Deferred Compensation

1

• Deferred Compensation Still Changing
• Session 59
• October 25, 2006
• John H. Lowell Randolph B. Root
• CCA Strategies LLC Prudential Financial
• [phone] [phone]

2

• SEC Proxy Requirements

3
Whats The Big Deal About The Proxy?

• Dont our clients call us the day before
  publication?
• They just need that pension table again
• They want to know if they can use last years
  table, or if we need to create a new one
• And, while youre at it, check the words at the
  bottom to see if they are still right

4
Did Something Happen?

• Lots of compensation was hidden
• Not well disclosed
• Efforts made to obfuscate, rather than to clarify
• SEC decided that 1992 rule needed updating

5
Whats New A Brief Look

• CDA
• Filed, not furnished
• (Almost) all compensation is to be considered
• Tables, tables, tables

6
Whats the Same?

• Not much
• Performance graph retained
• 5 Executives
• CEO still required
• CFO as well
• 3 others
• Proposed rule could add up to 3 more

7
Compensation Discussion Analysis

• Narrative disclosure, including
• What are objectives of compensation programs?
• What is compensation program designed to reward?
• Why is each element chosen?
• How is amount and formula chosen?
• How does each element fit into overall
  compensation objectives?
• Not to be boiler plate

8
CDA More Detail

• How allocate between long-term and immediate
  compensation?
• How allocate between cash and non-cash? Different
  forms of non-cash?
• For LTI, basis for allocating to each type of
  award?
• How timing of awards determined?
• What types of corporate performance considered?
• How structured to reflect corporate performance?
• Factors influencing increasing or decreasing
  comp?
• Interplay among different elements? E.g., do
  option gains affect retirement benefits? Why?
• Impact of tax and accounting treatments?
• Companys ownership guidelines, and policies
  regarding hedging associated risk?
• How was benchmarking used?
• The role of executive officers in the
  compensation process?

9
Filed, Not Furnished

• Say what?
• Who cares?
• Isnt that just a formality?

10
Filed, Not Furnished

• Say what?
• Who cares?
• Isnt that just a formality?
• CEO and CFO must certify !!
• Sarbanes-Oxley treatment
• Only Compensation Committee Report will be
  furnished

11
Who Gets Named?

• Principal Executive Officer (PEO)
• Principal Financial Officer (PFO)
• 3 other Executive Officers with the greatest
  total compensation
• Sum of
• Salary
• Bonus
• Stock awards
• Option awards
• Non-equity incentive plan compensation
• Change in pension value and NQDC earnings
• All other compensation
• Reduced by the sum of the increase in pension
  values and the above-market or preferential
  earnings on NQDC

12
Tables

• Summary Compensation Table (SCT)
• Supplemental Grants of Plan-Based Awards Table
  (PBA)
• Narrative disclosure to SCT and PBA
• Outstanding Equity Awards at Fiscal Year-end
  Table
• Option Exercises and Stock Vested Table
• Pension Benefits Table
• Nonqualified Deferred Compensation Table (NQDC)
• Director Compensation

13
Summary Compensation Table
14
Grants of Plan-Based Awards
15
Outstanding Equity Awards at Fiscal Year-End
16
Option Exercises and Stock Vested
17
Pension Benefits
18
Nonqualified Deferred Compensation
19
Director Compensation
20
Other Important Disclosures

• Change in control compensation
• Perquisites
• Anything else that may be relevant to a
  shareholder

21

• Section 409A Requirements

22
Background

• Rules on executive compensation have three goals
• Prevent tax avoidance
• Protect qualified plan system
• Promote good corporate governance
• History of Section 409A
• October 2004 New IRC Section 409A added
• December 2004 IRS Notice 2005-1 provided
  guidance and transition relief
• October 2005 Proposed regs published
• October 2006 IRS Notice 2006-79 provided
  extension of transition relief

23
Background

• Section 409A provides that NQ deferrals are
  included in income unless
• Subject to substantial risk of forfeiture, and
• Certain requirements are satisfied

24
Plans Subject to 409A

• Four types of NQ deferred compensation plans
• Account / DC
• Non-account / DB
• Separation pay
• Other such as equity based compensation
• All deferrals under same plan type are aggregated
• Qualified plans and short-term deferrals excluded

25
Elections

• Initial election to defer
• General rule is prior to start of year in which
  compensation is earned
• New participant has 30 days
• Performance-based bonus election 6 months before
  end of service period
• Election must indicate time and form of payment
• Subsequent election
• Change in form or timing of payment requires 12
  month notice
• Also requires 5 year push-out of payment

26
Distributions

• Permitted upon
• Separation from service
• Death
• Disability
• Time specified at deferral election
• Change in control
• Hardship
• Key employees must wait 6 months following
  separation from service
• Accelerated payments generally prohibited
• Allowed in certain situations such as QDRO, to
  pay FICA tax, plan termination, de minimis
• Haircut provisions eliminated

27
Grandfathered Amount

• Amounts deferred as of 12/31/2004 not subject to
  409A
• Must be no material modifications after
  10/03/2004
• DC grandfathered amount
• Vested account balance at 12/31/2004 plus future
  earnings
• DB grandfathered amount
• Based on 12/31/2004 accrued vested benefit
• PV of 12/31/2004 accrued benefit
• Increase in PV due to passage of time included
• Early retirement subsidy based on aging included

28
Reporting

• All deferrals to be reported
• Includes amounts not currently taxable
• Includes income on deferrals
• Reported on W-2 or 1099
• DB amounts reported once reasonably ascertainable
• All NQ plan distributions to be reported
• All amounts distributed, regardless of when
  deferred

29
Penalties

• Participant immediately taxed on all vested
  deferrals
• Additional 20 penalty
• Additional interest penalty
• All NQ plans of same type are combined

30
Notice 2006-79

• Issued October 2006
• Provides further transition relief
• Final regs expected to be issued in 2006
• Will be effective 1/1/2008
• Reasonable, good faith compliance through
  12/31/2007
• New form/timing payment elections permitted
  through 12/31/2007
• SERP payments may continue to be linked to
  qualified plan through 12/31/2007
• Plan amendments by 12/31/2007