– Broc Romanek, CompensationStandards.com
Today, ISS issued 78 FAQs on its US proxy voting policies – there are two FAQs on proxy access that are literally highlighted in the document. FAQ #30 describes the policy regarding a board’s implementation of proxy access in response to a proxy access shareholder proposal that received majority support and FAQ #60 sets forth the analytical framework for evaluating proxy access director nominees.
ISS also posted 69 compensation-related FAQs – note it’s hard to discern the year-over-year changes from last year’s comp FAQs since the 2015 FAQs are formatted differently from the 2016 FAQs.
Finally, ISS posted these 52 equity compensation plan FAQs…
– Broc Romanek, CompensationStandards.com
As noted in this Meridian Compensation Partners press release:
– Earnings-based measures (e.g. EPS, Operating Income, EBITDA) remain the most prevalent type of metric used in annual incentive plans, with over three-fourths (77%) of companies including at least one earnings-based measure in their annual incentive plan.
– Long-term performance-based vehicles (e.g., performance shares/units) are used at 93% of companies surveyed and continue to comprise more than one-half of the total long-term incentive opportunity granted to the CEO (56%) and the other NEOs (53%).
– TSR is the most common metric used in long-term performance awards (58%) and the prevalence of companies granting TSR remains higher than the overall prevalence of companies using at least one earnings-based metric (e.g., EPS, Operating Income, EBITDA) (48%).
– Majority voting standards for director elections and de-classified board structures continue to be predominant practices, with prevalence of 93% and 82%, respectively.
– Broc Romanek, CompensationStandards.com
Here’s this interview with Paula Todd & Don Delves of Towers Watson:
Late last month, as part of the 23d annual conference of the National Association of Stock Plan Professionals (NASPP), we participated in a panel discussion reflecting on the tenth anniversary of FAS 123(R) (now ASC 718), the accounting rule change that requires companies to expense stock options. The following article was originally published as a “Meet the Speaker” interview in NASPP Advisor and is republished here with NASPP’s permission.
In the period leading up to the adoption of FAS 123(R), there were a lot of predictions of dire consequences. Do you think any of those predictions were accurate?
Don Delves: One of the predictions was that companies would stop granting options to all or substantially all employees in the organization. This has largely taken place and it happened very quickly at the vast majority of companies. While some smaller firms and technology firms still grant options to all or most employees, most others grant equity only down to the director or manager level. Prior to the adoption of FAS 123(R), a substantial number of both technology and other companies granted options to a significant slice of the employee population.
Other predictions about FAS 123(R)’s impact for the most part did not come to pass, including:
– Executive pay did not decrease, although it did level off and slow its ascent.
– Company stock values did not drop dramatically because of the added (noncash) expense.
– The United States did not lose its edge in technology, nor did U.S. companies lose their ability to attract talent.
– Start-ups did not evaporate, nor lose their ability to attract investors.
– California neither slid off into the Pacific, nor seceded from the union. (Yes, this one is a canard. The others were actual predictions brandished by FAS 123(R)’s opponents.)
Has there been a silver lining to FAS 123(R)?
Don Delves: Yes, absolutely. There are three significant positive results of FAS123(R):
– First, boards now carefully weigh the cost versus benefits of various long term-incentive (LTI) vehicles and designs and choose the mix, vehicles, performance measures and goals that are right for their company. Prior to FAS 123(R), well over 90% of all LTI grants by all companies were in the form of stock options. Hard to believe, but very true. Given the choice of plan types and vehicles, the vast majority of boards chose to grant “free” stock options. LTI programs are now highly tailored to each company’s situation, and LTI alternatives are carefully weighed against each other, using a reasonably consistent estimate of their potential costs and benefits to shareholders.
– Second, executive pay now tracks much better with both absolute financial performance and relative stock performance. Long-term performance plans tie pay to long-term financial results. Relative total shareholder return (TSR) plans reward stock performance relative to the market or peers. Options, while still part of the LTI package, reward increases in the stock price, but are now part of a much more balanced package that rewards both financial performance and relative stock performance. The inclusion of either time-based or performance-based restricted stock in most LTI programs also rewards and encourages the payment of dividends, which options do not. These are all significant improvements in overall incentive design.
– Third and perhaps most important, FAS 123(R) helped slow the dramatic increase in CEO and executive pay that had been fueled by “free” stock options. It was true that CEO pay was “spiraling out of control,” with no real governor on the system, in the late 1990s and early years of the new millennium. That is no longer the case and has not been the case for over 10 years. The accounting expense did what it was supposed to do. It added accountability and rationality to a system that needed it. While it certainly hurt rank-and-file employees, it also improved corporate governance and pay-for-performance alignment for executives.
