– Liz Dunshee

Last week, Glass Lewis announced the publication of its 2021 Voting Guidelines. As always, the first few pages of the Guidelines summarize the policy changes. Here are the compensation-related highlights:

– Short-Term Incentives: We have codified additional factors Glass Lewis will consider in assessing a company’s short-term incentive plan. Specifically, we expect clearly disclosed justifications to accompany any significant changes to a company’s short-term incentive plan structure, as well as any instances in which performance goals have been lowered from the previous year. Additionally, we have expanded our description of the application of upward discretion to include instances of retroactively prorated performance periods.

– Long-Term Incentives: We have codified additional factors we will consider in assessing long-term incentive plan structure. Specifically, we have defined inappropriate performance-based award allocation as a criterion which may, in the presence of other major concerns, contribute to a negative recommendation. Additionally, any decision to significantly roll back performance-based award allocation will be reviewed as a regression of best practices, that outside of exceptional circumstances, may lead to a negative recommendation. Additionally, we have defined that clearly disclosed explanations are expected to accompany long-term incentive equity granting practices, as well as any significant structural program changes or any use of upward discretion.

Glass Lewis also clarified its existing policies on several topics, including:

– Excise Tax Gross-Ups & Golden Parachute Votes: We have added language codifying how we evaluate the addition of new excise tax gross-ups to specific change-in-control transactions. In such scenarios, Glass Lewis may consider expanding a negative recommendation beyond the golden parachute proposal in which the gross-up entitlements first appear to also include a subsequent recommendation against the compensation committee members and the say-on-pay proposals of any involved corporate parties.

– Option Exchanges & Repricing: We have added language clarifying our approach in evaluating option exchanges and repricing proposals, which emphasizes the importance of the exclusion of officers and board members from the program, as well as that the program be value-neutral or value-creative, in driving any exceptions to Glass Lewis’ general op-position to such proposals.

– Peer Group Methodology: In the section titled Pay for Performance, we have clarified that, in determining the peer groups used in our A-F pay-for-performance letter grades, Glass Lewis utilizes a proprietary methodology, as previously announced in 2019. In forming this proprietary peer group, Glass Lewis considers both country-based and sector-based peers, along with each company’s network of self-disclosed peers. Each component is considered on a weighted basis and is subject to size-based ranking and screening. The peer groups used are provided to Glass Lewis by CGLytics based on Glass Lewis’ methodology and using CGLytics’ data.

We’re posting memos in our “Proxy Advisors” Practice Area. To hear how to handle decisions that may impact short- and long-term incentives, tune in to our December 15th webcast, “Covid-19 Pay Adjustments: Engagement, Decision-Making & Documentation.”

Also, on TheCorporateCounsel.net, we’re hosting a January 14th webcast that will be a dialogue with Courteney Keatinge, Senior Director of ESG Research at Glass Lewis. Members of TheCorporateCounsel.net can access that webcast for free – if you’re not a member, you can try a no-risk trial.

– Liz Dunshee

Yesterday, the SEC continued its active year by announcing proposed changes to Form S-8 and Rule 701. The amendments suggested by the 156-page proposing release are responsive to comments that the Commission received on its 2018 concept release. Here are the highlights from the SEC’s Fact Sheet (we’ll be posting memos in our “Form S-8″ Practice Area):

With respect to Rule 701, the proposed amendments would:

• Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million, including how the disclosure threshold applies, the type of financial disclosure required, and the frequency with which it must be updated;

• Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;

• Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and

• Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.

With respect to Form S-8, the proposed amendments would:

• Implement improvements and clarifications to simplify registration on the form, including:

o Clarifying the ability to add multiple plans to a single Form S-8;

o Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and

o Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.

• Implement improvements to simplify share counting and fee payments on the form, including:

o Requiring the registration of an aggregate offering amount of securities for defined contribution plans;

o Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and

o Conforming Form S-8 instructions with current IRS plan review practices.

• Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.

With respect to both Rule 701 and Form S-8, the proposals would:

• Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and

• Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.

There’s More! SEC Proposes Temporary Expansion of Compensatory Offerings to Gig Workers

The SEC saved the more interesting – and controversial – part of its “compensatory offering” modernization for an entirely separate proposal – which would, for a temporary five-year period and subject to a number of conditions, permit companies to provide equity compensation to gig workers who provide services (not goods) to the company (or as the SEC calls them, “platform workers”). Commissioners Hester Peirce & Elad Roisman issued a statement in support of the proposal. Commissioners Allison Herren Lee & Caroline Crenshaw dissented – and they were careful to point out that they did support the other proposal.

