

under the Securities Act of 1933,

Forms N-

1A,

N-2,

and N-3

under the Securities Act and the Investment Company Act of 1940,

and Form N-CSR

under the Investment Company Act and the Exchange Act.

17 CFR 229.201 and 17 CFR 228.201.

17 CFR 229.306 and 17 CFR 228.306.

17 CFR 229.401 and 17 CFR 228.401.

17 CFR 229.402 and 17 CFR 228.402.

17 CFR 229.403 and 17 CFR 228.403.

17 CFR 229.404 and 17 CFR 228.404.

17 CFR 229.10

et seq.

17 CFR 228.10

et seq.

17 CFR 229.601.

17 CFR 229.1107.

17 CFR 229.1100

et seq.

17 CFR 232.304.

17 CFR 232.10

et seq.

17 CFR 245.100.

17 CFR 245.100

et seq.

17 CFR 240.13a-11.

17 CFR 240.14a-3.

17 CFR 240.14a-6.

17 CFR 240.14c-5.

17 CFR 240.15d-11.

17 CFR 240.16b-3.

15 U.S.C. 78a

et seq.

17 CFR 240.14a-101.

17 CFR 249.308.

17 CFR 249.210.

17 CFR 249.210b.

17 CFR 249.308a.

17 CFR 249.308b.

17 CFR 249.310.

17 CFR 249.310b.

17 CFR 249.220f.

17 CFR 239.10.

17 CFR 239.11.

17 CFR 239.13.

17 CFR 239.25.

17 CFR 239.18.

15 U.S.C. 77a

et seq.

17 CFR 239.15A and 274.11A.

17 CFR 239.14 and 274.11a-1.

17 CFR 239.17a and 274.11b.

15 U.S.C. 80a-1

et seq.

17 CFR 249.331 and 274.128.

Table of Contents

I. Background and Overview

II. Executive and Director Compensation Disclosure

A. Options Disclosure

1. Background

2. Required Option Disclosures

a. Tabular Disclosures

b. Compensation Discussion and Analysis

i. Timing of Option Grants

ii. Determination of Exercise Price

B. Compensation Discussion and Analysis

1. Intent and Operation of the Compensation Discussion and Analysis

2. Instructions to Compensation Discussion and Analysis

3. “Filed” Status of Compensation Discussion and Analysis and the “Furnished” Compensation Committee Report

4. Retention of the Performance Graph

C. Compensation Tables

1. Compensation to Named Executive Officers in the Last Three Completed Fiscal Years—The Summary Compensation Table and Related Disclosure

a. Total Compensation Column

b. Salary and Bonus Columns

c. Plan-Based Awards

i. Stock Awards and Option Awards Columns

ii. Non-Equity Incentive Plan Compensation Column

d. Change in Pension Value and Nonqualified Deferred Compensation Earnings Column

i. Earnings on Deferred Compensation

ii. Increase in Pension Value

e. All Other Compensation Column

i. Perquisites and Other Personal Benefits

ii. Additional All Other Compensation Column Items

f. Captions and Table Layout

2. Supplemental Grants of Plan-Based Awards Table

3. Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

a. Narrative Description of Additional Material Factors

b. Request for Additional Comment on Compensation Disclosure for up to Three Additional Employees

4. Exercises and Holdings of Previously Awarded Equity

a. Outstanding Equity Awards at Fiscal Year-End Table

b. Option Exercises and Stock Vested Table

5. Post-Employment Compensation

a. Pension Benefits Table

b. Nonqualified Deferred Compensation Table

c. Other Potential Post-Employment Payments

6. Officers Covered

a. Named Executive Officers

b. Identification of Most Highly Compensated Executive Officers; Dollar Threshold for Disclosure

7. Interplay of Items 402 and 404

8. Other Changes

9. Compensation of Directors

D. Treatment of Specific Types of Issuers

1. Small Business Issuers

2. Foreign Private Issuers

3. Business Development Companies

E. Conforming Amendments

III. Revisions to Form 8-K and the Periodic Report Exhibit Requirements

A. Items 1.01 and 5.02 of Form 8-K

1. Item 1.01—Entry into a Material Definitive Agreement

2. Item 5.02—Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

B. Extension of Limited Safe Harbor under Section 10(b) and Rule 10b-5 to Item 5.02(e) of Form 8-K and Exclusion of Item 5.02(e) from Form S-3 Eligibility Requirements

C. General Instruction D to Form 8-K

D. Foreign Private Issuers

IV. Beneficial Ownership Disclosure

V. Certain Relationships and Related Transactions Disclosure

A. Transactions with Related Persons

1. Broad Principle for Disclosure

a. Indebtedness

b. Definitions

2. Disclosure Requirements

3. Exceptions

B. Procedures for Approval of Related Person Transactions

C. Promoters and Control Persons

D. Corporate Governance Disclosure

E. Treatment of Specific Types of Issuers

1. Small Business Issuers

2. Foreign Private Issuers

3. Registered Investment Companies

F. Conforming Amendments

1. Regulation Blackout Trading Restriction

2. Rule 16b-3 Non-Employee Director Definition

3. Other Conforming Amendments

VI. Plain English Disclosure

VII. Transition

VIII. Paperwork Reduction Act

A. Background

B. Summary of Information Collections

C. Summary of Comment Letters and Revisions to Proposals

D. Revisions to Paperwork Reduction Act Burden Estimates

1. Securities Act Registration Statements, Exchange Act Registration Statements, Exchange Act Annual Reports, Proxy Statements and Information Statements

2. Exchange Act Current Reports

IX. Cost-Benefit Analysis

A. Background

B. Summary of Amendments

C. Benefits

D. Costs

X. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

XI. Final Regulatory Flexibility Act Analysis

A. Need for the Rules and Amendments

B. Significant Issues Raised by Public Comment

C. Small Entities Subject to the Rules and Amendments

D. Reporting, Recordkeeping and Other Compliance Requirements

E. Agency Action to Minimize Effect on Small Entities

XII. Statutory Authority and Text of the Amendments

I. Background and Overview

On January 27, 2006, we proposed revisions to our rules governing disclosure of executive compensation, director compensation, related party transactions, director independence and other corporate governance matters, current reporting regarding compensation arrangements and beneficial ownership.

We received over 20,000 comment letters in response to our proposals. In general, commenters supported the proposals and their objectives. We are adopting the rules and amendments substantially as proposed, with certain modifications to address a number of points that commenters raised.

Executive Compensation and Related Party Disclosure,

Release No. 33-8655 (Jan. 27, 2006) [71 FR 6542] (the “Proposing Release”).

The amendments to the compensation disclosure rules are intended to provide investors with a clearer and more complete picture of compensation to principal executive officers, principal financial officers, the other highest paid executive officers and directors. Closely related to executive officer and director compensation is the participation by executive officers, directors, significant shareholders and other related persons in financial transactions and relationships with the company. We are also adopting revisions to our disclosure rules regarding related party transactions and director independence and board committee functions.

Finally, some compensation arrangements must be disclosed under our rules relating to current reports on Form 8-K. Accordingly, we are reorganizing and more appropriately focusing our requirements on the type of compensation information that should be disclosed on a real-time basis.

Since the enactment of the Securities Act and the Exchange Act,

the

Commission has on a number of occasions explored the best methods for communicating clear, concise and meaningful information about executive and director compensation and relationships with the company.

The Commission also has had to reconsider executive and director compensation disclosure requirements in light of changing trends in executive compensation. Most recently, in 1992, the Commission adopted amendments to the disclosure rules that eschewed a mostly narrative disclosure approach adopted in 1983 in favor of formatted tables that captured all compensation, while categorizing the various elements of compensation and promoting comparability from year to year and from company to company.

Initially, disclosure requirements regarding executive and director compensation were set forth in Schedule A to the Securities Act and Section 12(b) of the Exchange Act, which list the type of information to be included in Securities Act and Exchange Act registration statements. Item 14 of Schedule A called for disclosure of the “remuneration, paid or estimated to be paid, by the issuer or its predecessor, directly or indirectly,

during the past year and ensuing year to (a) the directors or persons performing similar functions, and (b) its officers and other persons, naming them wherever such remuneration exceeded $25,000 during any such year.” Section 12(b) of the Exchange Act as enacted required disclosure of “(D) the directors, officers, and underwriters, and each security holder of record holding more than 10 per centum of any class of any equity security of the issuer (other than an exempted security), their remuneration and their interests in the securities of, and their material contracts with, the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer;” and “(E) remuneration to others than directors and officers exceeding $20,000 per annum.”

In 1938, the Commission promulgated its first executive and director compensation disclosure rules for proxy statements. Release No. 34-1823 (Aug. 11, 1938) [3 FR 1991]. At different times thereafter, the Commission has adopted rules mandating narrative, tabular, or combinations of narrative and tabular disclosure as the best method for presenting compensation disclosure in a manner that is clear and useful to investors. See,

e.g.

, Release No. 34-3347 (Dec. 18, 1942) [7 FR 10653] (introducing first tabular disclosure); Release No. 34-4775 (Dec. 11, 1952) [17 FR 11431] (introducing separate table for pensions and deferred remuneration);

Uniform and Integrated Reporting Requirements: Management Remuneration,

Release No. 33-6003 (Dec. 4, 1978) [43 FR 58151] (the “1978 Release”) (expanding tabular disclosure to cover all forms of compensation); and

Disclosure of Executive Compensation,

Release No. 33-6486 (Sept. 23, 1983) [48 FR 44467] (the “1983 Release”) (limiting tabular disclosure to cash remuneration).

Executive Compensation Disclosure,

Release No. 33-6962 (Oct. 16, 1992) [57 FR 48126] (the “1992 Release”); See also

Executive Compensation Disclosure; Securityholder Lists and Mailing Requests,

Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010] (the “1993 Release”), at Section II.

We believe this tabular approach remains a sound basis for disclosure. However, especially in light of the complexity of and variations in compensation programs, the very formatted nature of those rules has resulted in too many cases in disclosure that does not inform investors adequately as to all elements of compensation. In those cases investors may lack material information that we believe they should receive.

We are thus today adopting an approach that builds on the strengths of the requirements adopted in 1992 rather than discarding them. However, today's amendments do represent a thorough rethinking of the rules in place prior to these amendments, combining a broader-based tabular presentation with improved narrative disclosure supplementing the tables. This approach will promote clarity and completeness of numerical information through an improved tabular presentation, continue to provide the ability to make comparisons using tables, and call for material qualitative information regarding the manner and context in which compensation is awarded and earned.

The amendments that we publish today require that all elements of compensation must be disclosed. We also have sought to structure the revised requirements sufficiently broadly so that they will continue to operate effectively as new forms of compensation are developed in the future.

Under the amendments, compensation disclosure will now begin with a narrative providing a general overview. Much like the overview that we have encouraged companies to provide with their Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A),

the new Compensation Discussion and Analysis calls for a discussion and analysis of the material factors underlying compensation policies and decisions reflected in the data presented in the tables. This overview addresses in one place these factors with respect to both the separate elements of executive compensation and executive compensation as a whole. We are adopting the overview substantially as proposed, but, in response to comments, we are requiring a separate report of the compensation committee similar to the report required of the audit committee,

which will be considered furnished and not filed.

Item 303 of Regulation S-K [17 CFR 229.303]. See also

Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations,

Release No. 33-8350 (Dec. 19, 2003) [68 FR 75055], at Section III.A.

The Audit Committee Report, required by Item 306 of Regulations S-B [17 CFR 228.306] and S-K [17 CFR 229.306] prior to these amendments, will now be required by Item 407(d) of Regulations S-B and S-K.

The Compensation Committee Report that we adopt today is not deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C [17 CFR 240.14a-1

et seq.

or 240.14c-1

et seq.

], other than as specified, or to the liabilities of Section 18 of the Exchange Act [15 U.S.C. 78r], except to the extent a company specifically requests that the report be treated as filed or as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act, other than by incorporating by reference the report from a proxy or information statement into the Form 10-K. Instructions 1 and 2 to Item 407(e)(5).

Following the Compensation Discussion and Analysis, we have organized detailed disclosure of executive compensation into three broad categories:

• Compensation with respect to the last fiscal year (and the two preceding fiscal years), as reflected in an amended Summary Compensation Table that presents compensation paid currently or deferred (including options, restricted stock and similar grants) and compensation consisting of current earnings or awards that are part of a plan, and as supplemented by a table providing back-up information for certain data in the Summary Compensation Table;

• Holdings of equity-related interests that relate to compensation or are potential sources of future gains, with a focus on compensation-related equity interests that were awarded in prior years and are “at risk,” whether or not these interests are in-the-money, as well as recent realization on these interests, such as through vesting of restricted stock or the exercise of options and similar instruments; and

• Retirement and other post-employment compensation, including retirement and deferred compensation plans, other retirement benefits and other post-employment benefits, such as those payable in the event of a change in control.

We are requiring improved tabular disclosure for each of the above three categories and appropriate narrative disclosure that provides material information necessary to an understanding of the information presented in the individual tables.

We have made some modifications from the proposal in response to comments.

This narrative disclosure, together with the Compensation Discussion and Analysis noted above, will replace the narrative discussion that was required in the Board Compensation Report on Executive Compensation prior to these amendments. The narrative disclosure, along with the rest of the amended executive officer and director compensation disclosure, other than the new Compensation Committee Report, will be company disclosure filed with the Commission.

In Release No. 33-8735, published elsewhere in the proposed rules section of this issue of the

Federal Register

and for which comments are due on or before October 23, 2006, we also solicit additional comments regarding the proposed disclosure requirement of the total compensation and job description of up to an additional three most highly compensated employees who are not

executive officers or directors but who earn more than the named executive officers. In particular, we have specific requests for comment as to whether the proposal should be modified to apply only to large accelerated filers who would disclose the total compensation for the most recent fiscal year and a description of the job position for each of their three most highly compensated employees whose total compensation is greater than any of the named executive officers, whether or not such persons are executive officers. Under this approach, employees who have no responsibility for significant policy decisions within either the company, a significant subsidiary or a principal business unit, division, or function, would be excluded from the determination of the three most highly compensated employees and no disclosure regarding them would be required.

