The Advisors' Blog

– Liz Dunshee

This blog from Willis Towers Watson looks at practices & plan design features that originated because of the “performance-based” exemption under Section 162(m). In addition to investors’ continued desire for companies to link pay to performance and regularly submit equity plans to shareholders (every 3-5 years), companies also might want to keep some of these other practices in place – even though there’s no longer an express tax reason to do so. That includes:

– Establishing maximum amounts/shares payable to covered employees (per the plan document)
– Agreeing upon extraordinary items and rules around financial metrics exclusions at the beginning of period (not decided after the fact at year-end)
– Pre-establishing performance goals (i.e., within the first 90 days after the beginning of the performance period)
– Ensuring performance goal outcomes are substantially uncertain when adopted
– Limiting the use of “upward” discretion outside of individual performance goals (which should generally be measurable and objective)

The question is whether to hard-wire those requirements into the plan, versus adding some leeway to the plan documents or even stripping out the requirements and providing a “softer” disclosure commitment. Remember that this is still an area that plaintiffs are watching, and there’s a litigation risk if aspirational disclosure commitments don’t align with practices. Here’s what Willis Towers Watson says about another disclosure point:

Companies must also decide whether they’ll continue to use “negative discretion,” and how the plan is disclosed in the proxy with the overarching consideration being whether this would alter the Summary Compensation Table (SCT) disclosure.

SEC staff guidance in Compensation and Disclosure Interpretations 119.02 permits 162(m) compliant plan payouts using negative discretion to be disclosed in the Non-Equity Plan Compensation (NEPC) column. If positive discretion is applied instead, this would cause more compensation to be shown in the SCT’s Bonus column due to discretionary adjustments. It’s unclear whether suddenly moving disclosed values to the Bonus column will increase scrutiny from proxy advisors and shareholders, but if this approach is taken we strongly suggest that a clear description of the reasoning appears prominently in the proxy. And such action might require more detailed disclosure of actual performance thresholds, targets and maximums in the Grants of Plan Based Awards (GOPBA) table as we discussed in “162(m) changes will affect your proxy disclosure, but not in the manner some suggest”, Executive Pay Matters, December 21, 2017.