Here’s the latest 137-page guide for compensation committees from Wachtell Lipton, and it even includes a sample compensation committee charter at the back. In the sample charter, they note that it’s not unusual for human capital management to be slotted under either the compensation committee or the Nom/Gov committee – and offer up some sample charter language on HCM oversight.  As noted in the guide’s introduction, compensation committees will need to proactively manage compensation & human capital needs this year, and be prepared to act quickly to retain key contributors.

– Emily Sacks-Wilner

Meridian Compensation Partners released its 2021 Study of Executive Severance Arrangements Not Related to a Change in Control, with data from 100 large U.S. public companies. The study examines the following NEO severance arrangements: (i) payment triggers, (ii) cash severance benefits, (iii) stub year annual bonus, (iv) continuation of health care benefits and (v) treatment of long-term incentive awards – but doesn’t incorporate benefits payable to an NEO upon death/disability/retirement or renegotiated benefits upon actual termination.  Here is an excerpt of the key findings:

– 69% of Study Group Companies provided Cash Severance to at least one named executive officer.

– The payment of cash severance is always triggered upon an involuntary termination without “cause” and to a significantly lesser extent upon a voluntary termination for “good reason.”

– 85% of companies determined the amount of cash severance based on a fixed multiple of “pay”.

• Definition of Pay – The majority practice is to define pay as the sum of base salary and bonus (with
  bonus typically defined as current year target bonus).
• Cash Severance Based on a Fixed Multiple of Pay – The dominant severance multiple for CEOs and
  other NEOs was 2.0x (62% and 40% of companies, respectively).

– 61% of companies that maintained executive severance arrangements paid stub-year bonuses on a pro rata basis (typically based on target).

– The most prevalent continuation periods were 24 months (38%) and 12 months (23%) for CEOs, and 18 months (27%) and 12 months (34%) for other NEOs.

Meridian’s survey also shows that the treatment of LTI awards varies by types of awards – and whether the NEO is the CEO. A majority forfeit stock options but fully/partially vests restricted stocks/RSUs upon a qualifying termination.

– Emily Sacks-Wilner

Comments on the SEC’s reopened “clawbacks” proposal were due at the end of November. As usual, though, the SEC has continued to welcome submissions even after that deadline, and letters have continued to roll in as recently as last week. You can view all of the comments submitted – from 2015 to present – on the SEC’s website. Here are a few notable ones:

– ABA Business Law Section

– NYSE Group (commenting on the delisting standards that exchanges would apply in determining whether an issuer has complied with its recovery policy and advocating for Exchange staff discretion)

– As You Sow

– Hunton Andrews Kurth

– Davis Polk

– US Chamber

– NYC Comptroller

– Business Roundtable

– CII

– Sullivan & Cromwell

Many of the comments reiterate concerns that were previously raised in response to the 2015 proposal. Not surprisingly, investors are general supportive of broader corporate clawback policies, and issuers are advocating for more bright-line tests that are tied to financial statement materiality. The Davis Polk letter also discusses issuer compliance costs and the potential impact on executive compensation arrangements. There are differences of opinion on some points – e.g. whether to include a Form 10-K cover page checkbox – even amongst the issuer community. The Staff certainly has a lot to consider as it moves towards finalizing this rule.

– Liz Dunshee

There are so many facets of the SEC’s December proposal on Rule 10b5-1 & Insider Trading that it’s been easy to overlook the impact it could have on option grant policies & practices. This Willis Towers Watson blog from Steve Seelig, Bill Kalten and Lindsay Green zeroes in on that aspect, which came on the heels of last fall’s Staff Accounting Bulletin about spring-loaded grants.

The blog recommends that you take the SAB and these proposed rule amendments into account when considering the timing of 2022 option grants. Here’s an excerpt about what will be required if the proposal is adopted as-is:

The proposal expands the information all companies would need to disclose, not just those companies required to add a footnote to their ASC 718 expense disclosures referenced in the above example. The proposal would require all public companies, under new section 402(x), to include a description in their 10-K annual reports of their option/SAR grant policies and practices, how they determine the timing of grants (predetermined dates during the year or not), and the influence of material nonpublic information in their compensation committees’ grant timing and grant valuations.

This discussion would also be included in the company’s compensation discussion and analysis, so that shareholders can understand company option grant timing practices when considering say-on-pay votes, when approving executive compensation plans and when electing directors. We expect that these will become garden-variety discussions that all companies will be required to include, unless special circumstances exist.

For companies that make grants to named executive officers within 14 days before or after the release of material nonpublic information on quarterly reports or 8-Ks, the SEC would require additional disclosures so that shareholders understand with complete transparency how the process works. The SEC believes that many companies, after the end of a completed fiscal quarter or annual period, hold meetings with their boards of directors a week or two before issuing the earnings release when they are likely aware of material nonpublic information that could affect the stock price of the company. Rather than propose a facts and circumstances test, the SEC proposed a black letter rule that would mandate disclosure within this time frame.

This tabular disclosure would be required for companies that make awards within 14 calendar days before or after the filing of a periodic report on Form 10-Q or Form 10-K, an issuer share repurchase, or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information (including earnings information).

Instructions are provided as to how these columns must be populated, with rules substantially similar to those in the current proxy disclosure rules. All public companies must abide by the option disclosure rules, including smaller reporting companies.

The WTW team notes that if the proposal is adopted, companies could be required to provide this additional disclosure in 2023 proxies, about 2022 grants. For that reason, even though we don’t yet have the final rules, companies may want to take a second look at their 2022 grant cycle. It may be prudent to reconsider grants that are expected to fall within 14 days before or after earnings or other announcements that could affect share price – or at least consult with legal counsel on whether to be so proactive. Remember that the SEC is also looking for comments on aspects of the rule that may not work well in practice (and since the proposal still hasn’t been published in the Federal Register, which will start the clock on the comment period, you have extra time to get those in).

Here’s an excerpt from WTW’s blog, with parting thoughts:

If the regulations are finalized during 2022, it is likely that the SEC will allow companies and insiders some ramp-up time before they must comply with the new restrictions. It would certainly be worthwhile for companies to consult with their stock plan administrators to determine what actions need be taken to meet the new rules. The question of whether it makes sense to adopt the new requirements before they are finalized becomes a legal question that SEC counsel can help determine.

– Liz Dunshee

There’s been a lot of back & forth on whether shareholders actually provided lower support for say-on-pay resolutions last year. That’s probably because the data was mixed. Semler Brossy’s year-end summary explains:

– The Russell 3000 average Say on Pay vote (90.4%) was consistent with the prior two years.

– The Russell 3000 did see an uptick in failures (63).

– At least 32% of failures happened because of Covid-19 pay actions.

– In the S&P 500, average vote results decreased to 88.3%. This was 130 basis points below the prior year result and 210 basis points below the Russell 3000 average vote.

It’s easy to go around & around with stats, but the bottom line is that companies should not get complacent about say-on-pay. I’ve previously blogged that low support is “blood in the water” for activists. Semler Brossy’s report says that over the past 5 years, average direct support at companies that received a say-on-pay vote below 50% in the prior year is 5% lower than at companies that received above 70% support.

– Liz Dunshee