Finally, we are adopting a director compensation table that is similar to the amended Summary Compensation Table.

We had proposed similar amendments, which we did not act on, regarding director compensation in 1995.

Streamlining and Consolidation of Executive and Director Compensation Disclosure,

Release No. 33-7184 (Aug. 6, 1995) [60 FR 35633] (the “1995 Release”), at Section I.B.

We also highlight in the release that the principles-based disclosure rules we are adopting today, including but not limited to the Compensation Discussion and Analysis section, may require disclosure of various aspects of a company's use of options in compensating its executives and directors, including any programs, plans or practices a company may have with regard to the timing or dating of option grants.

We are also modifying, as proposed, some of the Form 8-K requirements regarding compensation. Form 8-K requires disclosure within four business days of the entry into, amendment of, and termination of, material definitive agreements that are entered into outside of the ordinary course of business. Under our definition of material contracts in Item 601 of Regulation S-K for the purposes of determining what exhibits are required to be filed, many agreements regarding executive compensation are deemed to be material agreements entered into outside the ordinary course. When, in 2004, for purposes of consistency, we looked to this definition for use in the Form 8-K requirements, we incorporated all of these executive compensation agreements into the Form 8-K disclosure requirements. Therefore, many agreements regarding executive compensation, including some not related to named executive officers, have been required to be disclosed on Form 8-K within four business days of the applicable triggering event. Consistent with our intent that Form 8-K capture only events that are unquestionably or presumptively material to investors, we are today amending the Form 8-K requirements substantially as proposed.

We believe that executive and director compensation is closely related to financial transactions and relationships involving companies and their directors, executive officers and significant shareholders and respective immediate family members. Disclosure requirements regarding these matters historically have been interconnected, given that relationships among these parties and the company can include transactions that involve compensation or analogous features. Such disclosure also represents material information in evaluating the overall relationship with a company's executive officers and directors. Further, this disclosure provides material information regarding the independence of directors. The related party transaction disclosure requirements were adopted piecemeal over the years and were combined into one disclosure requirement beginning in 1982.

In light of many developments since then, including the increasing focus on corporate governance and director independence, we believe it is necessary to revise our requirements. Today's amendments update, clarify and somewhat expand the related party transaction disclosure requirements. The amendments fold into the disclosure requirements for related party transactions what had been a separate disclosure requirement regarding indebtedness of management and directors.

Further, we are adopting a requirement that calls for a narrative explanation of the independence status of directors under a company's director independence policies. We intend this requirement to be consistent with recent significant changes to the listing standards of the nation's principal securities trading markets.

We also are consolidating this and other corporate governance disclosure requirements regarding director independence and board committees, including new disclosure requirements about the compensation committee, into a single expanded disclosure item.

Disclosure of Certain Relationships and Transactions Involving Management,

Release No. 33-6441 (Dec. 2, 1982) [47 FR 55661] (the “1982 Release”).

Prior to these amendments, related party transactions were disclosed under Item 404(a) of Regulations S-K and S-B, while indebtedness was separately required to be disclosed under Item 404(c) of Regulation S-K.

See,

e.g.

NASD and NYSE Rulemaking: Relating to Corporate Governance

, Release No. 34-48745 (Nov. 4, 2003) [68 FR 64154] (the “NASD and NYSE Listing Standards Release”). This new requirement will replace the disclosure requirement about director relationships that could affect independence specified in Item 404(b) of Regulation S-K prior to these amendments.

New Item 407 of Regulations S-K and S-B.

In order to ensure that these amended requirements result in disclosure that is clear, concise and understandable for investors, we are adding Rules 13a-20 and 15d-20 under the Exchange Act to require that most of the disclosure provided in response to the amended items be presented in plain English. This extends the plain English requirements currently applicable to portions of registration statements under the Securities Act to the disclosure required under the items that we have amended, which impose requirements for Exchange Act reports and proxy or information statements incorporated by reference into those reports.

Finally, we are amending our beneficial ownership disclosure requirements as proposed to require disclosure of shares pledged by named executive officers, directors and director nominees, as well as directors' qualifying shares.

Item 403(b) of Regulations S-K and S-B.

II. Executive and Director Compensation Disclosure

Executive and director compensation disclosure has been required since 1933, and the Commission has had disclosure rules in this area applicable to proxy statements since 1938. In 1992, the Commission proposed and adopted substantially revised rules that embody our current requirements.

In doing so, the Commission moved away from narrative disclosure and back to using tables that permit comparability from year to year and from company to company. As we noted in the Proposing Release, although the reasoning behind this approach remains fundamentally sound, significant changes are appropriate. Much of the concern with the tables adopted in 1992 had also been their strength: they were highly formatted and rigid.

Thus, information not specifically called for in the tables had sometimes not been provided. For example, the highly formatted and specific approach had led some to

suggest that items that did not fit squarely within a “box” specified by the rules need not have been disclosed.

As another example, because the tables did not call for a single figure for total compensation, that information had generally not been provided prior to today's amendments, although there had been considerable commentary indicating that a single total figure is high on the list of information that some investors wish to have. To preserve the strengths of the former approach and build on them, we are taking several steps in adopting amendments to Item 402,

substantially as we proposed:

1992 Release.

See,

e.g.

, Council of Institutional Investors' Discussion Paper on Executive Pay Disclosure,

Executive Compensation Disclosure: How it Works Now, How It Can Be Improved

, at 11 (available at

www.cii.org/site_files/pdfs/CII%20pay%20primer%20edited.pdf

For examples, see,

e.g.

, The Corporate Counsel (Sept.-Oct. 2005) at 6-7; The Corporate Counsel (Sept.-Oct. 2004) at 7; but see Alan L. Beller, Director, Division of Corporation Finance, U.S. Securities and Exchange Commission,

Remarks Before Conference of the NASPP, The Corporate Counsel and the Corporate Executive

(Oct. 20, 2004), available at

www.sec.gov/news/speech/spch102004alb.htm.

The discussion that follows focuses on amendments to Item 402 of Regulation S-K, with Section II.D.1. explaining the different amendments to Item 402 of Regulation S-B. References throughout the following discussion are to Items of Regulation S-K, unless otherwise indicated.

• First, we are retaining the tabular approach to provide clarity and comparability while improving the tabular disclosure requirements;

• Second, we are confirming that all elements of compensation must be included in the tables;

• Third, we are providing a format for the amended Summary Compensation Table that requires disclosure of a single figure for total compensation; and

• Finally, we are requiring narrative disclosure comprising both a general discussion and analysis of compensation and specific material information regarding tabular items where necessary to an understanding of the tabular disclosure.

A. Options Disclosure

1. Background

Many companies use stock options to compensate their employees, including executives. In a simple stock option, a company may grant an employee the right to purchase a specified number of shares of the company's stock at a specific price, called the exercise price and usually set as the market price of the company's stock on the grant date. While some options require no future service from the employee, most include vesting provisions, such that the employee does not earn the option unless he remains employed by the company for a specified period of service. Often a company will grant a specific number of options that will then vest proportionately in staggered increments over a set time period. For example, if the grant vests at a rate of 20% per year for five years, the option for the last 20% is earned by the employee's provision of five years of services. Most options become exercisable upon vesting and remain exercisable until their stated expiration. Generally, upon termination of the employment relationship, however, an employee loses unvested options, and has a limited term (

e.g.

, 90 days) to exercise vested options.

More complex stock options can include provisions that alter the terms of the instrument based on whether performance or other targets are met.

Options have most often been issued “at-the-money”—

i.e.

, with an exercise price equal to the market price of the underlying stock at the date of grant—but may also be issued either “in-the-money”—

i.e.

, with an exercise price below the market price of the underlying stock at the date of grant—or “out-of-the-money”—

i.e.

, with an exercise price above the market price of the underlying stock at the date of grant. An option holder benefits only when the company's stock price is above the exercise price when the employee exercises the option. Hence, setting a lower exercise price increases the value of the option.

As some commentators have observed, using options for compensation purposes may have advantages. These commentators point out that, unlike salary and bonus compensation, stock option compensation does not require the payment of cash by the company, and therefore can be particularly attractive to companies for which cash is a scarce resource. Stock option compensation may also provide an incentive for employees to work to increase the company's stock price. Additionally, some companies may be able to use stock option compensation to help retain employees, because an employee with unvested in-the-money options forfeits their potential value if he leaves the company's employ.

At the same time, other commentators stress that option compensation is not without costs and disadvantages. Options granted to employees, if ultimately exercised with the resulting issuance of the underlying stock, give rise to a dilution of the interests in the company held by existing stockholders. Options that are not in-the-money may not provide a retention benefit, and some managers believe that options that fall out-of-the-money (or are “underwater”) not only fail to motivate employees but, in fact, can result in poor employee morale and resultant turnover, especially at companies where option compensation is an important component of total compensation. In addition, options with shorter vesting periods or longer term options approaching their vesting dates may provide incentives to employees to focus on increasing the company's stock price in the short term rather than working toward achieving longer term business goals and objectives that would enable the company to achieve and sustain future success.

The Commission does not seek to encourage or discourage the use of stock options or any other particular form of executive compensation. The federal securities laws, however, do require full and fair disclosure of compensation information to the extent material or required by Commission rule.

2. Required Option Disclosures

The Commission acknowledged the importance to investors of proper disclosure of executives' option compensation throughout the Proposing Release. The existing body of rules regarding disclosure of executive stock option grants, however, has not previously contained a line-item requirement with respect to information regarding programs, plans or practices concerning the selection of stock option grant dates or exercise prices.

The disclosure we proposed in January, along with related disclosure we also adopt today, should provide investors with more information about option compensation.

We have summarized

below the various provisions of the rules that we adopt today that relate to options disclosure.

Our existing rules for companies' disclosure do prohibit material misrepresentations of option grant dates, as well as any resulting material misstatements of affected financial statements. Companies are also required under our existing rules to disclose any material information that may be necessary to make their other disclosures, in the light of the circumstances under which they are made, not misleading. See,

e.g.

, Rule 12b-20 under the Exchange Act [17 CFR 240.12b-20].

We note that Exchange Act Rule 16a-3 [17 CFR 240.16a-3] setsforth the general reporting requirements under Exchange Act Section 16(a). Prior to August 2002, a number of transactions between an issuer and its officers or directors—such as the granting of options—were required to be disclosed following the end of the fiscal year in which the transaction took place although individuals could disclose those transactions earlier if they chose to. In implementing Section 403(a) of the Sarbanes-Oxley Act of 2002, in August 2002, the Commission required immediate disclosure of these transactions for the first time. As a result, since August 2002, grants, awards and other acquisitions of equity-based securities from the issuer, including those pursuant to employee benefit plans (which were previously reportable on an annual basis on Form 5) have been required to be reported by officers and directors on Form 4 within two business days.

Ownership Reports and Trading by Officers, Directors and Principal Security Holders,

Release No. 34-46421 (Aug. 27, 2002) [56 FR 56461] at Section II.B.

We also note that under our rules regarding disclosure of director compensation, the concerns and considerations for disclosure of option timing or dating practices in the executive compensation realm would also apply when the recipients of the stock option grants are directors of the company.

a. Tabular Disclosures

The following disclosures are required in the tables we adopt today. These provisions are discussed in more detail later in the section relating to each particular table.

• As proposed and adopted, grants of stock options will be disclosed in the Summary Compensation Table at their fair value on the date of grant, as determined under FAS 123R. By basing the executive compensation disclosure on the full grant date fair value computed in accordance with FAS 123R, companies will give shareholders an accurate picture of the value of options at the time they are actually granted to the highest-paid executive officers.

Item 402(c)(2)(vi).

• A separate table including disclosure of equity awards, the Grants of Plan-Based Awards Table, requires disclosure of the grant date as determined pursuant to FAS 123R.

The grant date is generally considered the day the decision is made to award the option as long as recipients of the award are notified promptly. Even if the option's exercise price is set based on trading prices as of an earlier date or dates, the grant date does not change.

Item 402(d)(2)(ii) and Item 402(a)(6)(iv).

• If the exercise price is less than the closing market price of the underlying security on the date of the grant, a separate, adjoining column would have to be added to this table showing that market price on the date of the grant.

Item 402(d)(2)(vii).

• If the grant date is different from the date the compensation committee or full board of directors takes action or is deemed to take action to grant an option, a separate, adjoining column would have to be added to this table showing the date the compensation committee or full board of directors took action or was deemed to take action to grant the option.

Item 402(d)(2)(ii).

Further, if the exercise or base price of an option grant is not the closing market price per share on the grant date, we require a description of the methodology for determining the exercise or base price.

Instruction 3 to Item 402(d).

b. Compensation Discussion and Analysis

Companies will also be required to address matters relating to executives' option compensation in the new Compensation Discussion and Analysis section, particularly as they relate to the timing and pricing of stock option grants. Without being an exhaustive list, several of the examples provided in Item 402(b)(2) illustrate how these types of issues and questions might be covered in a company's disclosure. For example, Item 402(b)(2)(iv) shows that how the determination is made as to when awards are granted could be required disclosure. This example was included in part to note that material information to be disclosed under Compensation Discussion and Analysis may include the reasons a company selects particular grant dates for awards, such as for stock options. Similarly, other examples we provide in Item 402(b)(2) illustrate how the material information to be disclosed under Compensation Discussion and Analysis might need to include the methods a company uses to select the terms of awards, such as the exercise prices of stock options.

i. Timing of Option Grants

We understand that some companies grant options in coordination with the release of material non-public information. If the company had since the beginning of the last fiscal year, or intends to have during the current fiscal year, a program, plan or practice to select option grant dates for executive officers in coordination with the release of material non-public information, the company should disclose that in the Compensation Discussion and Analysis section. For example, a company may grant awards of stock options while it knows of material non-public information that is likely to result in an increase in its stock price, such as immediately prior to a significant positive earnings or product development announcement. Such timing could occur in at least two ways:

• The company grants options just prior to the release of material non-public information that is likely to result in an increase in its stock price (whether the date of that release of material non-public information is a regular date or otherwise pre-announced, or not); or

• The company chooses to delay the release of material non-public information that is likely to result in an increase in its stock price until after a stock option grant date.

