– Broc Romanek

Here’s a piece from Willis Towers Watson about pay disclosures in the UK. Here’s an excerpt:

Interestingly, only 35 of the first 50 companies to report (70%) have put their remuneration policies to a vote, reflecting the significant minority that have conducted binding remuneration policy votes (which must be held at least every three years) since 2014. Looking at the new proposed policies, we see three clear themes:

– More reductions in pay levels than ever before
– A strong move toward increased long-term alignment in the form of more deferrals, holding periods and increased shareholding guidelines
– Many moves to align pension contributions with those of the wider workforce.

– Broc Romanek

As noted in this blog, the SEC brought an enforcement action against MDC Partners back in January for not disclosing perks for a former CEO adequately. At that time, the company agreed to pay a $1.5 million penalty.

Yesterday, the SEC announced it had settled with the former CEO himself – and that he paid $5.5 million ($1.85 million in disgorgement, $150k in interest and a $3.5 million penalty). That’s big money!

Here’s an excerpt from the SEC’s press release:

According to the SEC’s order, shareholders were informed in annual filings that Miles S. Nadal received an annual perquisite allowance of $500,000 in addition to other benefits as the chairman and CEO of MDC Partners. But the SEC’s investigation found that without disclosing information to investors as required, MDC Partners paid for Nadal’s personal use of private airplanes as well as charitable donations in his name, yacht and sports car expenses, cosmetic surgery, and a wide range of other perks. All total, Nadal improperly obtained an additional $11.285 million in perks beyond his disclosed benefits and $500,000 annual allowances. He has since resigned and returned $11.285 million to the company.

– Broc Romanek

Yesterday, the FASB issued “Accounting Standards Update No. 2017-09, Stock Compensation (Topic 718).” The ASU is effective for annual periods – and interim periods within those annual periods – beginning after December 15, 2017.

Here’s the intro from this “Accounting Today” article:

The Financial Accounting Standards Board has released an accounting standards update containing guidance on which changes to the terms or conditions of a share-based payment award require companies to apply modification accounting. The new standards update aims to give accountants more clarity on the guidance FASB provided in an earlier stock compensation accounting standard, known as Topic 718. FASB wants to reduce the differences in practice in applying the standard, along with the cost and complexity of applying it, to a change to the terms or conditions of a share-based payment award.

Companies can change the terms or conditions of a share-based payment award for a variety of different reasons, and the nature and effect of the change can vary significantly. FASB currently defines the term “modification” as “a change in any of the terms or conditions of a share-based payment award,” but some of its constituents have pointed out that the definition of the term modification is broad and its interpretation results in diversity in practice.

Some companies evaluate whether a change to the terms or conditions of an award is substantive. When they decide the change is substantive, they apply modification accounting in Topic 718. But when they conclude a change isn’t substantive, they don’t apply modification accounting. Topic 718 doesn’t include guidance about what changes are considered “substantive.”

– Broc Romanek

Here’s an excerpt from this “Proxy Insights” article (pg. 6):

Using data from Proxy Insight, it is possible to compare the policies of investors with their actual voting record. While investors typically oppose the priciple of golden parachutes, caveats in their policies often result in much higher support for the issue than might be expected. This is highlighted in Table 1, where 8 out of 10 investors supported more than half of all golden parachute resolutions they voted on, indicating that there are at least some investors paying lip service to good governance through their policies, yet taking a very different approach in practice.

This could help to explain the fact that, despite their divisive nature and tendency to provoke a fair amount of shareholder opposition, golden parachute proposals still rarely fail. Of the 438 golden parachute proposals that Proxy Insight has collected, all but 30 proved to be successful with the average level of support for these being 83%.

– Broc Romanek

Here’s a teaser from this Shearman & Sterling memo:

The Delaware Chancery Court recently dismissed the shareholder class action suit – In re Columbia Pipeline Group, Inc. Stockholder Litigation, C.A. No. 12152-VCL (Del. Ch. Mar. 7, 2017) – reaffirming that a fully-informed vote of a company’s disinterested stockholders will result in application of the business judgment rule. However, in a recently filed transcript of the proceedings, the Court made some noteworthy remarks regarding equity acceleration in the context of change of control transactions.

– Broc Romanek

Here’s the key findings from this study of share utilization by Willis Towers Watson:

– A continuing trend of reduced run rate overall, although there is some growth among companies with the highest run rates
– A continuing increase in the fair value of LTI awards (e.g., the typical S&P 1500 company awarded $23.1 million in LTIs in 2015, up from a median of $17.5 million two years ago), even as share usage has declined
– Growing use of full-value (time- or performance-lapsing) shares, while the use of stock options continues to wane.