Here’s the highlights from the SEC’s Fact Sheet:

Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:

• the issuer operates and controls the platform, as demonstrated by its ability to provide access to the platform, to establish the principal terms of service for using the platform and terms and conditions by which the platform worker receives payment for the services provided through the platform, and by its ability to accept and remove platform workers participating in the platform;

• the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement, and is not for services that are in connection with the offer or sale of securities in a capital-raising transaction, or services that directly or indirectly promote or maintain a market for the issuer’s securities;

• no more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;

• the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash; and

• the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.

The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.

The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.

The proposed amendments would require companies that sell securities to gig workers to furnish information to the SEC at 6-month intervals, to help the Commission decide whether the rule changes should expire, be extended or be made permanent.

Both proposals will be subject to a 60-day comment period following their publication in the Federal Register. Time will tell whether the next SEC Chair will carry either of these proposals across the finish line.

– Lynn Jokela

We’ve blogged before about how compensation committees are considering whether to use discretion to adjust executive pay in response to fallout from the pandemic.  Many calendar-year companies have been considering possible action, but many have continued gathering information about company performance and ongoing events.  Another factor top of mind is whether shareholders will be supportive of any potential actions taken in response to the pandemic.  For a preview, a recent Weil Gotshal memo looks at pay actions taken in response to the pandemic and how these actions have affected say-on-pay votes at quarter and mid-year FYE companies.

The memo examines proxy statement disclosures, ISS vote recommendations and vote results of 42 Russell 1000 companies that held their shareholder meetings by October 31.  Of those 42 companies, 25 disclosed Covid-19-related changes to their compensation plans.  To help understand how companies explain different pay adjustments, the memo includes disclosure excerpts from companies included in the review.  Here’s an excerpt about the findings:

The review found that 2019 and 2020 say-on-pay vote results for many companies in the sample were close, with a majority even seeing higher shareholder support.  That many companies in the sample were able to achieve shareholder support in 2020 comparable to that of 2019 is a testament to the their use of objective performance metrics, a reasonable alignment of executive pay and company performance, and their inclusion of robust disclosures to “sell the story” behind those decisions – e.g., when discretion was used, giving detailed descriptions of their rationale, with clear and reasonable outcomes. ISS noted that certain actions it would consider problematic during normal times may be viewed as reasonable in the extraordinary circumstances of the pandemic if clear justifications were disclosed and the outcomes were reasonably commensurate with company performance. From the proxy statement disclosures, it seems that several companies in the sample satisfied these criteria, with just over one quarter of the sample receiving lower/slightly lower shareholder support in 2020 compared to 2019, and just one company receiving an “AGAINST” recommendation from ISS with a resulting 54% shareholder support.

– Lynn Jokela

ClearBridge Compensation Group recently came out with its report reviewing annual and long-term incentive plan trend data for large-cap companies.  The report reviews incentive plan design trends among 100 S&P 500 companies over the last 10 years and includes data on performance metrics, vesting periods, award mix, etc.  Here are some high-level findings:

Annual Incentive Plans:

– Almost all are formulaic, shifting away from discretionary plans for making bonus determinations

– Increased prevalence of companies that use three or more performance measures – 64% in 2020, up from 55% in 2010

– Use of EPS is the most common performance measure while use of revenue and non-financial measures have risen the most – up 15% and 7% from 2010 respectively

Long-Term Incentive Plans:

– Use of time-vested stock options as part of the mix has decreased significantly since 2010 – 64% in 2010 compared to 42% in 2020

– Most time-vested restricted stock/units and time-vested stock options/SARs vest ratably over the vesting period, a minority of companies use cliff vesting

– In 2020, 74% of companies that granted performance-vested long-term incentives used more than one performance measure – up from just 43% of companies in 2010

– Use of stock price/TSR as performance measures are the most prevalent and prevalence has increased significantly – 68% in 2020, up from 35% in 2010

– Of companies granting performance-based incentive comp, in 2020, 24% used a stock price/TSR modifier – one such example being a relative TSR cap (limits the payout of a performance award by establishing a payout cap if certain stock price/TSR goals are not achieved relative to a comparator group)

– In 2020, the majority of companies have included at least one absolute and one relative performance metric – this compares to 2010 when companies were more likely to measure performance solely on an absolute basis