What are some of the areas of compliance with the standard that are still a challenge for companies today?
Paula Todd: During the past 10 years, most companies have adapted pretty well to the compliance aspect of the standard. Further, the Financial Accounting Standards Board’s proposed amendments contained in its June 2015 Exposure Draft, if adopted, would address many of the most bothersome aspects of the requirements, such as allowing a broader range of tax-withholding rates (beyond just the minimum withholding rate) as well as providing relief for certain private (nonpublic) companies.
Interestingly, the biggest push-back in comment letters on the proposed amendments relates to the accounting treatment for the income tax effects from equity plans. Even though the proposal would do away with an administratively complicated requirement (related to the APIC pool), most of the companies submitting comments said they’d prefer the current administrative complexity to the potential earnings volatility that could result from the proposed change. It will be interesting to see how this issue gets resolved in final rules.
To my mind, the bigger ongoing challenge with ASC 718 comes from the disconnect in accounting treatment between plans with market and performance conditions. In order to achieve more predictable earnings, many companies won’t consider using equity plans that have nonmarket performance conditions even where such plans could make good sense from an incentive design perspective. As valuation techniques improve, it would seem the bright line between market and performance conditions might be softened so that more plans could receive grant-date valuation.
What do you think the next 10 years will bring in terms of stock plan accounting? Are we going to be talking about IFRS 2 at the 2025 NASPP Conference?
Paula Todd: I certainly wouldn’t expect to see the same degree of change related to stock plan accounting in the next 10 years as we’ve seen in the past 10 to 20 years. To the extent there are any changes, they likely would come from program changes that are the direct outgrowth of congressional action (along the lines of Dodd-Frank or major tax reform) or investor mandates. For example, if Institutional Shareholder Services or some other shareholder group would push companies to adopt a particular plan feature that didn’t exist or wasn’t common when the current accounting guidance was adopted, then fine-tuning in the current accounting guidance might be needed to accommodate the new design element or practice. But, I certainly wouldn’t expect the need for significant further changes to the accounting treatment of equity plans.
Of course, the issues raised by the international convergence of accounting standards are part of a broader discussion about U.S. versus international GAAP. With regard to this aspect of corporate accounting, however, any issues with convergence would tend to be fairly minimal considering that the two standards were debated and adopted in concert.
– Broc Romanek, CompensationStandards.com
This memo from Compensation Advisory Partners includes these perk trends:
– Perquisites represent only a small portion of the total pay program for a CEO or CFO. However, perquisite based pay is – and we expect will continue to be – highly scrutinized
– In 2014 83% of companies provided perquisites to their CEO, and 81% of companies provided perquisites to their CFO
– The four most common CEO/CFO perquisites in 2014 were: personal use of corporate aircraft, auto allowance, personal security and financial planning
– The median value of total perquisites provided to CEOs increased by approximately 15% to $143,000 in 2014, and was flat at approximately $25,000 for CFOs
– Broc Romanek, CompensationStandards.com
Here’s some of the highlights from this new EY report:
– Investors overwhelmingly support SOP proposals: The vast majority of SOP proposals – about 12,000 in total –have averaged more than 90% support. Each year, less than 10% of all proposals receive low support and only about 2% fail.
– When are compensation committee members vulnerable: This year, votes against compensation committees at companies with low SOP votes averaged 9%—an “opposition penalty” of 3 times the average 3% vote against other directors of these companies.
– How compensation committees respond to low SOP support: Of the S&P 500 companies with low SOP support in 2014, nearly all (88%) modified their pay practices and/or disclosures following outreach efforts. These engagement-driven changes appear to have paid off, with the average SOP vote increasing nearly 30 percentage points from 57% to 85%.
– Prepare for future pay-related requirements, including CEO pay-ratio, now: Forward looking boards of all companies can anticipate that the changes ushered in by SOP – such as enhanced company-investor dialogue – will become more widespread over time.
– Jurgita Ashley, Thompson Hine LLP
At times companies face challenges of needing to grant equity awards that fall outside of their equity plan limits, particularly when new talent is coming onboard. Based on the premise that a company and new employees have an arm’s length relationship, NYSE, NYSE MKT and NASDAQ provide an exemption from shareholder approval requirements for inducement grants of equity awards to new hires.
Although most exchange-listed companies have shareholder approved equity incentive plans, the exemption comes in handy when insufficient shares for planned awards remain available under those plans or when grants are large enough to exceed the plan’s individual participant limits.