Although the facts would be slightly different, a company also may coordinate its grant of stock options with the release of

negative

material non-public information. Again, such timing could occur in at least two ways:

• The company delays granting options until after the release of material non-public information that is likely to result in a decrease in its stock price; or

• The company chooses to release material non-public information that is likely to result in a decrease in its stock price prior to an upcoming stock option grant.

The Commission does not express a view as to whether or not a company may or may not have valid and sufficient reasons for such timing of option grants, consistent with a company's own business purposes. Some commentators have expressed the view that following these practices may enable a company to receive more benefit from the incentive or retention effect of options because recipients may value options granted in this manner more highly or because doing so provides an immediate incentive for employee retention because an employee who leaves the company forfeits the potential value of unvested, in-the-money options. Other commentators believe that timing option grants in connection with the release of material non-public information may unfairly benefit executives and employees.

Regardless of the reasons a company or its board may have, the Commission believes that in many circumstances the existence of a program, plan or practice to time the grant of stock options to executives in coordination with material non-public information would be material to investors and thus should be fully disclosed in keeping with the rules we adopt today. Consistent with principles-based disclosure, companies should consider their own facts and circumstances and include all relevant material information in their corresponding disclosures.

If the company has such a program, plan or practice, the company should disclose that the board of directors or compensation committee may grant options at times when the board or committee is in possession of material non-public information. Companies might also need to consider disclosure about how the board or compensation committee takes such information into

account when determining whether and in what amount to make those grants.

Relevant material information might include disclosure in response to the examples in Item 402(b)(2) in the Compensation Discussion and Analysis section, discussed below.

Although it is not an exhaustive list, there are some elements and questions about option timing to which we believe a company should pay particular attention when drafting the appropriate corresponding disclosure.

• Does a company have any program, plan or practice to time option grants to its executives in coordination with the release of material non-public information?

• How does any program, plan or practice to time option grants to executives fit in the context of the company's program, plan or practice, if any, with regard to option grants to employees more generally?

• What was the role of the compensation committee in approving and administering such a program, plan or practice? How did the board or compensation committee take such information into account when determining whether and in what amount to make those grants? Did the compensation committee delegate any aspect of the actual administration of a program, plan or practice to any other persons?

• What was the role of executive officers in the company's program, plan or practice of option timing?

• Does the company set the grant date of its stock option grants to new executives in coordination with the release of material non-public information?

• Does a company plan to time, or has it timed, its release of material non-public information for the purpose of affecting the value of executive compensation?

Disclosure would also be required where a company has not previously disclosed a program, plan or practice of timing option grants, but has adopted such a program, plan or practice or has made one or more decisions since the beginning of the past fiscal year to time option grants.

ii. Determination of Exercise Price

Separate from these timing issues, some companies may have a program, plan or practice of awarding options and setting the exercise price based on the stock's price on a date other than the actual grant date. Such a program, plan or practice would also require disclosure, including, as appropriate, in the tables described in II.A.2.a above and in the Compensation Discussion and Analysis section. Again, as with the timing matters discussed above, companies should consider their own facts and circumstances and include all relevant material information in their corresponding disclosures.

Similar to such a practice of setting the exercise price based on a date other than the actual grant date, some companies have provisions in their option plans or have followed practices for determining the exercise price by using formulas based on average prices (or lowest prices) of the company's stock in a period preceding, surrounding or following the grant date. In some cases these provisions may increase the likelihood that recipients will be granted in-the-money options. As these provisions or practices relate to a material term of a stock option grant, they should be discussed in the Compensation Discussion and Analysis section.

B. Compensation Discussion and Analysis

We are adopting a new Compensation Discussion and Analysis section.

As we proposed, this section will be an overview providing narrative disclosure that puts into context the compensation disclosure provided elsewhere.

Commenters generally supported the new Compensation Discussion and Analysis section.

This overview will explain material elements of the particular company's compensation for named executive officers by answering the following questions:

Item 402(b). In addition to the narrative Compensation Discussion and Analysis, we are amending the rules so that, to the extent material, additional narrative disclosure will be provided following certain tables to supplement the disclosure in the table. See,

e.g.

, Section II.C.3.a., discussing the narrative disclosure to the Summary Compensation Table and the Grants of Plan-Based Awards Table. We are also requiring disclosure of compensation committee procedures and processes as well as information regarding compensation committee interlocks and insider participation in compensation decisions as part of new Item 407 of Regulation S-K. See Section V.D., below.

See Jeffrey N. Gordon,

Executive Compensation: What's the Problem, What's the Remedy? The Case for Compensation Discussion and Analysis,

30 J. Corp. L. 695 (2005) (arguing that the Commission should require proxy disclosure that includes a “Compensation Discussion and Analysis” section that collects and summarizes all the compensation elements for senior executives, providing a “bottom line assessment” of the different compensation elements and an explanation as to why the board thinks such compensation is warranted).

See,

e.g.

, letters from British Columbia Investment Management Corporation (“BCIMC”); Leo J. Burns (“L. Burns”); CFA Centre for Financial Market Integrity, dated April 13, 2006 (“CFA Centre 1”); Chamber of Commerce of the United States of America (“Chamber of Commerce”); Board of Fire and Police Pension Commissioners of the City of Los Angeles (“F&P Pension Board”); F&C Asset Management; Foley & Lardner LLP (“Foley”); Hermes Investment Management Limited; Governance for Owners USA, Inc. (“Governance for Owners”); International Association of Machinists and Aerospace Workers (“IAM”); Board of Trustees of the International Brotherhood of Electrical Workers Pension Benefit Fund (“IBEW PBF”); International Brotherhood of Teamsters (“Teamsters”); Remuneration Committee of the International Corporate Governance Network; Investment Company Institute (“ICI”); Institutional Shareholder Services (“ISS”); jointly, California Public Employees’ Retirement System, California State Teachers' Retirement System, Co-operative Insurance Society—UK, F&C Asset Management—UK, Illinois State Board of Investment, London Pensions Fund Authority—UK, New York State Common Retirement Fund, New York City Pension Funds, Ontario Teachers' Pension Plan, PGGM Investments—Netherlands, Public Sector and Commonwealth Super (PSS/CSS)—Australia, RAILPEN Investments—UK, State Board of Administration (SBA) of Florida, Stichting Pensioenfonds ABP—Netherlands, UniSuper Limited—Australia, and Universities Superannuation Scheme—UK (“Institutional Investors Group”); The Pension Boards—United Church of Christ (“PB-UCC”); State of Wisconsin Investment Board; and T. Rowe Price Associates, Inc.

• What are the objectives of the company's compensation programs?

• What is the compensation program designed to reward?

• What is each element of compensation?

• Why does the company choose to pay each element?

• How does the company determine the amount (and, where applicable, the formula) for each element?

• How do each element and the company's decisions regarding that element fit into the company's overall compensation objectives and affect decisions regarding other elements?

As proposed, the second question also asked what the compensation program is designed

not

to reward. Commenters stated that compensation committees often may not consider this objective in developing compensation programs, expressing concern that the question could generate potentially limitless disclosure that would not add meaning to disclosure of what the compensation program

designed to award.

In response to this concern, we have not included this question in the rule as adopted.

See,

e.g.

, letters from American Bar Association, Committee on Federal Regulation of Securities (“ABA”); Committee on Securities Regulation of the New York City Bar (“NYCBA”); and WorldatWork (“WorldatWork”).

1. Intent and Operation of the Compensation Discussion and Analysis

The purpose of the Compensation Discussion and Analysis disclosure is to provide material information about the compensation objectives and policies for named executive officers without resorting to boilerplate disclosure. The Compensation Discussion and Analysis is intended to put into perspective for investors the numbers and narrative that follow it.

As described in the Proposing Release and as adopted, the Compensation Discussion and Analysis requirement is principles-based, in that it identifies the disclosure concept and provides several illustrative examples. Some commenters suggested that a principles-based approach would be better served without examples, on the theory that “laundry lists” would lead to boilerplate.

Other commenters expressed the opposite view—that more specific description of required disclosure topics would more effectively elicit meaningful disclosure.

See,

e.g.

, letter from Curt Kollar (“C. Kollar ”).

See,

e.g.

, letters from CFA Centre 1 and Hewitt Associates LLC (“Hewitt”).

As we explained in the Proposing Release, overall we designed the proposals to state the requirements sufficiently broadly to continue operating effectively as future forms of compensation develop, without suggesting that items that do not fit squarely within a “box” specified by the rules need not be disclosed. We believe that the adopted principles-based Compensation Discussion and Analysis, utilizing a disclosure concept along with illustrative examples, strikes an appropriate balance that will effectively elicit meaningful disclosure, even as new compensation vehicles develop over time.

We wish to emphasize, however, that the application of a particular example must be tailored to the company and that the examples are non-exclusive. We believe using illustrative examples helps to identify the types of disclosure that may be applicable. A company must assess the materiality to investors of the information that is identified by the example in light of the particular situation of the company. We also note that in some cases an example may not be material to a particular company, and therefore no disclosure would be required. Because the scope of the Compensation Discussion and Analysis is intended to be comprehensive, a company must address the compensation policies that it applies, even if not included among the examples. The Compensation Discussion and Analysis should reflect the individual circumstances of a company and should avoid boilerplate disclosure.

We have adopted, substantially as proposed, the following examples of the issues that would potentially be appropriate for the company to address in given cases in the Compensation Discussion and Analysis:

• Policies for allocating between long-term and currently paid out compensation;

• Policies for allocating between cash and non-cash compensation, and among different forms of non-cash compensation;

• For long-term compensation, the basis for allocating compensation to each different form of award;

• How the determination is made as to when awards are granted, including awards of equity-based compensation such as options;

• What specific items of corporate performance are taken into account in setting compensation policies and making compensation decisions;

• How specific elements of compensation are structured and implemented to reflect these items of the company's performance and the executive's individual performance;

• The factors considered in decisions to increase or decrease compensation materially;

• How compensation or amounts realizable from prior compensation are considered in setting other elements of compensation (

e.g.

, how gains from prior option or stock awards are considered in setting retirement benefits);

• The impact of accounting and tax treatments of a particular form of compensation;

• The company's equity or other security ownership requirements or guidelines and any company policies regarding hedging the economic risk of such ownership;

• Whether the company engaged in any benchmarking of total compensation or any material element of compensation, identifying the benchmark and, if applicable, its components (including component companies); and

• The role of executive officers in the compensation process.

At the suggestion of a commenter,

we have expanded the example addressing how specific forms of compensation are structured to reflect company performance to also address implementation. We have made a similar change with regard to the example regarding the executive's individual performance.

As adopted, this example includes not only whether discretion can be exercised (either to award compensation absent attainment of the relevant performance goal(s) or to reduce or increase the size of any award or payout), as proposed, but also whether such discretion has been exercised. By doing this, we move to the Compensation Discussion and Analysis overview an example of a material factor that had been proposed for the narrative disclosure that follows the Summary Compensation Table,

and expand its scope so that it is no longer limited to non-equity incentive plans. Because of the policy significance of decisions to waive or modify performance goals, we believe that they are more appropriately discussed in the Compensation Discussion and Analysis.

See letter from ABA.

We have also reordered this example, so it is clearer that the items of company performance referenced are the ones noted in the immediately preceding example.

This example had been proposed as Item 402(f)(1)(iv).

As discussed in Section II.A. above, a company's policies, programs and practices regarding the award of stock options and other equity-based instruments to compensate executives may require disclosure and discussion in the Compensation Discussion and Analysis. As with all disclosure in the Compensation Discussion and Analysis, a company must evaluate the specific facts and circumstances of its grants of options and equity-based instruments and provide such disclosure if it supplies material information about the company's compensation objectives and policies for named executive officers.

Further in response to comment,

we have revised the example addressing how the determination is made as to when awards are granted so that it is not limited to equity-based compensation, as was proposed, but we clarify in the rule as adopted that it would include equity-based compensation, such as stock options.

Regarding the example noting the impact of accounting and tax treatments of a particular form of compensation, some commenters urged that companies be required to continue to disclose their Internal Revenue Code Section 162(m) policy.

The adoption of this example should not be construed to eliminate this discussion. Rather, this example indicates more broadly that

any

tax or accounting treatment, including but not limited to Section 162(m), that is material to the company's compensation policy or decisions with respect to a named

executive officer is covered by Compensation Discussion and Analysis. Tax consequences to the named executive officers, as well as tax consequences to the company, may fall within this example.

See letter from ABA.

This example is discussed in more detail above in Section II.A., the discussion of stock option disclosure.

See,

e.g.

, letters from Buck Consultants; Frederic W. Cook & Co., Inc., dated March 9, 2006 (“Frederic W. Cook & Co.”); Thomas Rogers; and WorldatWork. The Commission has construed the Board Compensation Committee Report on Executive Compensation (which had been required to be furnished by Item 402(k) prior to these amendments) to require discussion of this policy. 1993 Release at Section III.

In addition, we have followed commenters' recommendations to add the following specific examples addressing additional factors:

• Company policies and decisions regarding the adjustment or recovery of awards or payments if the relevant company performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment;

and

See,

e.g.

