A couple months back, the IRS released “Generic Legal Advice Memorandum 2020-004” – which addresses the timing of tax withholding on options, SARs and RSUs. This Troutman Pepper memo explains that under the memo, the tax date for RSUs is the date the employer “initiates payment” – i.e., when it instructs the transfer agent to transfer shares to the employee’s account.
Under most RSU agreements, the share transfer is baked in to occur on the vesting date. But for some awards – e.g., performance awards that provide for a payment during a specified period after certification of year-end financial results – there is more flexibility, and the memo clarifies that there are tax consequences to that decision. Here are some planning opportunities that the memo highlights:
– Having a single payment date for administration of tax reporting and withholding for RSUs andPSUs that vest on multiple prior days during a year,
– Timing the payment date to be during an open trading window (e.g., three days after public release of quarterly or annual financial statements), and
– Timing the payment date in coordination with dividend record dates (e.g., so that the shares delivered in settlement will qualify to receive the dividend).
For example, assume an employer has time-vesting RSUs that vest on February 12, 14, and 15during 2021. Assume there is also a PSU award with a 2018-2020 performance period that the compensation committee, at its meeting in February 2021, determines was earned at target.Assume the employer plans to file it’s 10-K at the end of February, with an open trading window under their insider trading policy starting on March 4. If the award agreements include language permitting the employer to pick a payment date within a specified administrative period (e.g., on a day no later than March 15, 2021), the employer could select March 4 as the payment date for all of these awards and initiate payment on that date. This single payment date for the various awards could provide several potential benefits, such as:
– Simpler administration for tax reporting and withholding (e.g., by having a single stock price to value all of the awards for tax purposes);
– If share withholding is used to cover taxes for Section 16 officers, simpler Form 4 filing requirements (with a single Form 4 reporting those share withholding transactions for each Section 16 officer); and
– If tax withholding is to be covered through employee-directed broker sales of shares subject to the awards, simpler compliance with insider trading policy requirements (i.e., by having the sale transactions executed during an open window).
Last year, I blogged that CalPERS would begin voting “against” compensation committee members in the same year that it votes against say-on-pay or compensation plans. That policy is now in effect, and the country’s largest public pension fund doesn’t appear to be letting up in its scrutiny of executive pay. This “Financial Planning” article says the fund has voted against 52% of pay plans so far this year, consistent with its voting record last year. In regards to the new policy, it reports:
The pension also voted against 2,716 directors who sit on compensation committees and are responsible for setting executive pay.
While the say-on-pay vote is merely advisory, votes against directors can be embarrassing and be fodder for activist investors seeking to argue that the company’s leadership is out of touch with shareholders.
Last week marked the 10-year anniversary of President Obama signing the Dodd-Frank Act into law. The SEC continues to track its progress on the mandatory rulemaking provisions. When it comes to executive pay, we have this legislation to thank for rules on compensation committee independence, pay ratio, hedging disclosure, Chair/CEO structure disclosure – and the biggie, Say-on-Pay.
Of the remaining open items, clawback rules seem the most likely right now to make it to the finish line. Here’s what’s still on the “to-do” list:
– Pay-for-performance disclosure – proposed in 2015 – and now possibly appears to be abandoned in favor of “private ordering”
– Proposed rules that would require institutional investors to annually report how they vote on executive pay
– Prohibitions on certain executive pay arrangements at financial institutions and related disclosure – proposed in 2011, and then re-proprosed in 2016
As Mike blogged, the SEC’s Reg Flex Agenda implies that we might also see action on these other compensation-related items in the near future:
– Amendments to Rule 701/Form S-8
– Modernization & simplification of Regulation S-K Items 101, 103 and 105
We’ll be covering all of the latest developments on these topics at our Proxy Disclosure & Executive Pay Conferences – coming up virtually on September 21st-23rd. Here are the agendas – 18 panels over three days, including panels devoted to clawbacks, proxy advisors and pay-for-performance. Register today to get a discounted rate and ensure you get the information you need!
We’ve posted the transcript for the recent webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.” Mark Borges, Dave Lynn & Ron Mueller shared their latest takes on these topics:
1. Virtual Annual Meetings
2. Say-on-Pay Results
3. Performance-Based Compensation Disclosure
4. Director Compensation Disclosure
5. CEO Pay Ratio
6. Pandemic-Related Disclosure
7. Hedging Disclosure
8. Perquisites Disclosure
9. Shareholder Proposals
10. Proxy Advisors
11. Status of SEC Rulemaking
Yesterday, the SEC adopted amendments to the rules governing proxy advisors and it also issued supplemental guidance concerning proxy voting responsibilities of investment advisers – many have been waiting for rules on proxy advisors for years. Mike Melbinger provides some initial thoughts in his blog and Liz blogged about the amendments on TheCorporateCounsel.net.
We’ll be posting memos – likely lots of them – in our “Proxy Advisors” Practice Area. And, we’ll be covering the rule amendments and discussing impacts of the amendments at our upcoming “Proxy Disclosure” & “Executive Pay” Conferences – which will be held entirely virtually over three days – September 21 – 23. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Here’s the registration information.