Resale Restrictions & Registration Considerations
Inducement grants are made outside of the plan and are not covered by the company’s existing registration statement on Form S-8 for the plan. A company may choose to file another Form S-8 for inducement grants or, as occurs more frequently, may be able to rely on an exemption from registration under Section 4(a)(2) of the Securities Act or Regulation D promulgated under that act. If a registration statement is not put into place, the awarded securities are “restricted” and are subject to a six-month holding period before they can be freely tradable. In the case of employee stock options, the holding period commences when the options are exercised and paid for at the time of the exercise.
Whether or not a registration statement is available, if the award recipient is hired as an executive officer or is otherwise an affiliate of the company, the recipient will be deemed to hold “control” securities and will have to comply with the other restrictions of Rule 144, including volume and broker transaction restrictions, before being able to dispose of the securities but the holding period only applies when shares are unregistered.
When its use is advantageous, a Form S-8 registration statement is simple, can be prepared quickly and inexpensively as long as the company is current in its filings with the Securities and Exchange Commission for the last twelve months, and can be filed at any time before stock is granted or inducement options are exercised, without regard to when the options were granted or became exercisable. The terms of the inducement grant are generally set forth in an award agreement or an employment agreement with all applicable change of control, termination and other provisions, which, in the case of the grants under the plan, are frequently incorporated from the plan. If a registration statement is filed, the new employee should also receive a short prospectus describing the terms of the award, tax consequences and any resale restrictions.
Public Announcement
Somewhat as a deterrent, stock exchanges require inducement grants to be publicly announced by promptly issuing a press release. The release has to name the recipient and the recipient’s title, list the number of shares subject to the award, and describe the material terms of the grant. It also usually states that the company is relying on an exemption for inducement grants from shareholder approval requirements.
When inducement grants are made to non-executive-level employees and are not specifically negotiated or approved, but instead are made pursuant to the company’s pre-existing program of routinely granting equity to new hires without individual negotiation, then in press releases, companies are permitted to aggregate information about grants to new hires made over two weeks and provide that information in a summary form listing the number of employees hired over those two weeks and the equity granted to them during that period, without identifying the specific employees. However, inducement grants to executive officers must be immediately announced in a press release, identifying the recipients. A Form 8-K, which may have to be filed with the SEC for certain officer appointments, is insufficient to replace the press release required by stock exchanges.
In addition, in connection with submitting an additional listing application to the exchange, exchanges require a company’s representation that the grant is an inducement material to the new hire entering into employment with the company. Although stock exchanges generally request an additional listing application two weeks prior to stock issuances, exchanges work with companies on applications for inducement grants within more realistic timeframes. For example, NASDAQ specifically provides that an additional listing application for an inducement grant should be submitted no later than five calendar days after entering into the agreement to issue the securities or the date of the press release announcing the grant, whichever occurs earlier. NASDAQ considers a press release for the inducement grant to be timely and “prompt” as long as it is issued within four business days of the grant.
Limitations
The exemption for inducement grants is of limited nature. It applies only to employees and does not extend to new consultants, newly appointed non-employee directors, or directors entering into employment arrangements with the company. It is also limited to grants made in connection with an offer of employment and does not extend to grants otherwise made shortly after an individual is hired. As another potential limitation, performance-based compensation that is not approved by shareholders does not qualify for an exemption from the Section 162(m) deduction limit. Section 162(m) of the Internal Revenue Code imposes a million dollar deduction limit on the compensation paid in a taxable year to each of the public corporation’s covered employees, which generally include all named executive officers included in the corporation’s proxy statement, with the exception of the chief financial officer for larger corporations. Section 162(m) includes an exemption from the deduction limit for performance-based compensation if, among other requirements, the terms, including the performance goals, are approved by shareholders. Since that is not the case for inducement grants, the company is not entitled to exclude these grants from the Section 162(m) deduction limit.
Disclosure Considerations
Other reporting and disclosure requirements for inducement grants are similar to the requirements applicable to equity grants made pursuant to shareholder approved plans. Inducement grants have to be approved by a compensation committee consisting of independent directors or a majority of the company’s independent directors. These grants may trigger a Form 8-K for the company for the new compensation-based material agreement that is not made pursuant to a previously disclosed plan or for the unregistered issuance of securities if no Form S-8 is filed to cover the grants. For higher-level employees, the awards may also trigger the requirement for the recipient to report the receipt of equity securities on a Form 4. As with other compensation, the company must report these awards in its proxy statement for the annual meeting of shareholders.
In the company’s proxy tables, inducement grants should appear as the plans that are not approved by shareholders. Any material amendments to inducement awards following their issuance would require shareholder approval under the stock exchange rules despite the fact that the initial grants were made pursuant to an exemption from shareholder approval requirements.
The use of inducement grants is a limited, but at times very effective tool. While granting equity under shareholder approved plans presents less limitations and is advisable when possible, inducement grants can be effectively utilized to attract necessary talent to the company.