Focus on SEC Executive Compensation Disclosure Obligations in 2025: Security Costs and New Item 402(x)

Heading into 2025, boards of directors must be prepared to address both rising concerns around executive security costs and new Securities and Exchange Commission (SEC) disclosure rules relating to the timing of option and stock appreciation right (SAR) awards.

We discuss the issues directors should consider below.

Executive Security During Volatile Times

The recent killing of UnitedHealthcare Group’s insurance division CEO Brian Thompson outside a New York City hotel while he was attending the company’s annual investor meeting has brought executive security into sharp focus for many boards of directors heading into 2025.[1] Although companies may conclude that providing personal security benefits outside of business engagement to CEOs or other senior executives is necessary to protect the company’s human capital assets, the SEC has to date been clear that these expenses should be disclosed as perquisites to the impacted executives[2] and we thus far have not seen any indication that the SEC’s views will shift during the current proxy season. That said, investor perspectives with respect to security-related expenses may well shift as a result of the very serious and tangible risks to key management. Below, we discuss key issues associated with executive security costs and the related disclosure that directors should take into account.

• Companies Disclosing Security Expenses: According to data from Equilar cited by the Wall Street Journal, just over a quarter of S&P 500 companies disclosed providing personal security services as a perquisite to CEOs in 2023, while only about 13% disclosed providing personal security services to executives other than the CEO.[3] Given recent events, absent a change in the SEC’s position on personal security protection we would expect these numbers to rise significantly, especially among companies that have identified specific threats, conduct business in controversial fields or engage with consumers and other stakeholders in emotionally charged settings. We also anticipate companies may increase security protection provided to executives while engaged in business and on business-related travel and otherwise engaged in business-related activities, which (under current SEC guidance) would not be disclosed as a perquisite.
• Disclosure Obligations: Security arrangements for named executive officers (NEOs) often need to be disclosed in a company’s annual proxy statement as a perquisite, depending on the nature of the expense. According to the SEC, an item is not considered a perquisite or personal benefit if it is “integrally and directly related” to the performance of the executive’s duties.[4] The SEC has stated that the concept of a benefit that is “integrally and directly related” to job performance is a narrow one.[5] Whether the company has determined that an expense is an “ordinary” or “necessary” business expense for tax or other purposes, or whether it is for the benefit or convenience of the company, is not relevant when determining if the expense should be considered a perquisite for disclosure purposes.[6] Security costs that qualify as NEO perquisites need to be disclosed and identified in the company’s annual proxy statement if the NEO receives over $10,000 in total perquisites.[7] When disclosing these costs as perquisites, many companies try to mitigate the impact of the disclosure (including criticisms by proxy advisory firms, such as ISS, about the magnitude of personal security costs) by noting that they consider the security expenses for personal travel and/or family to be appropriate business expenses that arise from the executive’s employment responsibilities, necessary to his or her job performance and aimed at ensuring the safety of the covered executive and his or her family. We anticipate that recent events will result in issuers doubling down on these sorts of disclosures to justify what will likely be increased expenditures on security costs that, despite the business justifications, are likely to require perquisite disclosure under the current SEC rules. Below, we discuss key examples of security costs that may be disclosed as personal expenses and others that the SEC may consider business expenses:
  • Business Trips: If a company provides security for an NEO’s business meetings or attendance at a company business event, such as an annual investor meeting, these costs would be considered “integrally and directly related to the performance of the executive’s duties” and, therefore, would not require disclosure.
  • Personal Vacations: Many companies have policies that, for security purposes, require certain executives (or their families) to use company aircraft for personal travel or company-provided property for vacations. If an NEO is traveling with family on a personal vacation and the company provides security for the trip or mandates the use of company-provided property or aircraft, the security costs (as well as the use of the aircraft or property) should be disclosed as a perquisite, even if the company deems the security a necessary business expense. 
  • Family Attending Business Events: If an NEO’s family members attend a business-related event, the incremental costs associated with security for the NEO’s family members should be disclosed as a perquisite.[8]
  • Company-Sponsored Entertainment Events: If an NEO is traveling to an entertainment event where the company has a sponsorship relationship, such as a sporting event, the security provided for the trip may need to be disclosed as a perquisite, even if there is a business purpose due to the company’s sponsorship of the event. This is a grey area, and the facts and circumstances will be critical to the analysis. For example, if the NEO’s attendance is mandated by the terms of a sponsorship agreement (e.g., to present an award or fulfill other duties on behalf of the company) then there may be grounds to determine that the security provided is not a perquisite. However, given the spotlight on these issues from the SEC and the fact that shareholders and proxy advisory firms may be more accepting of security costs and related disclosure in the wake of recent events, a more conservative approach is often advisable in these types of situations.
  • Commuting: Security provided for commuting to and from work, including a company-provided car and driver is considered a perquisite that requires disclosure since commuting costs are a per se perquisite under the SEC rules.[9]
• How Security Costs Are Calculated for Disclosure Purposes: For proxy disclosure purposes, companies typically only disclose the approximate aggregate incremental cost for non-business-related security. In order to calculate these costs correctly, boards of directors and compensation committees need to ensure that management has established effective controls and procedures for identifying and valuing perquisites (including, for example, proper tracking processes, training programs and guidelines for how to handle specific perquisite issues), since gathering the relevant information in real time is critical to ensuring accurate year end disclosure when preparing a proxy statement. It is also important to note that the calculations for security costs in proxy disclosures often differ from those used for accounting or tax reporting purposes. Therefore, companies should consult with tax and legal advisors when considering security policies and as new fact patterns emerge to ensure that executive security costs are not only appropriately monitored and tracked over the course of the year in a manner that is appropriate for all relevant purposes, but also calculated correctly for each such purpose.  