, letters from Amalgamated Bank Long-View Funds (“Amalgamated”); CFA Centre 1; and Council of Institutional Investors, dated March 29, 2006 (“CII”). Section 304 of the Sarbanes-Oxley Act of 2002 [codified at 15 U.S.C. 7243] provides that if a company is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the principal executive officer and principal financial officer of the company shall reimburse the company for any bonus or other incentive-based or equity-based compensation received by that person from the company during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement, and any profits realized from the sale of securities of the company during that 12-month period. This example would not necessarily be limited to policies covering only situations contemplated by Section 304.

• The basis for selecting particular events as triggering payment with respect to post-termination agreements (

e.g.

, the rationale for providing a single trigger for payment in the event of a change-in-control).

See letter from Anonymous, dated April 10, 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.

See,

e.g.

, letters from Buck Consultants; Frederic W. Cook & Co.; and Mercer Human Resource Consulting, Inc., dated April 10, 2006 (“Mercer”).

Forward looking information in the Compensation Discussion and Analysis will fall within the safe harbors for disclosure of such information. See,

e.g.

, Securities Act Section 27A [15 U.S.C. 77z-2] and Exchange Act Section 21E [15 U.S.C. 78u-5].

The Compensation Discussion and Analysis should be sufficiently precise to identify material differences in compensation policies and decisions for individual named executive officers where appropriate. Where policies or decisions are materially similar, officers can be grouped together. Where, however, the policy or decisions for a named executive officer are materially different, for example in the case of a principal executive officer, his or her compensation should be discussed separately.

2. Instructions to Compensation Discussion and Analysis

We are adopting instructions to make clear that the Compensation Discussion and Analysis should focus on the material principles underlying the company's executive compensation policies and decisions, and the most important factors relevant to analysis of those policies and decisions, without using boilerplate language or repeating the more detailed information set forth in the tables and related narrative disclosures that follow. The instructions also provide that the Compensation Discussion and Analysis should concern the information contained in the tables and otherwise disclosed.

Because this section is intended to provide meaningful analysis, it may specifically refer to the tabular or other disclosures where helpful to make the discussion more robust. A commenter raised a concern that the instruction not to repeat information set forth in the other disclosures might somehow limit the disclosure made in Compensation Discussion and Analysis.

We have revisited this instruction, which is intended to encourage analysis and to forestall mere repetition of the information in the tables, to provide that repetition and boilerplate language should be avoided. The instruction does not prohibit or discourage discussion of that specific information.

Instruction 2 to Item 402(b).

See letter from ABA.

We are adopting an instruction to make clear that, as was the case with the Board Compensation Committee Report on Executive Compensation required prior to the adoption of these amendments, companies are not required to disclose target levels with respect to specific quantitative or qualitative performance-related factors considered by the compensation committee or the board of directors, or any other factors or criteria involving confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to the company.

Some commenters objected that this instruction would impair the quality of information disclosed by making it difficult to assess the link between pay and company performance, and suggested that competitive harm would be mitigated if disclosure were required on an after-the-fact basis, after the performance related to the award is measured.

Different commenters stated that performance targets often are based on confidential, competitively sensitive business plans, and that requiring disclosure could encourage the use of more generic targets that could hinder a company's goal of pay-for-performance.

Other commenters observed that companies rarely use a performance metric for a single year or plan cycle, but select measures because of their relevance to the company's business strategy over several years, so that even disclosure on an after-the-fact basis could reveal proprietary business information that would be useful to competitors.

Having considered these comments, we remain persuaded that this disclosure, even on an after-the-fact basis could pose significant risk of competitive harm and we are therefore not requiring it in those cases in which the factors or criteria considered involve confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to the company.

Instruction 4 to Item 402(b). Prior to these amendments, Instruction 2 to Item 402(k) had provided a similar exclusion for this type of information.

See,

e.g.

, letters from American Federation of Labor and Congress of Industrial Organizations, dated April 5, 2006 (“AFL-CIO”); CII; Governance for Owners; IAM; and The Honorable Barney Frank, United States Representative (MA).

See,

e.g.

, letter from Sullivan & Cromwell LLP (“Sullivan”).

See,

e.g.

, letter from Mercer.

As noted in the Proposing Release, in applying this instruction, we intend the standard for companies to use in making a determination that this information

does not have to be disclosed to be the same one that would apply when companies request confidential treatment of confidential trade secrets or confidential commercial or financial information that otherwise is required to be disclosed in registration statements, periodic reports and other documents filed with us.

Under this approach, to the extent a performance target has otherwise been disclosed publicly, non-disclosure pursuant to this instruction would not be permitted. To make these standards clearer and respond to commenters' concerns that companies may exploit the instruction to exclude information in inappropriate circumstances, we are revising this instruction as adopted to clearly apply the same standard as for confidential treatment requests. Companies will not be required, however, to submit confidential treatment requests in order to rely on the instruction.

To mitigate commenters' concerns that omission of specific performance targets would impair the quality of disclosure, the instruction requires additional disclosure regarding the significance of the undisclosed target. Specifically, if the company uses target levels for specific quantitative or qualitative performance-related factors, or other factors or criteria that it does not disclose in reliance on the instruction, the company must discuss how difficult it will be for the executive or how likely it will be for the company to achieve the undisclosed target levels or other factors. In addition, as discussed below, the Compensation Discussion and Analysis will be considered soliciting material and will be filed with the Commission. This disclosure will be subject to review by the Commission and its staff. Therefore, if a company uses target levels that otherwise would need to be disclosed but does not disclose them in reliance on the instruction, the company may be required to demonstrate to the Commission or its staff that the particular factors or criteria involve confidential trade secrets or confidential commercial or financial information and why disclosure would result in competitive harm. If the Commission or its staff ultimately determines that a company has not met these standards, then the company will be required to disclose publicly the factors or criteria used. In response to a commenter's concern,

we have also added an instruction to clarify that disclosure of a target level that applies a non-GAAP financial measure will not be subject to the general rules regarding disclosure of non-GAAP financial measures but the company must disclose how the number is calculated from the audited financial statements.

See Securities Act Rule 406 [17 CFR 230.406], Exchange Act Rule 24b-2 [17 CFR 240.24b-2], Exemption 4 of the Freedom of Information Act [5 U.S.C. 552(b)(4)], and Rule 80(b)(4) promulgated under the Freedom of Information Act [17 CFR 200.80(b)(4)].

While the instruction adopted today, like the instruction that it replaces, does not require a company to seek confidential treatment under the procedures in Securities Act Rule 406 and Exchange Act Rule 24b-2 with regard to the exclusion of the information from the disclosure provided in response to this item, the standards specified in Securities Act Rule 406, Exchange Act Rule 24b-2, Exemption 4 of the Freedom of Information Act and Rule 80(b)(4) promulgated under the Freedom of Information Act still apply and are subject to review and comment by the staff of the Commission.

See letter from ABA.

Instruction 5 to Item 402(b). The non-GAAP financial measure provisions are specified in Regulation G [17 CFR 244.100-102], Item 10(e) of Regulation S-K [17 CFR 229.10] and Item 10(h) of Regulation S-B [17 CFR 228.10].

One commenter stated that the Compensation Discussion and Analysis of a new public company should be permitted to be a prospective-only discussion.

While we agree the most significant disclosure in that situation may be future plans, we do not believe a prospective-only discussion is appropriate. Instead, companies may emphasize the new plans or policies.

See letter from ABA.

3. “Filed” Status of Compensation Discussion and Analysis and the “Furnished” Compensation Committee Report

We proposed that the Compensation Discussion and Analysis would be considered a part of the proxy statement and any other filing in which it was included. Unlike the Board Compensation Committee Report on Executive Compensation that was required prior to these amendments, we proposed that the Compensation Discussion and Analysis would be soliciting material and would be filed with the Commission. Therefore, it would be subject to Regulation 14A or 14C and to the liabilities of Section 18 of the Exchange Act.

In addition, to the extent that the Compensation Discussion and Analysis and any of the other disclosure regarding executive officer and director compensation or other matters are included or incorporated by reference into a periodic report, the disclosure would be covered by the certifications that principal executive officers and principal financial officers are required to make under the Sarbanes-Oxley Act of 2002.

Likewise, a company's disclosure controls and procedures

100

apply to the preparation of the company's proxy statement and Form 10-K, including the Compensation Discussion and Analysis.

15 U.S.C. 78r.

Exchange Act Rules 13a-14 [17 CFR 240.13a-14] and 15d-14 [17 CFR 240.15d-14]. See also

Certification of Disclosure in Companies' Quarterly and Annual Reports

, Release No. 34-46427 (Aug. 29, 2002) [67 FR 57275], at n. 35 (the “Certification Release”) (stating that “the certification in the annual report on Form 10-K or 10-KSB would be considered to cover the Part III information in a registrant's proxy or information statement as and when filed”).

100

Exchange Act Rules 13a-15 [17 CFR 240.13a-15] and 15d-15 [17 CFR 240.15d-15].

We noted in the Proposing Release that in adopting the rules that have applied since 1992, the Commission took into account comments that the Board Compensation Committee Report on Executive Compensation should be furnished rather than filed to allow for more open and robust discussion in the reports.

101

The Board Compensation Committee Reports on Executive Compensation that were provided prior to today's amendments in general did not suggest that this treatment resulted in such discussion, nor the more transparent disclosure that the comments suggested would result.

102

Further, we noted that we believe that it is appropriate for companies to take responsibility for disclosure involving board matters as with other disclosure.

101

1992 Release, at Section II.H.

102

See also Martin D. Mobley,

Compensation Committee Reports Post-Sarbanes-Oxley: Unimproved Disclosure for Executive Compensation Policies and Practices

, 2005 Colum. Bus. L. Rev. 111 (2005).

Some commenters supported the proposal to have the Compensation Discussion and Analysis filed, noting among other things that filing should lead to increased accuracy and better disclosure.

103

Other commenters objected to this treatment, claiming that certification by principal executive officers and principal financial officers with regard to the disclosure included in the annual report on Form 10-K, including particularly the Compensation Discussion and Analysis, would inappropriately insert these officers into the compensation

committee's deliberative process, potentially calling into question the committee's independence.

104

Further, many commenters expressed the view that the Compensation Discussion and Analysis should, in effect, be the report of the compensation committee, submitted under the names of its members, for which they should be accountable.

105

103

See,

e.g.

, letters from AFL-CIO; American Federation of State, County and Municipal Employees; California Public Employees' Retirement System (“CalPERS”); Paul Hodgson, Senior Research Associate, Executive and Board Compensation, the Corporate Library (“Corporate Library”); Connecticut Retirement Plans and Trust Funds, dated April 10, 2006 (“CRPTF”); Southwestern Pennsylvania and Western Maryland Area Teamsters and Employers Pension Fund (“Teamsters PA/MD”); Teamsters Local 671 Health Services and Insurance Plan (“Teamsters Local 671”); Walden Asset Management (“Walden”); and Western PA Teamsters & Employers Welfare Fund (“Western PA Teamsters Fund”).

104

See,

e.g.

, letters from The Corporate & Securities Law Committee and the Employment & Labor Law Committee of the Association of Corporate Counsel (“ACC”); Compass Bancshares, Inc. (“Compass Bancshares”); National Association of Manufacturers (“NAM”); Peabody Energy Corporation (“Peabody Energy”); and WorldatWork.

105

See,

e.g.

, letters from Jesse Brill, Chair of CompensationStandards.com and Chair of the National Association of Stock Plan Professionals, dated March 1, 2006 (“J. Brill 1”); CFA Centre 1; CRPTF; Frederic W. Cook & Co.; and Hewitt.

Some of these objections may reflect a misconception of the purpose of the Compensation Discussion and Analysis. Although the Compensation Discussion and Analysis discusses company compensation policies and decisions, the Compensation Discussion and Analysis does not address the deliberations of the compensation committee, and is not a report of that committee. Consequently, in certifying the Compensation Discussion and Analysis, principal executive officers and principal financial officers will not need to certify as to the compensation committee deliberations.

However, in response to concerns of commenters that compensation committees should continue to be focused on the executive compensation disclosure process, we are adopting a Compensation Committee Report similar to the Audit Committee Report.

106

Drawing on commenters' suggestions for a new Compensation Committee Report,

107

the rules we adopt today require the compensation committee to state whether:

106

We are moving the audit committee report previously required by Item 306 of Regulations S-K and S-B to Item 407(d) under the amendments adopted today. See Section V.D., below.

107

See,

e.g.

, letters from J. Brill 1; California State Teachers' Retirement System (“CalSTRS”); CFA Centre 1; and Professor William J. Heisler.

• The compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management; and

• Based on the review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in the company's annual report on Form 10-K and, as applicable, the company's proxy or information statement.

Unlike the Audit Committee Report, the Compensation Committee Report will be required to be included or incorporated by reference into the company's annual report on Form 10-K, so that it is presented along with the Compensation Discussion and Analysis when that disclosure is provided in the Form 10-K or incorporated by reference from a proxy or information statement.

108

Like the Audit Committee Report, the Compensation Committee Report will only be required one time during any fiscal year.

109

The name of each member of the company's compensation committee (or, in the absence of a compensation committee, the persons performing equivalent functions or the entire board of directors) must appear below the disclosure.

110

This report will be “furnished” rather than “filed.” The principal executive officer and principal financial officer will be able to look to the Compensation Committee Report in providing their certifications required under Exchange Act Rules 13a-14 and 15d-14.

111

108

The audit committee report is only required in a company proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting). See Instruction 3 to Item 407(d).

109

Instruction 3 to Item 407(e)(5). The audit committee instruction is specified in Instruction 2 to Item 407(d).

110

Item 407(e)(5)(ii).

111

We note that one commenter suggested that the Compensation Discussion and Analysis should not be required of companies that have only registered the offer and sale of debt securities. See letter from Financial Security Assurance Holdings Ltd. The Compensation Discussion and Analysis is intended to put into perspective for investors the numbers and narrative that follow it. This section will provide a broader discussion than just that of the relationship of compensation to the performance of the company as reflected by stock price. Therefore, we believe it is appropriate for all companies that are not small business issuers or foreign private issuers filing on forms specified for their use to include the information.

