It’s big news – although not surprising if you’ve been paying attention. On Friday, at the ABA Annual Meeting, Corp Fin Director Bill Hinman said that the SEC won’t be delaying the implementation of pay ratio (as always, speaking for himself & not the Commission). Bill also mentioned that Corp Fin would be issuing guidance on the pay ratio rules at some point in the near future. It’s still possible that Congress could delay – or repeal – the pay ratio rule. But I wouldn’t make that bet…
We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
We know that executives are making a lot more than the average & median worker – and upcoming pay ratio disclosures will really bring that disparity into focus. This new research from the Kellogg School might get us closer to knowing why. Here’s a teaser:
Technological innovation is a significant factor in pay disparity, explaining about half of all fluctuations in the ratio of executive pay to worker pay. Their model implies that periods of rapid technological change will be accompanied by increases in differences in pay, both between executives and workers, as well as among different top executives.
In the model, game-changing technologies appear randomly and can increase the firm’s returns on certain capital-intensive projects. (Think Toyota choosing to develop the Prius just as electric batteries became more efficient and cheaper to produce.) Those returns then increase the executive’s paycheck—if the executive had the good sense to invest in a venture that took advantage of the technology, that is. Overall, finding new investment opportunities accounted for 63% of the average executive’s pay, with normal work duties accounting for the remainder.
To help optionees limit their alternative minimum tax, some companies grant options that can be exercised early. This Dorsey & Whitney memo explores the mechanics & tax risks pertaining to optionees for early-exercise ISOs vs. non-qualified stock options. Here’s a teaser:
In 2004, final ISO regulations clarified that Section 83(b) elections filed on restricted stock acquired via early exercise ISOs are only effective for AMT purposes and not for ordinary compensation tax purposes.
In the best case where both ISO holding periods are met (the shares acquired via ISO are held at least two years from the date of grant and at least one year from the date of exercise, prior to sale), the entire spread between the sale price and the exercise price paid will be taxed as long-term capital gain. However, if either holding period is not met, a “disqualifying disposition” occurs.
As compared to an ISO, the exercise of a non-qualified stock option is not a preference item for AMT purposes. If an optionee early exercises a NSO, an 83(b) election will be respected for compensation purposes and the optionee will only recognize compensation income equal to the fair market value of the shares on the date of exercise less the option’s exercise price.
1. For our employee determination date, we’re using:
– October 31st (or equivalent for non-calendar year companies) – 26%
– November 30th (or equivalent for non-calendar year companies) – 7%
– Fiscal year end – 36%
– Some other date – 31%
2. When it comes to “CACM,” we’re using:
– Base salary – 24%
– Total cash compensation – 15%
– Total gross compensation – 21%
– Taxable wages – 25%
– Some other measure – 15%
– No CACM, using annual total compensation instead – 0%
3. When it comes to using the de minimis exemption, we’re:
– Yes, we’re using the exemption – 14%
– No, we’re not using the exemption – 51%
– Don’t know yet – 35%
4. When it comes to excluding employees of acquired entities, we’re:
– Yes, we’re excluding – 4%
– No, we’re not excluding – 28%
– We don’t have acquired entities – 48%
– Don’t know yet – 20%
We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
Many companies held a “say-on-frequency” vote in 2017. If you fall in that category and haven’t already disclosed your frequency decision – now’s the time! Here’s an excerpt from this Davis Polk memo:
If the company does not report its decision in the initial Form 8-K, the due date for the Form 8-K/A is the earlier of 150 days after the annual meeting and 60 days before the next Rule 14a-8 shareholder proposal deadline, as disclosed by the company in its proxy statement. This deadline is rapidly approaching for many companies that held annual meetings in May 2017.
Failure to comply with these Form 8-K deadlines results in a loss of Form S-3 shelf eligibility. In 2011, many companies overlooked the requirement to disclose their decision on the frequency of say-on-pay votes, assuming that since the shareholder advisory vote matched the board’s recommendation, no further disclosure was necessary. Because the SEC staff recognized that many companies simply hadn’t understood this disclosure requirement, the staff routinely granted waivers of the shelf eligibility defect. It is not yet clear how the staff will handle similar waiver requests this year.
Verifying calculations for incentive payouts always made my skin crawl. Usually because I’d learn of payday adjustments for things “everyone’s always agreed on” a day before printing the proxy. So that would lead to a mad scramble to ensure that the proxy disclosure, minutes & actual payouts aligned. Spoiler alert: you usually have to fix them all. And since pay is a sensitive topic, probing questions and further adjustments aren’t warmly received.
But this SEC complaint from “Change to Win” Investment Group shows there’s at least one reason to keep fighting the good fight: activists are also tying out the numbers – and might alert the SEC to discrepancies. CtW’s press release explains its allegations:
T-Mobile’s executives were paid $4 million more in 2016 than they would have been if T-Mobile had followed the methods described in its own proxy statement for calculating executive pay, according to a complaint the CtW Investment Group filed today with the SEC.
The complaint documents T-Mobile’s explanation of how it calculates executive pay – in particular its annual bonuses – and then shows that it is not possible to replicate the bonuses awarded to T-Mobile executives by following these methods: T-Mobile awarded bonuses to executives as if they had exceeded targets on four performance measures by an average of 187%, when in fact they exceeded the board’s targets by only 128%.
Moreover, the Investment Group’s complaint highlights T-Mobile’s inadequate disclosure surrounding the calculation of non-GAAP metrics T-Mobile relies on to measure performance in its executive pay plans. For instance, T-Mobile claims to include gains or losses from the disposal of spectrum licenses in its Adjusted EBITDA measure, but fails to take into account an $835 million loss on spectrum license disposals reported on its financial statements for FY 2016. Another non-GAAP measure T-Mobile relies on – Operating Free Cash Flow – is impossible to calculate based on the vague description T-Mobile provides.
ISS announced yesterday that it’s changing hands – for the 5th time in the past 15 years or so. Genstar Capital, a San Francisco-based private equity firm, is buying the company from the previous PE owner – Vestar Capital Partners.
The ISS press release gives a few details on expected timing & transition plans:
The transaction is expected to close by early fourth quarter, subject to customary closing conditions.
ISS will continue to operate independently once the transaction is completed and the current ISS executive leadership team will remain in place.
Based on the press release, Genstar has some experience in backing service providers in the financial services sector – and plans to continue ISS’s strategic infrastructure & ESG initiatives. The press release doesn’t spell out whether “ESG” captures ISS’s involvement in pay-related policies & services, but there’s no indication right now that those activities will change.
Last month, I blogged about research showing that say-on-pay might be curbing excessive CEO compensation. This “Harvard Law” blog takes a closer look at say-on-pay studies, since findings vary. Here’s a teaser:
– Say-on-pay votes have little effect on reducing CEO compensation levels
– Say-on-pay votes do affect pay-performance sensitivity; CEOs of firms with negative votes face a greater penalty for poor performance than other CEOs
– Increased disclosure and shareholder engagement are two key non-quantifiable benefits of say-on-pay
– Unintended consequences of say-on-pay include movement to “one size fits all” executive compensation programs and a disregard for the creation of economic value
The author concludes there’s no clear consensus on what problem say-on-pay was trying to solve or the desired outcome of the requirements. Nobody knows whether executive pay would’ve been higher without it or if there would’ve been some other limiting factor that came into play.
Sounds like we’ll just need to keep working with what we have…