– Liz Dunshee

Was pay ratio “much ado about nothing?” This Semler Brossy blog joins the chorus that predicts that the ratio will garner more attention over time because people can easily track changes to the number. The blog recaps what we learned this year – and what to watch for going forward:

1. Pay ratio gives no new insight into pay practices. This is the easy one, and the current headline. Median employee pay is the one new data point. It also is useless for understanding differences among companies.

2. Scale & labor intensity drive pay ratios. Higher revenue = higher CEO pay = higher pay ratio. Labor intensity is more complex and a combination of items: number of employees, number of locations, use of part-time/seasonal employees, global span of employee population, insourced operations/manufacturing, and customer touchpoints. Median employee pay goes down when you increase any of them. Lower median employee pay = higher CEO pay ratio.

3. Median employee pay is not related to scale. This is why the CEO pay ratio doesn’t tell us anything new about the relationship between CEO pay and overall pay. Labor intensity is not a function of a company’s size. The result when you combine these two is that similarly sized companies may wind up with very different CEO pay ratios, making comparability difficult.

Median employee pay will be relatively stable over time in the absence of M&A or major strategic initiatives. But gradual pay ratio increases will occur over time if CEO pay grows at a faster rate than overall pay – and that trend could garner public attention. For that reason, compensation committees & others should monitor the impact of underlying pay ratio components and continue to be vigilant about communications.

– Liz Dunshee

This Semler Brossy memo (pg. 10) highlights how rare it is for equity plan proposals to fail – since 2011, only 0.5% have that distinction. But in some states, you’d be well-served to aim higher than the “majority of shares present & voting” standard that often applies to this type of proposal. This Keith Bishop blog examines two benefits of a high vote for California corporations:

If the equity plan is approved by a majority of the outstanding shares entitled to vote, then if it later turns out that the corporation has insufficient authorized but unissued shares to to satisfy exercise of outstanding options, Corporations Code Section 405(b) allows the board, without further shareholder approval, to amend the articles to increase the number of authorized shares to meet the need.

The second reason to obtain approval of the outstanding shares is to meet the requirements of the Commissioner of Business Oversight’s stock option rule. 10 CCR § 260.140.41(g). That rule requires that a stock option plan be approved by a majority of the outstanding securities entitled to vote within a specified time period.

This rule comes into play in two situations. First, it is the standard applied by the Commissioner when reviewing an application for qualification to sell securities under a plan. Second, it is a condition to the exemption for option plans pursuant to Corporations Code Section 25102(o).

– Liz Dunshee

This blog from Exequity’s Ed Hauder notes that for calendar-year companies, summer is the perfect time to review equity plans. His blog has a very detailed checklist of what to look at – here are the high-level categories:

1. Overall Plan Limits

2. Expected Retirement/Termination/Severance Grants & Forfeitures

3. Audit of Share Forfeitures, Tax Withholding and Option Exercises with Stock

4. Accounting Issues

5. Vesting Requirements

6. Director Awards & Limits

7. Expected Forms 4 & Forms 5

8. Compliance Check

9. Dilution/Burn Rate Analysis

– Liz Dunshee

With almost one year of pay ratio disclosure behind us, companies are now evaluating how to contextualize the inevitable peer comparisons – as well as year-over-year trends. This Bryan Cave blog outlines three strategies:

1. Include a supplemental ratio (I previously blogged that this isn’t very common…so far. The latest stats show about 20% of companies using one.)

2. Include supplemental text – e.g. describing how the company’s business strategy impacts its workforce & pay ratio

3. Disclose the ratio immediately after the CD&A, which can introduce themes or drivers that affect it

Compensation committees can also start evaluating variations in their companies’ pay ratios, a topic that Broc previously highlighted.