– Liz Dunshee

This 27-page memo from ClearBridge Compensation Group looks at how executive compensation policies have evolved at 100 S&P 500 companies over the last decade. It covers clawback policies, stock ownership guidelines & holding requirements, anti-hedging & anti-pledging policies, peer group approaches, perquisites, and CEO pay ratio. Here are the findings on clawback policies:

▪ Clawbacks have become a near-universal practice; 98% of companies disclose having a clawback policy in 2020

▪ The most common events that trigger a clawback are fraud or willful misconduct (73%) and a financial restatement with an executive at fault (70%)

▪ Most commonly, clawbacks cover performance-based compensation such as cash bonuses (95%) and performance shares/units (97%)

▪ The most common time period for which compensation is covered by a clawback policy is 3 years in 2020 (53%), which reflects a shift from 2010, where the most common period was 1 year

– Liz Dunshee

Tune in tomorrow for the webcast – “Pay Equity: What Compensation Committees Need to Know” – to hear Anne Bruno of Mintz, Tanya Levy-Odom of BlackRock, Josh Schaeffer of Equity Methods and Heather Smith of Impax Asset Management | Pax World Funds discuss pay equity – including why it’s in the spotlight, the difference between “pay equity” & “pay gap”, shareholder expectations, disclosure trends on pay gaps & pay equity, pay ratio interplay, mechanics of board & committee oversight and preparing for shareholder engagements & proposals.

– Liz Dunshee

As if the folks at Eastman Kodak weren’t having a hard enough year already, the Form 10-Q that the company filed last week disclosed that five former executives made millions by exercising forfeited stock options and selling the underlying shares. The exercises occurred in July – which was right about when Kodak was in the news for its short-lived federal loan. Here’s an excerpt from the notes to financials:

The options exercised in 2020 included 0.3 million options exercised by ex-employees of Kodak that had previously been forfeited. The Company issued shares to the ex-employees in exchange for proceeds based on the exercise prices of the forfeited options. The Company is accounting for the exercise of the forfeited options as a modification of the original awards.

The Company recognized compensation expense of approximately $5.1 million in the three months ended September 30, 2020, related to the 0.3 million previously forfeited options representing the fair value of the shares issued to the ex-employees less the exercise proceeds received from the ex-employees, which is reported in Selling, general and administrative expenses in the Consolidated Statement of Operations.

The Company is seeking to recover the fair value of the shares at the time of the sale of the shares by the ex-employees less the exercise proceeds and withholding (approximately $3.9 million) and the right to retain any refund of the withholding taxes the Company is seeking to obtain on behalf of the ex-employees (approximately $3.0 million). There are no assurances the Company will be successful in its claims against the ex-employees or in its recovery of the withholding taxes.

The company’s discussion of controls & procedures sheds some light on how this occurred – and shows why it’s important to promptly reconcile internal award updates with data maintained by a third-party stock administrator. My experience is that companies do have to be really explicit with service providers on things like forfeitures and blackouts. Here’s more detail from Kodak’s 10-Q (also see this WSJ article):

During the quarter ended September 30, 2020 the Company discovered deficiencies in controls required to safeguard Company assets. The Company did not prevent the unauthorized issuance of the Company’s common stock when previously forfeited non-qualified stock options were exercised by five former officers and employees in July 2020.

Errors existed in employee equity accounts for the five former officers and employees as well as other current and former officers and employees which could have resulted in additional inappropriate exercises. Controls were inadequate with regard to the timely input and verification of master data updates for equity grants, the maintenance of audit documentation of grant activity in the repository of grants serviced by a third-party administrator, and the performance of independent reconciliations of the repository to supporting company records for the detection of errors or misstatements in employee equity account balances.

– Liz Dunshee

ISS has released its 2021 proxy voting guidelines – which are effective for meetings on or after February 1st. As my colleague John blogged on TheCorporateCounsel.net, the biggest changes for US companies relate to board diversity and exclusive forum bylaws. As far as things to watch out for on the compensation front, the policies now explicitly say that directors whose pay is comparable to that of the company’s NEOs will not be considered independent. Here’s ISS’s explanation of that change:

Currently ISS looks at the pay of directors, and in some cases, where the pay is considerable and on par with NEO pay for multiple years, the director has been classified as non-independent under “Other material relationships with the company”. To better ensure data capture and categorization of material relationships, this factor is being made explicit.