We recently received the following question from a member on TheCorporateCounsel.net Q&A Forum (Topic #10382):
Prior to proxy statement filing a company timely filed its Form 10-K, which included all Part III information.
After the Form 10-K was filed, the company awarded NEO cash bonuses for last year. These bonuses were entirely discretionary and there was no expectation of, or contractual right to, bonuses by the NEOs at the time the Form 10-K was filed.
The Company is now filing its annual meeting proxy statement. The proxy statement will reflect the NEO cash bonuses in the compensation table. Does the company also need to amend its Form 10-K to reflect the bonuses for last year so that the compensation sections of the Form 10-K and proxy statement are identical?
Here was John’s response:
Legally, I think the answer is no. There is nothing in the rules to suggest that a company has an obligation to amend an Exchange Act report that was accurate when it was filed merely because some significant development occurs subsequent to filing. There may be a business issue about whether it is advisable to file an amendment or highlight the updated disclosure in a Form 8-K based on the company’s assessment of the potential for shareholder confusion.
You may want to refer to the article “When, Why & How to Amend an Exchange Act Report” that appeared in the May-June 2019 issue of “The Corporate Counsel.”
A recent Mercer report shows 2020 proxy season say-on-pay votes results have been pretty stable – with support averaging about 91%. Even though the average vote result has been stable, the number of failed say-on-pay votes at S&P 500 companies has ticked up – 9 through May 2020 compared to 7 failed votes for all of 2019 and also exceeding all but one of the prior years.
I blogged earlier this spring about the ISS impact on say-on-pay vote outcomes, which can play a significant part in vote results. The report says ISS has recommended shareholders vote “against” fewer say-on-pay proposals in 2020 when compared to last year and then lists the following factors contributing to say-on-pay failures this year:
– Modification of performance targets to make them easier to achieve
– Lack of quantifiable (vs qualitative) performance metrics
– Lack of transparency around performance goals, lack of goal rigor, and/or use of discretion
– One-off equity grants, especially when not sufficiently performance-based
– Mega grants covering current and future years
– Payment of cash severance on retirement in lieu of forfeited equity
A recent Exequity report explores the usage of relative total shareholder return (RTSR) within long-term incentive plans across S&P 500 companies. The report’s introduction says that comp committees may increasingly turn to RTSR as fallout from Covid-19 makes reliable goal-setting hard to come by. The report includes charts showing the prevalence of RTSR and design elements showing whether RTSR is used as a metric or modifier…
Today’s headline is based on an article from The Deal (subscription required) – which highlights that negative say-on-pay votes send a signal to activists that shareholders are willing to vote against management. Therefore, the thinking goes, they may be receptive to activist campaigns. Here’s an excerpt:
Chipotle Mexican Grill Inc. (CMG) is one of the highest-profile examples of a big negative vote on pay that drove an activist into the fold.
In 2014, only 23% of shares backed Chipotle’s executive compensation package. The Mexican-themed fast-food chain at the time had co-CEOs, a rare situation that typically is a red flag for investors. By 2016 — when investor sentiment around executive pay was still not great — Bill Ackman’s Pershing Square Capital Management LP swooped in with a campaign and ultimately a settlement to add dissident directors.
Elbaum noted that companies that wait too long to examine the root cause of negative shareholder votes could soon be targeted by activists, who often will try to paint boards as tone deaf to shareholder feedback.
As this Semler Brossy memo points out (pg. 2), 33% of the S&P 500 has gotten a “low” say-on-pay result at some point since 2011. The crisis environment might amplify this risk next year, so it’s time to start planning ahead.
We’ve blogged a few times about disclosure of EEOC data, in response to growing calls for transparency on diversity & pay equity. As Lynn blogged last week on our “Proxy Season Blog” on TheCorporateCounsel.net, here’s one of the most recent examples of a shareholder calling for this information:
The NYC Comptroller and three NYC retirement systems announced that they sent a letter to the CEOs of 67 S&P 100 companies requesting they back up statements calling for racial justice by disclosing EEO-1 report data. In support of the request, the announcement says disclosure of EEO-1 data will allow investors to evaluate a company’s diversity workforce practices while also facilitating board oversight of human capital management practices. Here’s an excerpt about the Comptroller’s expectations for companies receiving the latest letter:
Companies receiving the letter were asked to provide a written commitment by August 30, 2020 to publicly disclose their EEO-1 Report effective upon its next submission to the U.S. Equal Employment Opportunity Commission (EEOC) in 2021 or risk potential submission of shareholder proposals or opposition to the election of director nominees standing for re-election at the next annual shareholder meeting.
Diversity has been an ongoing focus for the NYC Comptroller’s office, although boardroom diversity seemed to garner most of the attention. Earlier this year, we blogged about results from the NYC Comptroller’s Boardroom Accountability 3.0 project that involved a version of the NFL’s “Rooney Rule.” Although the NYC Comptroller’s office has submitted shareholder proposals calling for EEO-1 data disclosure previously, it wasn’t done with a “splash” like it did this time around – the Comptroller’s 2019 postseason report shows it only submitted two proposals that year calling for EEO-1 data disclosures.