The Federal Securities and
Exchange Commission (SEC) requires public companies to
disclose management compensation information. Public companies
are considered "public" because they offer their securities
(usually stock) for sale to the general public, and are
required to register these securities with the SEC.
Stockholders in a public company are
eligible to vote on corporate matters, usually during a
company's annual meeting. Because it is not practical for all
stockholders to be present at a corporation's annual meeting,
the company distributes proxies to shareholders so that they
can designate a member of management to vote on their behalf.
The SEC requires that proxy statements
are distributed to all shareholders in a
public company, so that they will have access to key
information about the company before they decide how to vote.
Proxy statements contain biographical
information about a company's Board of Directors, proposals
from management or stockholders to be voted on during the
meeting, and specific information about the top five executive
officers' total compensation during the past three fiscal
years. While the CEO's compensation information must
be disclosed regardless of his salary level, the
remaining four executive officers must have total compensation
of $100,000 or more in the past fiscal year to be included in
the disclosure. The compensation information is provided using
a specific format required by the SEC, the Summary
Compensation Table. While the SEC is quite particular about
the format and scope of this disclosure, the company does
not have to file the proxy statement directly with the
The disclosure and table format requirements are outlined
S-K of the Securities and Exchange Act of 1934.
NQDP's and Proxy Disclosure
If a public company has a NQDP in place, then deferred
income and "above-market" plan earnings pertaining to the five
top executive officers must be included in the Summary
Compensation Table. Basically, the deferred portions of the
executive's salary and bonus, listed in columns (c) and (d) on
the Summary Compensation Table, must be included on the table.
Above-market earnings from the NQDP should be listed in column
Determining 'Above Market'
Earnings on deferred or long-term compensation are
above-market only if the maximum gain the executive would be
eligible to receive exceeds 120% of the applicable federal
long-term rate as prescribed under section 1274(d) of the
Internal Revenue Code. This rate is posted semi-annually in
the Internal Revenue Bulletin, available online at www.irs.gov.
XYZ Corporation's fiscal year, which corresponds to its
plan year, ends on December, 31. The CEO of XYZ Corporation,
Jane Smith, deferred $20,000 of her bonus into the company's
NQDP on the first day of fiscal year 2000, increasing her
total account balance to $100,000. XYZ's NQDP credits earnings
to participant accounts at the end of each fiscal year by
tracking the Lipper Mid Cap Funds Average, which for 2000 was
39.5%. On that date 120% of the applicable long-term Federal
rate (6.4%) is 7.68%.
The total earnings credited to Jane Smith's account were
$39,500, as compared to $7,680 assuming the permissible rate
of 7.68%. Therefore, XYZ Corporation reflects $31,820 ($39,500
- $7,680) of excess earnings on the Summary Compensation Table
in column (e), because this is the "above market" portion.
Here is how this information would appear on the Summary