John White, Director of the Division of Corporation Finance of the Securities and Exchange Commission, speaking at a proxy disclosure conference on October 21, stated that SEC reporting companies, in drafting their Compensation Discussion and Analysis (CD&A) sections of next year’s proxy statements, should take close note of the new executive compensation provisions in the Emergency Economic Stabilization Act which created the Troubled Asset Relief Program (TARP).

TARP provides for substantive and procedural requirements with respect to the compensation of the senior executive officers (the definition is taken from the SEC’s definition of “named executive officer” in Item 402 of Regulation S-K) of financial institutions that participate in TARP. The compensation committees of such financial institutions are required to certify in their CD&As that they have taken measures to ensure that executive incentive compensation policies have not encouraged and do not encourage “unnecessary and excessive risks that threaten the value of the financial institution by the executive officers”.

While a great majority of SEC reporting companies will not be participating in TARP, White suggested that it would “be prudent for compensation committees [of all public companies], when establishing targets in creating incentives, not only to discuss how hard or how easy it is to meet the incentives, but also to consider the particular risks an executive might be incentivized to take to meet the target—with risks, in this case, being viewed in the context of the enterprise as a whole.”

White also indicated that the Corporation Finance staff will focus in 2009 on a review of the annual reports, including proxy statement disclosure, of all of the largest financial institutions in the United States that are public companies. The annual reports and proxy disclosure of other public companies will continue to be reviewed on a regular and systematic basis, said White, in no event less frequently than once every three years, as mandated by Section 408 of the Sarbanes-Oxley Act.

Finally, White reviewed Corporation Finance’s observations and comments with respect to executive compensation disclosure contained in proxy statements filed in 2008. Areas that received the most attention in 2008 executive compensation comment letters issued by the SEC were the need for more “analysis”, the disclosure of performance targets and disclosure relating to benchmarking. As to performance targets, White stated that in every instance where the quantitative performance objectives tied to a named executive officer’s incentive compensation have been omitted from CD&A, the staff in its comments has requested that the filer justify the omission in light of the appropriate standard in Instruction 4 to Item 402(b) of Regulation S-K.

While not expressly so stating, White indicated a skepticism with respect to the “competitive harm” exception for disclosure, and emphasized that if that exception is invoked, alternative disclosures must be made, including “meaningful disclosure that describes the degree to which performance goals or matrix were sufficiently challenging or appropriate .... and how achievement of the objectives actually rewarded performance.” Further, he stated that there may need to be “a discussion of the extent to which incentive amounts were determined based upon a historical review of the predictability of achievement of the performance objectives and possibly a discussion of the relationship between historical and future achievement of the performance standard.”

As to benchmarking, White stressed that disclosure must be made of the identity of companies that comprise the peer group used for benchmarking as well as the basis for selecting the particular peer group and the relationship between actual compensation and the benchmarking data.

Returning to the lack of “analysis”, White stressed that many companies did not explain how and why specific compensation amounts and elements were determined and how each element of compensation impacted other compensation decisions. Further, White stated that where a comparison between actual results and performance objectives does not correspond with actual pay-outs, companies must provide appropriate qualitative disclosure reasons for the use of discretion to effect actual pay.