Implementing Internal Controls over Executive Compensation Creating a Sustainable Compensation Control Environment

Transcription

1 NASPP Implementing Internal Controls over Executive Compensation Creating a Sustainable Compensation Control Environment Michael S. Kesner, Principal

2 Sustainable Compensation Control Environment Tone At The Top Control Environment Infrastructure Competence Tone at the Top Integrity Ethical Values Management Philosophy Management Operating Style BoD Direction Control Environment Infrastructure Integrity and Ethical Values (Code of Conduct) Establishment, distribution, receipt, and certification Assignment of Authority and Responsibility Board of Directors Controllers Manual Corporate / Business Unit Policy Manuals Competence Core "talent review process" elements Supports those who execute control processes critical to producing sound Financial Reports Job descriptions, training/certification, performance and potential, and rewards/ consequences Methods of Measurement Structured Interview of Senior Leaders Employee Survey Record in Controls Repository Methods of Measurement Control Assessment Record in Controls Repository Methods of Measurement Control Assessment Record in Controls Repository

3 HR Control Areas Focus on the policies and practices across the HR department that have a direct impact on the financial statements and other SEC reporting requirements Examples include: Benefits Health and welfare plans Retirement plans Qualified and non-qualified plans Outsourcing oversight, if applicable Compensation Base compensation Short term incentive plans Long term incentive plans Severance payments Payroll Processing Accounting Data integrity of the master file Disbursement Outsourcing oversight, if applicable

4 Focus of Controls over Executive Compensation Authorization of all incentive plans Adherence to specific plan provisions in determining incentive payouts, severance benefits, deferred compensation accruals and payouts, etc. Proper tracking of payroll Appropriate accounting for equity and deferred compensation programs (including SERPs) Compliance with Internal Revenue Code requirements for cash and equity incentive compensation arrangements Accurate tracking and reporting of global compensation and benefit programs Proper reporting of fringe benefits (e.g., tax, SEC and accounting) Proper processing of merit increases, incentive plan payouts and stock option exercises Adherence to proper accounting for compensation arrangements under FAS 123 and FAS 87

5 Control Environment for Long Term Incentive Compensation (Illustrative) Control Objective Long term incentive compensation is accurately determined, paid and reported. Control Activities Procedures in place to monitor compliance with all significant policies. All exceptions to compliance are properly reported to the appropriate level within the company and pursued to proper resolution. Management analyzes, on a relatively regular basis, that amounts are being properly recorded in the financial statements. To the extent performance is a factor in developing proper accruals, appropriate levels are consulted to ensure performance estimates are reasonable. Plan participation is properly tracked and monitored. Plan metrics are accurately tracked to ensure incentive payouts are correct and determined according to corporate, business unit and individual performance. Plan payouts are properly coordinated with payroll; payroll entries are reviewed for accuracy and timeliness.

6 Control Environment for Equity Compensation (Illustrative) Control Objective Equity compensation is properly monitored. Control Activities Officer compensation and stock based compensation is properly disclosed in SEC filings. Accounting methods and assumptions used for valuing equity awards are consistent with company policy, authorized and based on clear guidance and supporting documentation. Grants, exercises and forfeitures are all properly tracked and recorded. Grants are made from appropriate plans; availability of shares is properly tracked on a regular basis. Proper procedures are followed in permitting exercises (including confirming awards are vested, exercise price and taxes are paid, Form 4 s are filed for corporate officers).

7 COSO and Sarbanes Oxley Intersection

8 COSO/Sarbanes Oxley Intersection High-Level Disclosure Controls and Procedures 302 Scope Internal Controls for Financial Reporting 404 Scope Operational Controls Disclosure Controls Legal & Regulatory Compliance Controls

9 COSO Framework

10 COSO Framework The process to determine whether internal control is adequately designed, executed, effective and adaptive The process which ensures that relevant information is identified and communicated in a timely manner The evaluation of internal and external factors that impact an organization s objectives The policies and procedures that help ensure that actions identified to manage risk are executed and timely The control conscience of an organization. The tone at the top 1992 by the American Institute of Certified Public Accountants, Inc. Reprinted with permission.