In addition, the policies clarify ISS’s position on shareholder proposals for pay gap disclosure – saying that they’ll consider local laws that restrict categorizing employees or impose different definitions of ethnic and/or racial minorities in making their recommendations. See Mike Melbinger’s blog for more detail. And don’t forget to tune in for our webcast this Thursday, “Pay Equity: What Compensation Committees Need to Know” – to hear from Mintz’s Anne Bruno, BlackRock’s Tanya Levy-Odom, Equity Methods’ Jash Schaeffer and Impax Asset Management’s Heather Smith.

– Lynn Jokela

With volatile economic conditions, some companies have been looking for ways to conserve cash and some have considered worker pay cuts and layoffs.  As an alternative, a recent White & Case memo says one strategy some of these companies are considering is replacing a portion of worker pay with equity compensation.  Although replacing pay with equity can help save cash and fill a gap created by pay cuts, the memo serves as a reminder of potential issues that can arise, including those relating to employee consent, exempt employment status and tax traps.  Here’s an excerpt about potential 409A issues:

While a reduction in salary alone should not trigger 409A concerns, employers should be aware that any commitment to repay the amount of reduced compensation at a later date, in the form of delayed salary payments or salary payments replaced with other consideration such as equity awards, may be a deferred compensation arrangement under Section 409A.

Under 409A, deferred compensation arrangements must comply with specific timing and other rules governing when and how deferral elections can be made. Failure to comply with the Section 409A deferred compensation requirements could exact harsh penalties on affected employees, including accelerated income taxation and a 20 percent penalty tax.

Strategies for avoiding 409A penalties include paying the deferred amount no later than the end of the short-term deferral period (for calendar year 2020 compensation, by March 15, 2021), or structuring the program without an explicit commitment to repay lost wages. In this instance, the employer could unilaterally choose to repay the forgone salary amounts at any time, even beyond March 15.

The latter strategy is risky, requiring great care in both the structure of the program and all related communications with employees. These should be crafted to avoid statements that could create an expectation of deferred payment that might rise to the level of a “reliance” claim resulting in a “legal obligation” of payment which would implicate the deferred compensation rules of Section 409A.

Even with the risks, the memo notes that for companies experiencing dips in their share price but that expect growth to return in the future, offering equity awards can be an efficient and cost-effective way of delivering a meaningful share in this growth to their employees in the long term.  The memo provides suggestions for companies that want to pursue such a strategy that can help get them started on the right foot, here are a few:

Transparency is key. A strong, open dialog must evolve among management, workers and unions. Communications must clearly explain to whom the plan applies, how long it will last, why any alternative approaches were rejected, what the benefits are to employees, and most importantly why management believes the plan is essential to the company’s success and the workers’ continued employment.

Communicate how the plan affects other employee programs (if at all), such as 401(k) plans, pensions, healthcare benefits and so on. Engage human resources at every stage of the plan to evaluate the HR effects of the plan and to help with communications.

Be mindful of time limits. In many jurisdictions, there are specific regulations related to how quickly a pay modification can begin after its announcement.

As an alternative, some companies may also want to consider using equity awards not to replace pay, but to make up for benefits reductions or to replace back pay already lost during furloughs.

– Lynn Jokela

We’ve blogged about trends in director pay – both for mid-cap and large-cap companies.  This Compensia memo reviews trends in technology sector director pay.  The memo examines the design and structure of director compensation programs over the last 10 years by comparing data from a 2010 study to more recent data collected earlier this year.  The memo notes that although basic pay elements have remained the same over the last 10 years, there have been changes in how the pay is structured and delivered.  Here are high-lights relating to director equity compensation:

– Over the last decade, companies have moved from using solely stock options and RSUs to almost exclusively using RSUs when granting equity awards to directors

– 95% of equity grants made today are fixed value-based grants whereas in 2010, only 30% of the companies studied used a fixed value approach

– The practice of granting new director “premium” equity awards, often with a value approximately 1.5x to 2.5x the size of an annual equity award, has  continued declining in recent years as the size of annual equity grants has slowly increased

Due to increased scrutiny of director pay, 68% of companies included in the 2020 data include a limit in their stock plan capping the amount of equity (and often, cash) compensation that can be paid to directors annually –  it’s noteworthy that these director pay limits were virtually non-existent in 2010

With respect to director “premium” equity awards, the memo discusses how increased investor and proxy advisor focus on ESG issues, along with increased attention on board composition, could lead to the return of “premium” equity awards.  Increased focus on ESG matters and certain skills and experiences of directors may well lead to increased competition for certain director candidates – if so, time will tell if this revitalizes the practice of granting “premium” equity awards, in which case eyes will be on the details about award size and related-vesting provisions.