A Year in Review: New Item 402(x)

On December 14, 2022, the SEC adopted new disclosure requirements under Item 402(x) Regulation S-K requiring disclosure of a company’s policies and practices on the timing of option and SAR awards as well as certain tabular disclosure of awards of options and SARs to NEOs that occur close in time to the company’s disclosure of material nonpublic information (MNPI). For calendar year-end companies, the upcoming proxy statement reporting on fiscal year 2024 equity grants will be the first time Item 402(x) disclosure is required. Below, we briefly highlight the requirements of Item 402(x) and share impressions from its first full fiscal year in effect.  

Recap

• Narrative Disclosure: Item 402(x) requires companies to discuss their policies and practices as to the timing of awards of options and SARs, as well as any other option-like awards, in relation to the disclosure of material nonpublic information (MNPI). Companies are required to include this narrative disclosure regarding their policies and practices regardless of whether the company has actually made grants of options, SARs or option-like awards close in time to the release of MNPI. It is worth noting that Item 402(x) also requires disclosure as to “whether the registrant has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation.”[10]  Many issuers have interpreted this aspect of the rule to require disclosure in respect of their equity grant timing practices with regard to all types equity incentive awards (including restricted stock units and performance stock units). This has typically resulted in simple disclosures stating that the issuer does not schedule equity award grants in anticipation of the release of MNPI, nor does it time the release of MNPI based on equity grant dates.
• Tabular Disclosure: If a company has awarded options or SARs to a NEO within the period starting four business days before and ending one business day after the filing or furnishing of a periodic or current report (excluding an 8-K disclosing the new option award, but including an earnings release) that discloses MNPI, Item 402(x) requires tabular disclosure of the following: (1) the name of the NEO; (2) the grant date of the award; (3) the number of securities underlying the award; (4) the per-share exercise price; (5) the grant date fair value of the award; and (6) the percentage change in the closing market price of the underlying securities between the trading day ending immediately prior to the disclosure of MNPI and the trading day beginning immediately following the disclosure of MNPI.

Year in Review

While all issuers must include narrative disclosure required by Item 402(x), tabular disclosure is only required of those issuers that grant options or SARs within the window designated by the rule. This tabular disclosure largely synthesizes information already publicly available, and as a result we have seen many issuers remain comfortable with their existing option grant process even if they trigger inclusion of the Item 402(x) table. A growing number of issuers, however, are considering shifting their option grant practices to intentionally avoid tabular disclosure in future years, frequently by stipulating the grant date of any option or SAR to be two or more business days following the filing date of any MNPI. As a result, it is advisable for boards and compensation committees to review their existing equity grant policies and practices and consider whether any changes are appropriate in light of these disclosure requirements, as well as other recent SEC guidance such as Staff Accounting Bulletin 120, which provides guidance about proper recognition and disclosure of compensation cost for “spring-loaded” awards made to executives of the issuer.

[1] See Chip Cutter, Theo Francis & Andrew Tangel, “UnitedHealth Shooting Is a Wake-Up Call on Corporate Security” (December 5, 2024), available here.

[2] One recent example is the SEC’s recent settlement with the Greenbrier Companies Inc. and certain of its executives for failing to disclose certain perquisites, including personal security costs.  See Securities and Exchange Commission Press Release, “SEC Charges Global Transportation Company Greenbrier and Former CEO for Failing to Disclose Perks and Payments” (March 2, 2023), available here.

[3] See Cutter et al.  supra note 1.

[4] See Securities and Exchange Commission “Executive Compensation and Related Person Disclosure, Release No. 33-8732A” (August 29, 2006) at 74, available here (the SEC Release).

[5] Id. at 75.

[6] Id. In many instances, an issuer’s board of directors may commission a “security study” in an effort to document a bona-fide security threat and to support, for federal income tax purposes, the deductibility of personal security related costs.  To date, the SEC has not indicated that studies supporting enhanced security measures for a company’s named executive officers would justify a conclusion that personal security costs are not perquisites.

[7] 17 CFR § 229.402(c)(ix)(A).

[8] In certain instances where the incremental costs are de minimis or not calculable on a per person basis, issuers often include general narrative footnote disclosure in the Summary Compensation Table  (SCT) describing the perquisite, but not attributing any monetary value in the “All Other Compensation” column of the SCT.

[9] SEC Release at 77.

[10] Item 402(x)(1) of Regulation S-K.