4. Retention of the Performance Graph

In light of the Compensation Discussion and Analysis requirement, we proposed to eliminate both the Board Compensation Committee Report on Executive Compensation and the Performance Graph.

112

The report and the graph were intended to be related and to show the relationship, if any, between compensation and corporate performance, as reflected by stock price. The rules we adopt today eliminate the Board Compensation Committee Report on Executive Compensation, as we proposed, in favor of the more comprehensive Compensation Discussion and Analysis and the new Compensation Committee Report, as described immediately above.

113

112

Prior to these amendments, the Board Compensation Committee Report on Executive Compensation had been required by Item 402(k) and the Performance Graph had been required by Item 402(l).

113

Section II.B.3.

Given the widespread availability of stock performance information about companies, industries and indexes through business-related Web sites or similar sources, we proposed to eliminate the requirement for the Performance Graph in the belief that it was outdated, particularly since the disclosure in the Compensation Discussion and Analysis regarding the elements of corporate performance that a given company's policies might reach is intended to allow broader discussion than just that of the relationship of compensation to the performance of the company as reflected by stock price. Many commenters objected to eliminating the Performance Graph, however, stating that it provides an easily accessible visual comparison of a company's performance relative to its peers and the market, and provides a standardized source for this type of information.

114

In light of the significance of this disclosure to a broad spectrum of commenters, we have decided to retain the Performance Graph in the amendments we adopt today.

114

See,

e.g.

, letters from CalSTRS; CFA Centre 1; CII; IUE-CWA Pension Fund and 401(k) Plan (“IUE-CWA”); John W. Hamm; NYCBA; Standard Life Investments Limited (“Standard Life”); and Vivient Consulting LLC.

However, we remain of the view that the Performance Graph should not be presented as part of executive compensation disclosure. In particular, as noted above, the disclosure in the Compensation Discussion and Analysis regarding the elements of corporate performance that a given company's policies consider is intended to encourage broader discussion than just that of the relationship of executive compensation to the performance of the company as reflected by stock price. Presenting the Performance Graph as compensation disclosure may weaken this objective. Accordingly, we have decided to retain the requirements for the Performance Graph, but have moved them to the disclosure item entitled “Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.”

115

retained, the Performance Graph will continue to be “furnished” rather than “filed.” The Performance Graph will be required only in the company's annual report to security holders that accompanies or precedes a proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting), and will not be deemed to be soliciting material under the proxy rules or incorporated by reference into any filing except to the extent that the company specifically incorporates it.

116

115

New Item 201(e) of Regulation S-K [17 CFR 229.201(e)] will require the Performance Graph. Consistent with our belief that the Performance Graph should not be linked to the compensation disclosure, we have not retained the portion of the language that was included in Instruction 4 to Item 402(l) prior to these amendments, which conditioned that other performance measures in addition to total return may be included in the graph only so long as the compensation committee (or persons performing equivalent functions or the entire board if there is no such committee) provided

a description of the link between the measure and the level of compensation in the Board Compensation Committee Report on Executive Compensation. As a result, companies may include other performance measures, such as return on average common shareholders' equity, so long as the meaning of any such measures is clear from the Performance Graph and any related legend or other disclosure.

116

Instructions 7 and 8 to Item 201(e). A “small business issuer” as defined in Regulation S-B, is not required to provide the Performance Graph. Instruction 6 to Item 201(e). Because Nasdaq has registered as a national securities exchange under Section 6 of the Exchange Act [15 U.S.C. 78f], the former separate reference to “Nasdaq market” is not retained. See Release No. 34-53128 (Jan. 13, 2006) ordering that the application of The NASDAQ Stock Market LLC for registration as a national securities exchange be granted. We also adopt a conforming revision to Rules 304(d) and (e) of Regulation S-T [17 CFR 232.304(d) and (e)], and we make technical revisions to those rules to correctly reference Item 22(b)(7)(ii) of Form N-1A and to eliminate the references to “prospectuses.”

C. Compensation Tables

To enhance the benefits of the tabular approach to eliciting compensation disclosure,

117

we proposed to reorganize and streamline the tables to provide a clearer and more logical picture of total compensation and its elements for named executive officers. We are adopting reorganized compensation tables and related narrative disclosure that cover three broad categories:

117

The tabular disclosure and related narrative disclosure under amended Item 402 applies, as it did prior to today's amendments, to named executive officers, with amended Item 402(k) applying to directors, as described in Section II.C.9. below. As discussed below in Section II.C.6.a., we are adopting certain changes to the definition of named executive officer.

1. Compensation with respect to the last fiscal year (and the two preceding fiscal years), as reflected in a revised Summary Compensation Table that presents compensation paid currently or deferred (including options, restricted stock and similar grants) and compensation consisting of current earnings or awards that are part of a plan, and as supplemented by one table providing back-up information for certain data in the Summary Compensation Table;

118

2. Holdings of equity-based interests that relate to compensation or are potential sources of future compensation, focusing on compensation-related equity-based interests that were awarded in prior years

119

and are “at risk,” as well as recent realization on these interests, such as through vesting of restricted stock or the exercise of options and similar instruments;

120

and

118

The table supplementing the Summary Compensation Table is the Grants of Plan-Based Awards Table, discussed below in Section II.C.2., which combines into a single table the disclosure of the proposed Grants of Performance-Based Awards Table and the proposed Grants of All Other Equity Awards Table. The accompanying narrative disclosure requirement is discussed below in Section II.C.3.a.

119

Under the disclosure rules as adopted, these interests will be disclosed as current compensation for those prior years.

120

Information regarding holdings of such equity-based interests that relate to compensation will be disclosed in the Outstanding Equity Awards at Fiscal Year-End Table, discussed below in Section II.C.4.a. Information regarding realization on holdings of equity-based interests will be required in the Option Exercises and Stock Vested Table discussed below in Section II.C.4.b.

3. Retirement and other post-employment compensation, including retirement and deferred compensation plans, other retirement benefits and other post-employment benefits, such as those payable in the event of a change in control.

121

Disclosure regarding retirement and post-employment compensation is required in the Pension Benefits Table, discussed below in Section II.C.5.a., the Nonqualified Deferred Compensation Table, discussed below in Section II.C.5.b., and the narrative disclosure requirement for other potential post-employment payments discussed below in Section II.C.5.c.

Reorganizing the tables along these themes should help investors understand how compensation components relate to each other. At the same time, we are retaining the ability for investors to use the tables to compare compensation from year to year and from company to company.

As we noted in the Proposing Release, by more clearly organizing the compensation tables to explain how the elements relate to each other, we may in some situations be requiring disclosure of both amounts earned (or potentially earned) and amounts subsequently paid out. This approach raises the possible perception of “double counting” some elements of compensation in multiple tables. However, a particular item of compensation only appears once in the Summary Compensation Table. In order to explain the item of compensation, it may also appear in one or more of the other tables. We believe the possible perception of double disclosure is outweighed by the clearer and more complete picture the disclosure in the additional tables will provide to investors. We strongly encourage companies to use the narrative following the tables (and where appropriate the Compensation Discussion and Analysis) to explain how disclosures relate to each other in their particular circumstances.

Commenters stated their general support for the format and presentation of the proposed tables.

122

We are adopting the tables substantially as proposed with some revisions, as noted below, in response to comments.

122

See,

e.g.

, letters from CFA Centre 1; jointly, Jennifer Clowes, Lindsey Erskine, Kendra Freeck and Kapri Malesich; F&P Pension Board; IAM; IBEW PBF; Plumbers & Pipefitters National Pension Fund; and Standard Life.

1. Compensation to Named Executive Officers in the Last Three Completed Fiscal Years—The Summary Compensation Table and Related Disclosure

Under today's amendments, the Summary Compensation Table continues to serve as the principal disclosure vehicle regarding executive compensation. This table, as amended, shows the named executive officers' compensation for each of the last three years, whether or not actually paid out. Consistent with the requirements prior to today's amendments, the amended Summary Compensation Table continues to require disclosure of compensation for each of the company's last three completed fiscal years.

123

Prior to today's amendments, an instruction to Item 402(b) permitted the exclusion of information for fiscal years prior to the last completed fiscal year if the company was not a reporting company pursuant to Exchange Act Section 13(a) or 15(d) at any time during that year, unless the company previously was required to provide information for any such year in response to a Commission filing requirement. This instruction has been retained and redesignated as Instruction 1 to Item 402(c) in the amended rule.

As we proposed, the amendments add disclosure of a figure representing total compensation, as reflected in other columns of the Summary Compensation Table, and simplify the presentation from that of the table prior to these amendments. As described in greater detail below, the amendments also provide for a supplemental table disclosing additional information about grants of plan-based awards. Narrative disclosure will follow the two tables, providing disclosure of material information necessary to an understanding of the information disclosed in the tables.

Summary Compensation Table

Name and principal position

Year

Salary

($)

Bonus

($)

Stock awards

($)

Option awards

($)

Non-equity incentive plan compensation

($)

Change in pension value and nonqualified deferred compensation earnings

($)

All other compensation

($)

Total

($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

PEO

124

PFO

125

a. Total Compensation Column

We are modifying the

Summary Compensation Table to provide a clearer picture of total compensation. As we proposed, we are requiring that all compensation be disclosed in dollars and that a total of all compensation be provided.

126

The new “Total” column aggregates the total dollar value of each form of compensation quantified in the other columns (revised columns (c) through (i)). This column responds to concerns that investors, analysts and other users of Item 402 disclosure have not been able to compute aggregate amounts of compensation using the disclosure in the table as specified prior to these amendments in a manner that was accurate or comparable across years or companies. Many commenters expressed their support for the proposal to include a Total column.

127

124

“PEO” refers to principal executive officer. See Section II.C.6.a. below for a description of the proposed named executive officers for whom compensation disclosure is required.

125

“PFO” refers to principal financial officer.

126

Instruction 2 to Item 402(c) (requiring all compensation values in the Summary Compensation Table to be reported in dollars and rounded to the nearest dollar). Prior to today's amendments, some stock-based compensation was disclosed in per share increments rather than in dollar amounts. Instruction 2 to Item 402(c) further requires, where compensation was paid or received in a different currency, footnote disclosure identifying that currency and describing the rate and methodology used for conversion to dollars.

127

See,

e.g.

, letters from CFA Centre 1; CII; Frederic W. Cook & Co.; ISS; Standard Life; and Walden. In addition, over 20,000 form letters from individuals specifically supported this proposal. See Letter Type A, available at

www.sec.gov/rules/proposed/s70306.shtml.

Other commenters expressed concerns that, as proposed, the total number was an amalgam of dissimilar types of compensation.

128

These concerns centered on the mix of compensation elements reported in the Summary Compensation Table being measured at different times and having different valuation methods, so that a Total column in effect would combine “apples” with “oranges.”

129

To address this issue, some commenters suggested dividing the Total column into two separate columns reporting Total Earned Compensation and Total Contingent Compensation.

130

Others recommended two separate Summary Compensation Tables—one for compensation that had been earned or realized and another for compensation that remained contingent or an opportunity.

131

128

See,

e.g.

, letters from Fenwick & West LLP (“Fenwick”); Chamber of Commerce; and Hodak Value Advisors, LLC (“Hodak Value Advisors”).

129

See,

e.g.

, letters from Caterpillar Inc. and Corporate Library.

130

See,

e.g.

, letters from Business Roundtable (“BRT”) and Mercer.

131

See,

e.g.

, letters from Eli Lilly and Company (“Eli Lilly”); Hewitt; Society of Corporate Secretaries & Governance Professionals (“SCSGP”); Towers Perrin, dated April 10, 2006 (“Towers Perrin”); and Watson Wyatt Worldwide (“Watson Wyatt”).

As we noted in the Proposing Release, the Summary Compensation Table is designed to disclose all compensation. Each element of compensation is only disclosed once in the Summary Compensation Table, although it may also be disclosed in some of the other tables. We realize that the timing of when particular items of compensation are disclosed in the Summary Compensation Table varies depending on the form of the compensation.

132

Given the various forms and complexities of compensation and the different periods they may be designed to relate to,

133

it is unavoidable that the timing of disclosure may vary from element to element in this table.

134

132

Compensation is generally calculated in a manner that reflects the cost of the compensation to the company and its shareholders.

133

See,

e.g.

, letter from ABA (noting that option grants made early in the year may be viewed by the compensation committee primarily as an award for the prior year's performance or as an incentive for future performance).

134

The approach as to the timing of disclosure that we proposed and that we adopt today is the same approach that has been used in the Summary Compensation Table since it was first proposed in 1992. See

Executive Compensation Disclosure,

Release No. 33-6940 (June 23, 1992) [57 FR 29582] (noting that the Summary Compensation Table will “provide shareholders a concise, comprehensive overview of compensation awarded, earned or paid in the reporting period”).

We note that some commenters were particularly concerned that non-equity incentive plan awards are reported when earned, while equity incentive plan awards are reported based on grant date value when awarded.

135

No single accepted standard for measuring non-equity incentive plan awards at grant date currently exists. Some commenters nonetheless suggested that we require grant date fair value estimates of non-equity incentive plan awards in the Summary Compensation Table.

136

We do not believe it is appropriate at this time for us to develop such a standard expressly for compensation disclosure purposes. Nevertheless, we believe that the Summary Compensation Table that we adopt today, including a total of all of the various elements presented, provides meaningful disclosure to investors and allows for comparability between companies and within a company.

135

See,

e.g.

, letters from ACC; Amalgamated; BDO Seidman, LLP (“BDO Seidman”); CII; IUE-CWA; and Mercer.

136

See,

e.g.

, letters from CII; IUE-CWA; and CRPTF. Information about the amounts that could be earned under non-equity incentive plans is required to be disclosed in the Grants of Plan-Based Awards Table when such awards are granted.