– Broc Romanek

Just landed, coming back from a nice holiday in Japan & Hong Kong (see my pics on Instagram). Today marks my 15th anniversary – 15 years! – of my blither & bother on “TheCorporateCounsel.net Blog” (note this blog is 9 years old – and the “DealLawyers.com Blog” is nearly 14 years old – not shabby!). It’s the one time of year that I feel entitled to toot my own horn – as it takes stamina and boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age…

Cap’n Cashbags: 15 Years of Blogging

Cap’n Cashbags – a CEO – tries to convince his director friend that 15 years of blogging is worth celebrating…

– Liz Dunshee

A few days ago, I blogged about whether 3-year performance periods align with investor definitions of “long-term.”

In this article, Joe Bachelder of McCarter & English presents a case study of Exxon Mobil’s lengthy vesting periods for Rex Tillerson & suggests a fix to existing incentive programs that would place more emphasis on 5-year or longer timeframes:

New incentive awards (including annual bonuses and three-year “long-term” awards) would be made subject to a “rolling” five-year adjustment factor. The adjustment factor would be applied each year based on a five-year cumulative performance target for the five years ending with that year. For example, the five-year period January 1, 2013 through December 31, 2017 would have a performance target (e.g., return on equity for the five-year period). Actual achievement would be expressed as a percentage of target (100 percent—exactly on target, 90 percent for 90 percent achievement of target, etc.).

This percentage would be applied to incentive awards being earned out at the end of that year. For example, at a 90 percent-achievement of the five-year performance target, each incentive award otherwise earned out would be adjusted to 90 percent of the earned-out award. If the five-year performance exceeded target, a corresponding adjustment upward would be made. In this way existing incentive programs could be continued without basic change but would be subject to adjustment, taking into account how well the employer is doing in its performance over periods longer than three years.

I like the concept – but two questions come to mind:

1. Are there many companies & execs brave enough to trail-blaze longer-term programs? Tillerson’s case is unique due to Exxon’s size & the fact that he worked there over 40 years.

2. Could grant date fair values in the summary comp table easily be adjusted downward to reflect longer vesting periods? You wouldn’t want to rely on investors reading all of the narrative info about the program…

Check out our “LTIPs” Practice Area for more suggestions on plan design & effective long-term incentives.

– Liz Dunshee

We haven’t heard much lately about proxy disclosure lawsuits, but they haven’t disappeared. An Intel shareholder is seeking to enjoin a May 18 vote on the company’s amended and restated stock plan – which would add 33 million new shares & extend the term of the plan to 2020.

Here’s more detail from Jim Hamilton’s World of Securities Regulation (also see Steve Quinlivan’s blog):

According to the complaint, Intel’s 2017 Proxy Statement fails to report how many participants are in the plan and why they are receiving these awards. Under Exchange Act Rules 14a-3(a) and 14a-101, the complaint asserts, a proxy statement soliciting a vote on a plan under which compensation may be paid must contain information required by Item 10(a)(1) of Schedule 14A, including the class and number of persons eligible to participate and the basis for their participation. The complaint asks the court to enjoin the vote unless and until Intel furnishes a supplemental proxy statement making the required disclosures.

Yesterday, Intel filed a “Proxy Statement Supplement” – which in addition to responding to shareholder proposals & highlighting Intel’s accomplishments, spells out the number and class of plan participants.

We don’t know whether Intel made any settlement payment in connection with filing the supplement, or whether this complaint signals a renewed trend. But it wouldn’t hurt to check out Intel’s original Proxy Statement and flag this disclosure item for your future EIP proposals…

– Liz Dunshee

A recent analysis of 250 large public companies found that nearly all use a 3-year period for “long-term” performance awards. In this article, Tom McNeill & Jon Szabo of Meridian Compensation Partners examine why this is the case – and what companies can do to break free of the norm.

Among other factors, they note:

A practical issue is the need to set fixed, three-year financial goals when using a performance award. While most (85%) companies set multi-year goals, a vocal minority have succumbed to the challenges and uncertainty of setting goals three years into the future, by using an average of three one-year goals. Extending the performance period beyond three years would only serve to increase the challenge and uncertainty of this situation. Resorting to one-year goals set annually will usually result in the proxy advisory firms making adverse comments on this approach.

However, the goal-setting argument does not work when relative TSR is the performance measure (it’s the most prevalent measure, used by 57% of companies). Since no goal-setting is required, decisions instead focus on the shape of the award payout curve – generally defined by the company’s percentile positioning or ranking versus peers. One could argue that for relative TSR plan designs, it should be easier to use a longer performance measurement period. Yet, only 2% of companies have performance periods longer than three years.

I blogged last week that TSR’s popularity is leveling off – maybe this is an argument for keeping it around. In any event, for companies considering a shift to longer-term performance periods – ongoing communication with investors & executives will be key.