I mentioned this point on the “50 Nuggets” panel at the 14th Annual Proxy Reporting Conference, but I wanted to pass it on to a broader audience. Many companies’ equity incentive plans or award agreements provide for full or partially accelerated vesting upon an executive’s termination of employment due to death or disability. Some employment agreements also provide for payments or benefits on death or disability. However, from time to time, we come across a proxy statement that fails to reflect these amounts in the Payments on Termination or Change in Control Table or Section. Companies usually justify this omission by arguing that, Instruction 5 to Item 402(j) provides that a company need not provide information with respect to contracts, agreements, plans, or arrangements to the extent they are available generally to all salaried employees and do not discriminate in scope, terms, or operation, in favor of executive officers of the company.

However, Compliance and Disclosure Interpretation (C&DI) Question 126.02 states that the Instruction 5 standard that the “scope” of arrangements not discriminate in favor of executive officers would not be satisfied where the awards to executives are in amounts greater than those provided to all salaried employees—which is nearly always the case.

Question 126.02

Question: A company's employee stock option plan provides for full and immediate vesting of all outstanding unvested awards upon a change-in-control of the company and this provision is included in each option recipient's award agreement (whether the recipient is an executive officer or an employee). Instruction 5 to Item 402(j) provides that a company need not provide information with respect to contracts, agreements, plans, or arrangements to the extent they are available generally to all salaried employees and do not discriminate in scope, terms, or operation, in favor of executive officers of the company. Can the company rely on Instruction 5 to omit disclosure of these awards when quantifying the estimated payments and benefits that would be provided to named executive officers upon a change-in-control?

Answer: No. The Instruction 5 standard that the “scope” of arrangements not discriminate in favor of executive officers would not be satisfied where the option awards to executives are in amounts greater than those provided to all salaried employees. [Aug. 8, 2007]

This is in contrast to ordinary group term life and long-term disability insurance, which is not reported.

Question 117.07

Question: Item 402(a)(6)(ii) provides that “registrants may omit information regarding group life, health, hospitalization, or medical reimbursement plans that do not discriminate in scope, terms or operation, in favor of executive officers or directors of the registrant and that are available generally to all salaried employees.” Does this provision also apply to a disability plan that satisfies these nondiscrimination conditions?

Answer: Yes. To the extent that the disability plan provides benefits not related to termination of employment, a registrant may rely on Item 402(a)(6)(ii) to omit information regarding the disability plan. To the extent that the disability plan provides benefits related to termination of employment, a registrant may rely on Instruction 5 to Item 402(j) to omit information regarding the disability plan. [July 8, 2011]

So let’s be careful out there.