However, in response to comments, we have created a separate column for the annual change in actuarial value of defined benefit plans and earnings on nonqualified deferred compensation.

137

As proposed, these compensation elements would have been included in the aggregate amount reported in the All Other Compensation column. We believe that presenting these items in a separate column will permit investors and other users of the Summary Compensation Table to readily identify elements included in the Total column that may relate principally to longevity of service. These items will not be used to determine the officers included in the table.

138

137

See Section II.C.1.d.i. below, which describes a modification of the proposed Summary Compensation Table disclosure of nonqualified deferred compensation earnings to present only the above-market or preferential portion in this table.

138

See Section II.C.6.b. below describing how in response to commenters this column is excluded from total compensation for the purpose of identifying named executive officers.

We proposed that the new column disclosing total compensation would appear as the first column providing compensation information.

139

Some commenters suggested moving this column to the right of the table, so that it would follow—rather than precede—the relevant component numbers.

140

In response to these comments, we have moved the Total column to the final column in the table.

139

Columns (a) and (b) specify the executive officer and the year in question.

140

See,

e.g.

, letters from Buck Consultants; Frederic W. Cook & Co.; and SCSGP.

b. Salary and Bonus Columns

The first columns providing compensation information that we are requiring are the salary and bonus columns (columns (c) and (d), respectively), which are retained substantially in their previous form. However, we are adopting some changes, as proposed, that will give an investor a clearer picture of the total amount earned.

As we proposed, compensation that is earned, but for which payment will be deferred, must be included in the salary, bonus or other column, as appropriate. A new instruction, applicable to the entire Summary Compensation Table, provides that if receipt of any amount of compensation is currently payable but has been deferred for any reason, the amount so deferred must be included in the appropriate column.

141

This treatment is no longer limited to salary and bonus, as it was prior to these amendments, and under the amended rules this treatment applies regardless of the reason for the deferral.

142

141

Instruction 4 to Item 402(c).

142

Prior to the amendments, this requirement was triggered only if the officer elected the deferral. We are amending this requirement as we proposed to cover all deferrals, no matter who has initiated the deferrals.

We also proposed that the amount so deferred must be disclosed in a footnote to the applicable column. As described below, the amount deferred will also generally be reflected as a contribution in the deferred compensation presentation.

143

The proposed footnote disclosure was intended to clarify the extent to which amounts disclosed in the Nonqualified Deferred Compensation Table described below represent compensation already reported, rather than additional compensation. Because commenters thought it could lead to potential double counting, we have not adopted this proposed footnote requirement.

144

143

See Section II.C.5.b., describing the Nonqualified Deferred Compensation Table. Disclosure of these amounts as contributions will now be required for nonqualified deferred compensation plans. This disclosure will not be required for qualified plans. Nonqualified deferred compensation plans and arrangements provide for the deferral of compensation that does not satisfy the minimum coverage, nondiscrimination and other rules that “qualify” broad-based plans for favorable tax treatment under the Internal Revenue Code.

144

See,

e.g.

, letter from WorldatWork. As described in Section II.C.5.b. below, however, we have adopted the corresponding footnote proposed for the Nonqualified Deferred Compensation Table.

As proposed, we have eliminated the delay that existed under the former rules where salary or bonus for the most recent fiscal year is determined following compliance with Item 402 disclosure. Under our new rules, where salary or bonus cannot be calculated as of the most recent practicable date, a current report under Item 5.02 of Form 8-K will be triggered by a payment, decision or other occurrence as a result of which either of such amounts become calculable in whole or part.

145

The Form 8-K will include disclosure of the salary or bonus amount and a new total compensation figure including that salary or bonus amount.

145

New Item 5.02(f) of Form 8-K and Instruction 1 to Item 402(c)(2)(iii) and (iv). Prior to these amendments, in the event that such amounts were not determinable at the most recent practicable date, they were generally reported in the annual report on Form 10-K or proxy statement for the following fiscal year. We believe providing the information more quickly is appropriate and are therefore adopting the use of a current report on Form 8-K. Instruction 1 to Item 402(c)(2) (iii) and (iv) requires that the company disclose in a footnote that the salary or bonus is not calculable through the latest practicable date and the date that the salary or bonus is expected to be determined. We proposed to include this requirement in an instruction to proposed paragraph (e) of Item 5.02 of Form 8-K. We are adopting it as a separate paragraph of Item 5.02 in order to make it clearer that it is a separate triggering event.

c. Plan-Based Awards

As we proposed, the next three columns—Stock Awards, Option Awards and Non-Equity Incentive Plan Compensation—cover plan-based awards.

i. Stock Awards and Option Awards Columns

As proposed and adopted, the Stock Awards column (column (e)) discloses stock-related awards that derive their value from the company's equity securities or permit settlement by issuance of the company's equity securities and, as we have clarified, are thus within the scope of FAS 123R for financial reporting, such as restricted stock, restricted stock units, phantom stock, phantom stock units, common stock equivalent units or other similar instruments that do not have option-like features.

146

Valuation is based on the

grant date fair value of the award determined pursuant to FAS 123R for financial reporting purposes. Stock awards granted pursuant to an equity incentive plan are also included in this column to ensure consistent reporting of stock awards and to ensure their inclusion in the revised Summary Compensation Table.

147

146

Generally speaking, a restricted stock award is an award of stock subject to vesting conditions, such as performance-based conditions or conditions based on continued employment for a specified period of time. This type of award is referred to as “nonvested equity shares” in FAS 123R. Phantom stock, phantom stock units, common stock equivalent units and other similar awards are typically awards where an executive obtains a right to receive payment in the future of an amount based on the value of a hypothetical, or notional, amount of shares of common equity (or in some cases stock based on that value). To the extent that the terms of phantom stock, phantom stock units, common stock equivalents or other similar awards include option-like features, the awards will be required to

be included in the Option Awards column. Prior to these amendments, restricted stock awards were valued in the Summary Compensation Table by multiplying the closing market price of the company's unrestricted stock on the date of grant by the number of shares awarded.

147

Prior to these amendments, these performance-based stock awards could be reported at the company's election as incentive plan awards under what was then specified in Instruction 1 to Item 402(b)(2)(iv). Our amendments today eliminate this alternative.

Awards of options, stock appreciation rights, and similar equity-based compensation instruments that have option-like features that, as we have clarified, are within the scope of FAS 123R, must be disclosed in the Option Awards column (column (f)) in a manner similar to the treatment of stock and other equity-based awards under the amendments.

148

Instead of the disclosure of the number of securities underlying the awards as was the case prior to today's amendments, this column requires disclosure of the grant date fair value of the award as determined pursuant to FAS 123R. In order to calculate a total dollar amount of compensation, the value rather than the number of securities underlying an award must be used. The FAS 123R valuation must be used whether the award itself is in the form of stock, options or similar instruments or the award is settled in cash but the amount of payment is tied to performance of the company's stock.

149

148

A stock appreciation right usually gives the executive the right to receive the value of the increase in the price of a specified number of shares over a specified period of time. These awards may be settled in cash or in shares.

149

As proposed, we are eliminating the requirement that had been specified in Options/SAR Grants in Last Fiscal Year Table under Item 402(c)(2)(vi) to report the potential realizable value of each option grant under 5% or 10% increases in value or the present value of each grant (computed under any option pricing model). These alternative disclosures are no longer necessary insofar as the grant date fair value of equity-based awards is included in the Summary Compensation Table.

Under FAS 123R, the compensation cost is initially measured based on the grant date fair value of an award,

150

and generally recognized for financial reporting purposes over the period in which the employee is required to provide service in exchange for the award (generally the vesting period). Some commenters suggested that rather than requiring disclosure of the grant date fair value of equity awards, we should require a company to disclose just the portion of the award expensed in the company's financial statements.

151

These commenters expressed concerns that disclosing the full grant date fair value would be inconsistent with the company's financial statements, would overstate compensation earned related to service rendered for the year, and would be inconsistent with the presentation of non-equity incentive plan compensation. Other commenters expressed support for requiring companies to report the full grant date fair value in the year of the award because it would provide a more complete representation of compensation.

152

150

Under FAS 123R, the classification of an award as an equity or liability award is an important aspect of the accounting because the classification will affect the measurement of compensation cost. Awards with cash-based settlement, repurchase features, or other features that do not result in an employee bearing the risks and rewards normally associated with share ownership for a specified period of time would be classified as liability awards under FAS 123R. For an award classified as an equity award under FAS 123R, the compensation cost recognized is fixed for a particular award, and absent modification, is not revised with subsequent changes in market prices or other assumptions used for purposes of the valuation. In contrast, liability awards are initially measured at fair value on the grant date, but for purposes of recognition in financial statement reporting are then re-measured at each reporting date through the settlement date under FAS 123R. These re-measurements would not be the basis for executive compensation disclosure under our amended rules, unless the award has been modified, as described later in this release.

151

See,

e.g.

, letters from the SEC Regulations Committee of the American Institute of Certified Public Accountants (“AICPA”); Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.; Chamber of Commerce; Computer Sciences Corporation (“Computer Sciences”); Deloitte & Touche LLP; Ernst & Young LLP (“E&Y”); Fenwick; Foley; HR Policy Association (“HRPA”); American Bar Association, Joint Committee on Employee Benefits (“ABA-JCEB”); and KPMG LLP (“KPMG”).

152

See,

e.g.

, letters from CalPERS; CFA Centre 1; CRPTF; L. Burns; Governance for Owners; Laborers International Union of North America; Nancy Lucke Ludgus (“N. Ludgus”); Institutional Investors Group; State Board of Administration (SBA) of Florida (“SBAF”); Teamsters Local 671; Teamsters PA/MD; United Church Foundation, Inc. (“UCF”); Washington State Investment Board (“WSIB”); and Western PA Teamsters Fund.

We are adopting these columns substantially as proposed.

153

Under our amendments, the compensation cost calculated as the grant date fair value will be shown as compensation in the year in which the grant is made.

154

As we stated in the Proposing Release, we believe that this approach is more consistent with the purpose of executive compensation disclosure. We are adopting an approach that subscribes to the measurement method of FAS 123R based on grant date fair value, but also provides for immediate disclosure of compensation. This timing of disclosure of option awards remains the same as it has been since 1992. The only change is that the awards are now disclosed in dollars rather than numbers of units or shares. Disclosing these awards as they are expensed for financial statement reporting purposes would not mirror the timing of disclosure of non-equity incentive plan compensation. While we have imported a financial statement reporting principle to enable disclosure of compensation costs, executive compensation disclosure must continue to inform investors of current actions regarding plan awards—a function that would not be fulfilled applying financial reporting recognition timing. If a company does not believe that the full grant date fair value reflects compensation earned, awarded or paid during a fiscal year, it can provide appropriate explanatory disclosure in the accompanying narrative section. Furthermore, disclosing grant date fair value will give investors a clearer picture of the value of any in-the-money awards. As we proposed, the number of shares underlying an award and other details regarding the award must be disclosed in a separate table covering grants of plan-based awards supplementing the Summary Compensation Table.

155

This supplemental table, which combines the disclosure that would have been required by the proposed Grants of Performance-Based Awards Table and Grants of All Other Equity Awards Table, discloses equity awards granted pursuant to incentive plans separately from other equity awards.

153

Item 402(c)(2)(v) and (vi).

154

FAS 123R requires a company to aggregate individuals receiving awards into relatively homogenous groups with respect to exercise and post-vesting employment termination behaviors for the purpose of determining expected term, for example executives and non-executives. The rules we adopt today are not intended to change the method used to value employee stock options for purposes of FAS 123R or to affect the judgments as to reasonable groupings for purposes of determining the expected term assumption required by FAS 123R. Under the rules we adopt today, where a company uses more than one group, the measurement of grant date fair value for purposes of Item 402 would be derived using the expected term assumption for the group that includes the named executive officers (or the group that includes directors for purposes of Item 402(k)).

155

See Section II.C.2., discussing the Grants of Plan-Based Awards Table required by Item 402(d).

We are adopting as proposed an instruction that requires a footnote referencing the discussion of the relevant assumptions in the notes to the company's financial statements or the discussion of relevant assumptions in the MD&A.

156

The same instruction also

provides that the referenced sections will be deemed to be part of the disclosure provided pursuant to Item 402. The referenced sections containing this disclosure are required in the company's annual report to shareholders that must precede or accompany the company's proxy statement.

157

In the case of Internet disclosure of proxy materials, companies could provide hyperlinks from the proxy statement to the referenced sections contained in the annual report.

158

While some commenters recommended requiring these valuation assumptions to be presented in the proxy statement,

159

we believe that investors will be able to easily access this information without requiring it to be repeated from other documents.

156

Instruction 1 to Item 402(c)(2)(v) and (vi).

157

See Exchange Act Rule 14a-3 [17 CFR 240.14a-3].

158

In addition, in December 2005, we proposed rules that would allow companies and other persons to use the Internet to satisfy proxy material delivery requirements.

Internet Availability of Proxy Materials,

Release No. 34-52926 (Dec. 8, 2005) [70 FR 74597].

159

See,

e.g.

, letters from Buck Consultants; CII; Frederic W. Cook & Co.; and IUE-CWA.

We proposed that previously awarded options or freestanding stock appreciation awards that the company repriced or otherwise materially modified during the last fiscal year be disclosed in the Summary Compensation Table based on the total fair value of the award as so modified. Under FAS 123R, only the incremental fair value, computed as of the repricing or modification date, is recognized for such an award. Several commenters recommended conforming Summary Compensation Table reporting to the incremental fair value recognition approach of FAS 123R, objecting that the proposed total fair value approach would inappropriately double count the fair value of many modified awards.

160

As adopted, the new rules reflect this recommendation.

161

Grants of reload or restorative options, however, are reportable based on total grant date fair value because they are new awards that do not replace previously cancelled awards.

162

160

See,

e.g.