– Liz Dunshee

Broc’s blogged quite a bit about peer groups and the “law of unintended consequences” – the data becomes useless if everyone wants to pay in the top quartile. That said, peer groups are pretty well-accepted: more than 97% of the S&P 500 say they use them to set executive pay – and ISS has used them for years to measure the alignment of pay & performance. These days, the ISS group typically bears some resemblance to the company group (however, they still aren’t perfect).

But could company selections – and pay decisions – be further improved by looking at the peers that your peer group uses? This “ISS Analytics” article explores that “meta” idea – and finds:

1. 83% of companies are already loosely doing this

2. Companies that aren’t doing this tend to have higher pay levels and lower say-on-pay results

Your first reaction to this article might be, “Who has this much time on their hands?” But if you’re looking for an additional reference point to set or evaluate pay, this could be your ticket. The article concludes:

For companies, crowd-sourced peer networks can provide a powerful tool to identify prospective peers, as well as to identify peers that may have weaker connections to the company. The goal isn’t to radically alter a company’s peer group — but rather, to understand where improvements might be sourced, and to prepare for questions about the justification for including certain peers in the peer set. As investors become increasingly sophisticated in their compensation analyses, we see these questions coming up more often.

And for investors, crowd-sourced peer groups can provide an additional viewpoint to compare compensation practices for a portfolio of companies. The goal isn’t to judge the appropriateness of any individual company’s peer group, or to replace ISS’s existing peer group construction methodology—but rather to provide a comparator group, implied by the “wisdom of the crowd,” to base additional pay analyses upon.

This blog from Exequity’s Ed Hauder discusses how upcoming GICS changes could impact peer groups…

– Liz Dunshee

We’ve posted the transcript for the webcast: “The Evolving Compensation Committee.”

– Liz Dunshee

We don’t often blog about issues specific to private companies – or hard-core tax stuff (thankfully we leave that to “The Corporate Executive” newsletter – and the NASPP). But it’s worth mentioning new Section 83(i) of the Internal Revenue Code, which was added by the Tax Cuts & Jobs Act. Section 83(i) allows private company employees to defer taxes for up to five years from the exercise of a stock option or settlement of a restricted stock unit.

This new Section is intended to benefit smaller & start-up companies, but whether it will actually be helpful remains to be seen. First, a 5-year deferral might not align with a liquidity event. And there are a lot of caveats – including that the company’s written equity plan must grant stock options or RSUs to at least 80% of all employees who provide services to the company in the U.S.

Not only that, Section 83(i) comes with some obligations & risks for companies – there’s a requirement to notify employees (or face penalties) if any of the outstanding awards are eligible for this tax deferral. This Wilson Sonsini memo dives into all of the conditions & requirements. It concludes:

Employers should begin assessing whether they have an obligation to comply with Section 83(i)’s notice requirements to avoid incurring penalties. Under a transition rule, until the IRS issues guidance implementing the employer notice and 80 percent test provisions, employers may comply with those requirements under a reasonable good faith interpretation of the statute. Employers wishing to enable their employees to take advantage of the Section 83(i) deferral opportunity should evaluate whether they wish to design their equity program to permit employees to make Section 83(i) elections in the future and begin planning early.

Section 83(i) provides a favorable, tax-deferral opportunity for rank-and-file employees. However, it likely will involve considerable administrative burden for employers to track eligibility, comply with the notice requirement, and properly report and withhold on deferred taxable income. Given the administrative complexities associated with Section 83(i), some employers may desire to avoid qualifying for Section 83(i) elections either by plan design or operation of the equity compensation program.

– Liz Dunshee

This “Proxy Insight” newsletter is full of interesting voting data. On page 4, it reports that 67 of this year’s say-on-pay votes failed to win majority approval. That’s a record number – and a big jump from last year’s 38. This is particularly surprising given the skyrocketing stock market. Wonder what’ll happen when the market falls back to earth…

– Liz Dunshee

Reduced Rates – Act by August 10th: Time to act on the registration information for our popular conferences – “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Here are the agendas – nearly 20 panels over two days. So register by August 10th to take advantage of the discount.