, letters from AICPA; Cleary Gottlieb Steen & Hamilton LLP (“Cleary”); Compass Bancshares; Cravath, Swaine & Moore LLP (“Cravath”); Hewitt; KPMG; Leggett & Platt, Incorporated (“Leggett & Platt”); SCSGP; and Sullivan.

161

Instruction 2 to Item 402(c)(2)(v) and (vi).

162

Generally speaking, reload or restorative options are grants of new options that are granted automatically when an executive exercises the old option. Reload or restorative options are treated as new grants under FAS 123R.

We proposed that all earnings, such as dividends, be included in the Stock Awards and Option Awards columns when paid. Several commenters noted that the value of the right to receive dividends is factored into the grant date fair value computed under FAS 123R.

163

If the stock award or option award entitles the holder to receive dividends, then such “dividend protection” is included in the grant date fair value computed under FAS 123R. We are persuaded by the commenters that subsequent disclosure of the value of dividends in these circumstances, as they are received, would repeat in the same table compensation that was previously disclosed. Therefore, we have revised the requirement. However, we note that if the stock award or option award does not entitle the holder to receive dividends, then “dividend protection” is not included in the grant date fair value computed under FAS 123R. Accordingly, the value of any dividends received would not have been previously disclosed in the Summary Compensation Table as part of the grant date fair value of the award. In order to appropriately capture the compensation in these latter circumstances, we are adopting a requirement to disclose any earnings on stock awards or option awards that are not included in the grant date fair value computation for those awards in the All Other Compensation column of the Summary Compensation Table when the dividends or other earnings are paid.

164

In addition, the material terms of any equity award (including whether dividends will be paid, the applicable dividend rate and whether that rate is preferential) may be factors to be discussed in the related narrative section.

165

163

See,

e.g.

, letters from Cleary; Emerson Electric Co. (“Emerson”); Foley; Hewitt; SCSGP; and Towers Perrin.

164

Item 402(c)(2)(ix)(G).

165

Item 402(e)(1)(iii), discussed in Section II.C.3.a. below.

We had proposed a definition of “non-stock incentive plan” that some commenters stated would result in confusing and potentially anomalous treatment of some awards.

166

To clarify the reporting treatment of different types of awards, we have:

166

See,

e.g.

, letter from ABA.

• Adopted a separate definition of “equity incentive plan” as “an incentive plan or portion of an incentive plan under which awards are granted that fall within the scope of FAS 123R”;

167

and

167

Item 402(a)(6)(iii). An equity incentive plan includes plans that have a performance or market condition. As defined in Appendix E of FAS 123R, a performance condition is “a condition affecting the vesting, exercisability, exercise price or other pertinent factors used in determining the fair value of an award that relates to both (a) an employee's rendering service for a specified (either explicitly or implicitly) period of time and (b) achieving a specified performance target that is defined solely by reference to the employer's own operations (or activities). Attaining a specified growth rate in return on assets, obtaining regulatory approval to market a specified product, selling shares in an initial public offering or other financing event, and a change in control are examples of performance conditions for purposes of this Statement. A performance target also may be defined by reference to the same performance measure of another entity or group of entities. For example, attaining a growth rate in earnings per share that exceeds the average growth rate in earnings per share of other entities in the same industry is a performance condition for purposes of this Statement. A performance target might pertain either to the performance of the enterprise as a whole or to some part of the enterprise, such as a division or an individual employee.” An award also would be considered to have a performance condition if it is subject to a market condition, which is “a condition affecting the exercise price, exercisability, or other pertinent factors used in determining the fair value of an award under a share-based payment arrangement that relates to the achievement of (a) a specified price of the issuer's shares or a specified amount of intrinsic value indexed solely to the issuer's shares or (b) a specified price of the issuer's shares in terms of a similar (or index of similar) equity security (securities).” An award that vests on an accelerated basis upon the occurrence of a change in control is not considered an award under an equity incentive plan if (a) the award contains no other performance or market conditions and (b) the award would otherwise vest based on the completion of a specified employee service period.

• Defined “non-equity incentive plan” as “an incentive plan or portion of an incentive plan that is not an equity incentive plan.”

168

Item 402(a)(6)(iii). See also discussion of the definition of “incentive plan” at Section II.C.1.f. below.

ii. Non-Equity Incentive Plan Compensation Column

The Non-Equity Incentive Plan Compensation column (column (g)) will report, as proposed, the dollar value of all amounts earned during the fiscal year pursuant to non-equity incentive plans.

169

This column includes all other incentive plan awards not included in the stock awards and option awards columns.

170

Compensation awarded under an incentive plan that is not within the scope of FAS 123R will be disclosed in the Summary Compensation Table in the year when the relevant specified performance criteria under the plan are satisfied and the compensation earned, whether or

not payment is actually made to the named executive officer in that year.

169

Item 402(c)(2)(vii). An incentive plan generally provides for compensation intended to serve as an incentive for performance to occur over a specified period, whether such performance is measured by reference to financial performance of the company or an affiliate, the company's stock price, or any other performance measure. See Item 402(a)(6)(iii) for the definition of “incentive plan.”

170

Awards disclosed in this column, column (g), are not covered by FAS 123R for financial reporting purposes because they do not involve share-based payment arrangements. Awards that involve share-based payment arrangements should be disclosed in the Stock Awards or Option Awards columns, as appropriate.

The grant of an award under a non-equity incentive plan will be disclosed in the supplemental Grants of Plan-Based Awards Table in the year of grant, which may be some year prior to the year in which compensation under the non-equity incentive plan is reported in the Summary Compensation Table.

171

As noted above, several commenters recommended Summary Compensation Table reporting of non-equity incentive plan awards on a grant date fair value basis, consistent with the reporting of equity incentive plans.

172

However, because there is not one clearly required or accepted standard for measuring the value at grant date of these non-equity incentive plan awards that reflects the applicable performance contingencies, as there is for equity-based awards with FAS 123R, we are not including such a value in the Summary Compensation Table. Instead, we continue the disclosure approach of reflecting these items of compensation when earned.

173

171

See Section II.C.2., discussing the Grants of Plan-Based Awards Table.

172

See,

e.g.

, letters from Amalgamated; Anonymous Compensation Consultant; BDO Seidman; CII; CRPTF; Mercer; and Teamsters Local 671. See discussion at Section II.C.1.a. above.

173

Prior to these amendments, Items 402(b)(2)(iv)(C) and 402(e) required disclosure of long-term incentive plan payouts when earned.

Once the disclosure has been provided in the Summary Compensation Table when the specified performance criteria have been satisfied and the compensation earned, and the grant of the award has been disclosed in the Grants of Plan-Based Awards Table, no further disclosure will be specifically required when payment is actually made to the named executive officer. Some commenters objected to Summary Compensation Table reporting of awards for which the relevant performance condition has been satisfied that remain subject to forfeiture conditions (such as conditions requiring continued service or conditions that provide for forfeiture based on future company performance).

174

We continue to believe that satisfaction of the relevant performance condition (including an interim performance condition in a long term plan) is the event that is material to investors for Summary Compensation Table reporting purposes. We encourage companies to use the related narrative section to disclose material features that are not reflected in the tabular disclosure including, for example, subsequent forfeitures of amounts reported in the table with respect to previous fiscal years.

175

174

See,

e.g.

, letters from Mercer; Watson Wyatt; and Richard E. Wood.

175

Commenters' issues concerning the scope of awards reportable in this column, in particular as compared to compensation reportable in the bonus column, are discussed in Section II.C.1.f. below.

As proposed and adopted, earnings on outstanding non-equity incentive plan awards are also included in the Non-Equity Incentive Plan Compensation column and identified and quantified in a footnote to the table.

176

Item 402(c)(2)(vii). These earnings were reportable prior to today's amendments in the Other Annual Compensation or All Other Compensation columns of the Summary Compensation Table under Items 402(b)(2)(iii)(C)(

) and 402(b)(2)(v)(C), respectively.

d. Change in Pension Value and Nonqualified Deferred Compensation Earnings Column

As we proposed, we are expanding the Summary Compensation Table to include information regarding the aggregate increase in actuarial value to the named executive officer of all defined benefit and actuarial plans (including supplemental plans) accrued during the year and earnings on nonqualified deferred compensation. However, as mentioned above, we have decided to present this information in a separate column rather than include it in the All Other Compensation column as proposed.

177

Footnote identification and quantification of the full amount of each element is required.

178

Any amount attributable to the defined benefit and actuarial plans that is a negative number should be disclosed by footnote, but should not be reflected in the amount reported in the column.

179

177

See the discussion of the Total column in Section II.C.1.a. above and the discussion of determination of named executive officers in Section II.C.6. below.

178

Instruction 3 to Item 402(c)(2)(viii). In contrast, as proposed to be disclosed in the All Other Compensation Column, separate identification and quantification of each element would have been required only if the element exceeded $10,000, although the amounts would have been included in that column without regard to size.

179

Instruction 3 to Item 402(c)(2)(viii).

i. Earnings on Deferred Compensation

We proposed to require disclosure of all earnings on compensation that is deferred on a basis that is not tax-qualified, including non-tax qualified defined contribution retirement plans.

180

Prior to our amendments, these earnings were required to be disclosed only to the extent of any portion that was “above-market or preferential.” This limitation generated criticism that the rule prior to today's amendments permitted companies to avoid disclosure of substantial compensation.

180

Nonqualified defined contribution and other nonqualified deferred compensation plans are plans providing for deferral of compensation that do not satisfy the minimum coverage, nondiscrimination and other rules that “qualify” broad-based plans for favorable tax treatment under the Internal Revenue Code. A typical 401(k) plan, by contrast, is a

qualified

deferred compensation plan.

Some commenters supported this proposal.

181

However, many commenters asserted that the Summary Compensation Table should continue to require disclosure only of earnings at above-market or preferential rates.

182

Commenters stated that differences in earnings on nonqualified deferred compensation among executives may result entirely from the executives' investment acumen and decisions as to amounts to defer. Commenters further claimed that deferred amounts invested at market rates are conceptually no different from amounts invested directly by an executive. Absent providing an above-market return, contributing additional amounts or guaranteeing investment returns, commenters asserted that the company has no role in the annual growth of the account.

181

See,

e.g.

, letters from CFA Centre 1 and jointly, Lucian A. Bebchuk, Jesse M. Fried and Robert J. Jackson, Jr. (“Professor Bebchuk,

et al.

”).

182

See,

e.g.

, letters from American Academy of Actuaries' Pension Committee (“Academy of Actuaries”); BRT; Frederic W. Cook & Co.; Computer Sciences; Kimball International, Inc.; NAM; and Sullivan.

We are persuaded that Summary Compensation Table disclosure of nonqualified deferred compensation earnings should continue to be limited to the above-market or preferential portion.

183

As under the rule prior to these amendments, the above-market or preferential portion is determined for interest by reference to 120% of the applicable federal long-term rate and for dividends by reference to the dividend rate on the company's common stock.

184

Footnote or narrative disclosure of the company's criteria for determining any portion considered to be above-market may be provided. The above-market or preferential earnings in this column would always be positive, as it would not be possible for above-market or preferential losses to occur.

183

Item 402(c)(2)(viii)(B).

184

Instruction 2 to Item 402(c)(2)(viii), which is based on the language which had appeared in Instructions 3 and 4 to Item 402(b)(2)(iii)(C) prior to these amendments.

However, we do not overlook the fact that the company is obligated to pay the executive the entire amount of the nonqualified deferred compensation account, which represents a claim on company assets and is part of a plan that provides the executive with tax

benefits.

185

To reflect this obligation, we have decided to require disclosure of all earnings on nonqualified deferred compensation in the separate Nonqualified Deferred Compensation Table, as we proposed.

186

The disclosure required by that table discloses the rate at which the company's obligation grows on an annual basis.

185

Nonqualified defined contribution and other nonqualified deferred compensation plans are generally unfunded, and their taxation is governed by Section 409A of the Internal Revenue Code [26 U.S.C. 409A].

186

This separate table is discussed in Section II.C.5.b. below.

Further, the method of calculating earnings on deferred compensation plans is an example of a factor that may be material and therefore described in the narrative disclosure to the Summary Compensation Table and the Grants of Plan-Based Awards Table.

187

See Section II.C.3.a. below.

ii. Increase in Pension Value

We proposed to require Summary Compensation Table disclosure of the aggregate increase in actuarial value to the executive officer of defined benefit and actuarial plans (including supplemental plans) accrued during the year.

In contrast to defined contribution plans, for which the Summary Compensation Table requires disclosure of company contributions, the rules prior to our amendments did not require disclosure of the annual change in value of defined benefit plans, such as pension plans, in which the named executive officers participated.

188

The annual increase in actuarial value of these plans may be a significant element of compensation that is earned on an annual basis, thus we proposed to include it in the computation of total compensation.

188

A typical defined contribution plan is a retirement plan in which the company and/or the executive makes contributions of a specified amount, and the amount that is paid out to the executive depends on the return on investments from the contributed amounts. A typical defined benefit plan is a retirement plan in which the company pays the executive specified amounts at retirement which are not tied to investment performance of the contributions that fund the plan.

Such disclosure is necessary to permit the Summary Compensation Table to reflect total compensation for the year. Such disclosure also permits a full understanding of the company's compensation obligations to named executive officers, given that defined benefit plans guarantee what can be a lifetime stream of payments and allocate risk of investment performance to the company and its shareholders. In addition commentators have noted that the absence of such a disclosure requirement creates an incentive to shift compensation to pensions, results in the understatement of non-performance-based compensation, and distorts pay comparisons between executives and between companies.

We are adopting the requirement substantially as proposed.

189

As proposed and adopted, an instruction specifies that this disclosure applies to each plan that provides for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including but not limited to tax-qualified defined benefit plans and supplemental executive retirement plans, but excluding defined contribution plans.

190

The retirement section, discussed below, provides more information regarding these covered plans.

191

189

Item 402(c)(2)(viii)(A).

190

Instruction 1 to Item 402(c)(2)(viii). Defined benefit plans include, for example, cash balance plans in which the retiree's benefit may be determined by the amount represented in an account rather than based on a formula referencing salary while still employed.

191

See Section II.C.5.a., discussing the Pension Benefits Table.

Some commenters raised issues regarding computation of the amount to be disclosed.

192

In response to these comments, we have revised the language of the requirement as adopted to clarify that the disclosure applies to the change, from the pension plan measurement date used for the company's audited financial statements for the prior completed fiscal year to the pension plan measurement date used for the company's audited financial statements for the covered fiscal year, in the actuarial present value of the named executive officer's accumulated benefit under all defined benefit and actuarial pension plans (including supplemental plans). The disclosure therefore includes both:

192

See,

e.g.,

letters from Academy of Actuaries; Frederick W. Cook & Co.; ABA-JCEB; and Mercer.

• The increase in value due to an additional year of service, compensation increases, and plan amendments (if any); and

• The increase (or decrease) in value attributable to interest.

As discussed below, this disclosure relates to the disclosure provided in the Pension Benefits Table

193

and promotes company-to-company comparability. In computing the amount to be disclosed, the company must use the assumptions it uses for financial reporting purposes under generally accepted accounting principles.

194

193

Item 402(h), discussed in Section III.C.5.a. below.

194

Instruction 1 to Item 402(c)(2)(viii) and Instruction 2 to Item (h)(2). Regarding such key assumptions as itnerest rate, form of benefit, number of years of service, level of compensation used to determine the benefit and mortality tables, a company must use the same assumptions as it applies pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 87,

Employers' Accounting for Pensions

(FAS 87) both for this Summary Compensation Table column and the separate Pension Benefits Table.

Other commenters objected to this item's potential to “distort” the Total column and the determination of named executive officers.

195

As described above, we continue to believe that inclusion of this element in the table is necessary to permit the Summary Compensation Table to reflect total compensation. However, we have addressed commenters' concerns by segregating this item and above-market or preferential earnings on nonqualified deferred compensation from the All Other Compensation column, presenting their sum in a separate column so that it will be deducted from the total for purposes of determining the named executive officers.

196

195

See,

e.g.,

letters from Eli Lilly and SCSGP.

196

See Section II.C.6. below.

e. All Other Compensation Column

The next column in the Summary Compensation Table discloses all other compensation not required to be included in any other column.

197

This approach allows the capture of all compensation in the Summary Compensation Table and also allows a total compensation calculation. We confirm that disclosure of all compensation is clearly required under the rules.

198

197

Item 402(c)(2)(ix).

198

The only exception, as discussed below, is for perquisites and personal benefits if they aggregate less than $10,00 for a named executive officer. The 1992 Release, at Section II.A.4., also noted “the revised item includes an express statement that it requires disclosure of all compensation to the named executive officers and directors for services rendered in all capacities to the registrant and its subsidiaries.” See also Item 402(a)(2) as stated prior to these amendments. Further, as described above, Summary Compensation Table disclosure of nonqualified deferred compensation earnings is limited to the above-market or preferential portion of earnings. As was previously the case before these amendments, companies may omit information regarding group life, health, hospitalization and medical reimbursement plans that do not discriminate in scope, terms or operation in favor of executive officers or directors of the company and that are available generally to all salaried employees. See Item 402(a)(6)(ii).

As proposed, we are clarifying the disclosure required in the All Other Compensation column (revised column (i)) in two principal respects:

• Consistent with the requirement that the Summary Compensation Table

disclose

all

compensation, we state explicitly that compensation not properly reportable in the other columns reporting specified forms of compensation must be reported in this column; and

• To simplify the Summary Compensation Table and eliminate confusing distinctions between items currently reported as “Annual” and “Long Term” compensation, we have moved into this column all items formerly reportable as “Other Annual Compensation.”

199

Prior to today's amendments, Item 402(b)(2)(iii)(c) had required the separate column entitled “Other Annual Compensation.”

We also are requiring that each item of compensation included in the All Other Compensation column that exceeds $10,000 be separately identified and quantified in a footnote. We believe that the $10,000 threshold balances our desire to avoid disclosure of clearly

de minimis

matters against the interests of investors in the nature of items comprising compensation. Each item of compensation less than that amount will be included in the column (other than aggregate perquisites and other personal benefits less than $10,000 as discussed below), but is not required to be identified by type and amount.

200

Items to be disclosed in the All Other Compensation column include, but are not limited to, the items discussed below.

200

See Section II.C.1.e.i. regarding separate standards for identification of perquisites and other personal benefits.

i. Perquisites and Other Personal Benefits

Perquisites and other personal benefits are included in the All Other Compensation column. As we proposed, we are adopting changes to the disclosure of perquisites and other personal benefits to improve disclosure and facilitate computing a total amount of compensation. Our amendments require the disclosure of perquisites and other personal benefits unless the aggregate amount of such compensation is less than $10,000. Some commenters thought this threshold was too high;

201

while other commenters thought it was too low.

202

While we realize that this threshold may result in the total amount of compensation reportable in the Summary Compensation Table being slightly less than a complete total amount of compensation, we believe $10,000 is a reasonable balance between investors' need for disclosure of total compensation and the burden on a company to track every benefit, no matter how small. Prior to today's amendments, the rule permitted omission of perquisites and other personal benefits if the aggregate amount of such compensation was the lesser of either $50,000 or 10% of the total of annual salary and bonus, allowing omission of too much information that investors may consider material.

201

See,

e.g.,

letters from Association of BellTel Retirees (“ABTR”); AFL-CIO; Amalgamated; Association of US West Retirees (“AUSWR”); Corporate Library; ISS; UCF; and Walden.

202

See

e.g.,

letters from Buck Consultants; Chamber of Commerce; Compass Bancshares; Computer Sciences; Eli Lilly; Emerson; Hodak Value Advisors; C. Kollar; NAM; and SCSGP.

The amendments we adopt today require, as proposed, footnote disclosure that identifies perquisites and other personal benefits. Prior to these amendments, the rule required identification and quantification only of perquisites and other personal benefits that were 25% of the total amount for each named executive officer.

203

We have modified this requirement so that, unless the aggregate value of perquisites and personal benefits is less than $10,000, any perquisite or other personal benefit must be identified and, if it is valued at the greater of $25,000 or ten percent of total perquisites and other personal benefits, its value must be disclosed.

204

Consistent with our objective to streamline the Summary Compensation Table, the revised threshold is intended to avoid requiring separate quantification of perquisites having

de minimis

value. Where perquisites are subject to identification, they must be described in a manner that identifies the particular nature of the benefit received. For example, it is not sufficient to characterize generally as “travel and entertainment” different company-financed benefits, such as clothing, jewelry, artwork, theater tickets and housekeeping services.

203

The requirement had been set forth in Instruction 1 to Item 402(b)(2)(iii)(C) prior to these amendments.

204

Instruction 4 to Item 402(c)(2)(ix).

As was formerly the case, tax “gross-ups” or other reimbursement of taxes owed with respect to any compensation, including but not limited to perquisites and other personal benefits, must be separately quantified and identified in the tax reimbursement category described below, even if the associated perquisites or other personal benefits are eligible for exclusion or would not require identification or footnote quantification under the rule.

In the Proposing Release, we provided interpretive guidance about factors to be considered in determining whether an item is a perquisite or other personal benefit. One commenter suggested that the Commission engage in a separate rulemaking to adopt a definition of perquisites in Regulation S-K.

205

As we noted in the Proposing Release, for decades questions have arisen as to what is a perquisite or other personal benefit required to be disclosed. We continue to believe that it is not appropriate for Item 402 to define perquisites or personal benefits, given that different forms of these items continue to develop, and thus a definition would become outdated. As stated in the Proposing Release, we are concerned that sole reliance on a bright line definition in our rules might provide an incentive to characterize perquisites or personal benefits in ways that would attempt to circumvent the bright lines. Many commenters sought additional or modified interpretive guidance, including guidance with respect to an item that is integrally and directly related to the performance of the executive's duties but has a personal benefit aspect as well.

206

Accordingly, we are providing additional explanation regarding how to apply this guidance. The amendments we adopt today require perquisites and personal benefits to be disclosed for both named executive officers and directors.

207

Further, the disclosure requirements we adopt regarding potential payments upon termination or change-in-control include disclosure of perquisites.

208

Accordingly, this discussion also applies in the context of each of these disclosure requirements.

205

See letter from Chamber of Commerce.

206

See,

e.g.,

letter from SCSGP.

207

For directors, the disclosure will be required in the Director Compensation Table discussed below in Section II.C.9.

208

Item 402(j), discussed in Section II.C.5.c. below.

Among the factors to be considered in determining whether an item is a perquisite or other personal benefit are the following:

• An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive's duties.

• Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.

We believe the way to approach this is by initially evaluating the first prong of the analysis. If an item is integrally and directly related to the performance of the executive's duties, that is the end of the analysis—the item is not a perquisite or personal benefit and no

compensation disclosure is required. Moreover, if an item is integrally and directly related to the performance of an executive's duties under this analysis, there is no requirement to disclose any incremental cost over a less expensive alternative. For example, with respect to business travel, it is not necessary to disclose the cost differential between renting a mid-sized car over a compact car.

Because of the integral and direct connection to job performance, the elements of the second part of the analysis (

e.g.

, whether there is also a personal benefit or whether the item is generally available to other employees) are irrelevant. An example of such an item could be a “Blackberry” or a laptop computer if the company believes it is an integral part of the executive's duties to be accessible by e-mail to the executive's colleagues and clients when out of the office. Just as these devices represent advances over earlier technology (such as voicemail), we expect that as new technology facilitates the extent to which work is conducted outside the office, additional devices may be developed that will fall into this category.

The concept of a benefit that is “integrally and directly related” to job performance is a narrow one. The analysis draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit. Some commenters objected that “integrally and directly related” is too narrow a standard, suggesting that other business reasons for providing an item should not be disregarded in determining whether an item is a perquisite.

209

We do not adopt this suggested approach. As we stated in the Proposing Release, the fact that the company has determined that an expense is an “ordinary” or “necessary” business expense for tax or other purposes or that an expense is for the benefit or convenience of the company is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes. Whether the company should pay for an expense or it is deductible for tax purposes relates principally to questions of state law regarding use of corporate assets and of tax law; our disclosure requirements are triggered by different and broader concepts.

209

See,

e.g.,

letters from NACCO Industries, Inc. (“NACCO Industries”) and NAM.

As we noted in the Proposing Release, business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job. Therefore, for example, a company's decision to provide an item of personal benefit for security purposes does not affect its characterization as a perquisite or personal benefit. A company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.

If an item is not integrally and directly related to the performance of the executive's duties, the second step of the analysis comes into play. Does the item confer a direct or indirect benefit that has a personal aspect (without regard to whether it may be provided for some business reason or for the convenience of the company)? If so, is it generally available on a non-discriminatory basis to all employees? For example, a company's provision of helicopter service for an executive to commute to work from home is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis. As we have noted, business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.

A company may reasonably conclude that an item is generally available to all employees on a non-discriminatory basis if it is available to those employees to whom it lawfully may be provided. For this purpose, a company may recognize jurisdictionally based legal restrictions (such as for foreign employees) or the employees' “accredited investor”

210

status. In contrast, merely providing a benefit consistent with its availability to employees in the same job category or at the same pay scale does not establish that it is generally available on a non-discriminatory basis to all employees.

210

“Accredited investor” is defined in Securities Act Rule 501(a)[17 CFR 230.501(a)] for purposes of Regulation D [17 CFR 230.501-508].

Applying the concepts that we outline above, examples of items requiring disclosure as perquisites or personal benefits under Item 402 include, but are not limited to: club memberships not used exclusively for business entertainment purposes, personal financial or tax advice, personal travel using vehicles owned or leased by the company, personal travel otherwise financed by the company, personal use of other property owned or leased by the company, housing and other living expenses (including but not limited to relocation assistance and payments for the executive or director to stay at his or her personal residence), security provided at a personal residence or during personal travel, commuting expenses (whether or not for the company's convenience or benefit), and discounts on the company's products or services not generally available to employees on a non-discriminatory basis.

Beyond the examples provided, we assume that companies and their advisors, who are more familiar with the detailed facts of a particular situation and who are responsible for providing materially accurate and complete disclosure satisfying our requirements, can apply the two-step analysis to assess whether particular arrangements require disclosure as perquisites or personal benefits. In light of the importance of the subject to many investors, all participants should approach the subject of perquisites and personal benefits thoughtfully.

211

The Commission has taken action in circumstances where perquisites were not properly disclosed. See

SEC

Greg A. Gadel and Daniel J. Skrypek,

Litigation Release No. 19720 (June 7, 2006) and

In the Matter of Tyson Foods, Inc. and Donald Tyson,

Litigation Release No. 19208 (Apr. 28, 2005).

The amendments we adopt today, as proposed, call for aggregate incremental cost to the company as the proper measure of value of perquisites and other personal benefits.

212

Some commenters instead recommended valuing perquisites based on current market values.

213

Consistent with our

approach of disclosing a company's compensation costs, we remain of the view that perquisites should be valued based on aggregate incremental cost.

212

Instruction 4 to Item 402(c)(2)(is).

213

See

e.g.,

letters from ABTR; AUSWR; CH; Computer Sciences; Pearl Meyer & Partners; and Institutional Investors Group. As we stated in the Proposing Release, the amount attributed to perquisites and other personal benefits for federal income tax purposes is not the incremental cost for purposes of our disclosure rules unless, independently of the tax characterization, it constitutes such incremental cost. Therefore, for example, the cost of aircraft travel attributed to an executive for federal income tax purposes is not generally the incremental cost of such a perquisite or personal benefit for purposes of our

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