Meredith blogged last week about the SEC’s fresh round of “Pay vs. Performance” CDIs. One of the CDIs reversed course from an earlier interpretation about how to value awards that accelerate upon retirement. This WTW blog explains the impact:

In the September C&DIs the SEC appeared to entertain this view and suggested that, for the purpose of determining compensation actually paid, an award that vests on an accelerated basis at retirement with no other substantive vesting conditions could be deemed vested at the date of grant for the purposes of PVP too. In effect, this approach meant that subsequent stock price changes for such awards would no longer impact compensation actually paid beyond the retirement eligibility date. This seems to contradict the intent of PVP disclosures. It also ran the risk of creating significant complexity for companies with pro rata accelerated vesting treatment of equity awards on retirement. We raised these concerns with the SEC, particularly given that the C&DIs remained unclear on this issue, and were pleased to see revised guidance reflected in the November C&DIs release.

The latest guidance says that “other substantive conditions” must be considered, in addition to retirement eligibility. These include a market condition, actual retirement, or the satisfaction of the requisite service period. While the language remains ambiguous, it does appear now to distinguish between retirement eligibility and actual retirement. Accordingly, for awards that provide for accelerated vesting on retirement, issuers can now value awards during the vesting period through to the date of an actual retirement rather than merely the retirement eligibility date.

WTW points out that this interpretation is more consistent with the methodology that companies used for Year 1 disclosures, better aligned with the rule’s intent, and less burdensome. This FW Cook blog agrees that while the CDI provides welcome clarification, it doesn’t fully resolve the disclosure questions, and delves into the ambiguity that remains:

The CDI now appears to indicate that for purposes of calculating CAP the concept of retirement eligibility is no longer an issue in the typical case where the holder must actually retire to be “vested.” This would be the result, for example, where the award contains an explicit service period and also states that vesting of the award will accelerate upon a termination due to retirement. In other words, even if there were no barrier to the holder retiring immediately, the act of retiring is itself treated as a substantive condition.

However, the CDI may leave open one potential situation where the interpretive issues noted in our October 24th blog could still apply. The issues previously noted may arise if the award agreement explicitly states that a holder is vested upon the earlier of the requisite service period or meeting the definition of “retirement” (as opposed to actually having to retire). We also recognize that there will be some award agreements that do not clearly fit into one category or the other, due to nuanced differences in drafting.

We note that the specific language used for the CDI is unusual and could have been more precise as to its intent and impact, but we cannot think of any other interpretation, and other practitioners with whom we have discussed have reached the same conclusions. As such, in light of the revised CDI, companies should yet again review their equity award agreements to assess the specific language around retirement favorable vesting, in order to determine how they may be impacted by this guidance.

– Liz Dunshee

According to a recent 12-page recap from WTW, this year has been relatively quiet when it comes to say-on-pay failures, with only 49 this year, compared to 69 last year and 60 in 2021. However, votes on equity plans indicate eroding support on that front. Here’s an excerpt:

We have observed some headwinds for equity plan share requests. We have observed one failure within the S&P 1500, similar to last year at this time (two failures at this time in 2021); however, ISS opposition is the highest at 17% compared with 13% at this time in 2022 and 2021. Support is at 89% compared with 91% at this time in 2022 and 2021.

Companies should monitor their investors’ voting guideline updates and engage with stakeholders to address proactively any potential issues anticipated ahead of planned stock plan proposals. With talent pressures continuing, companies should manage share pools to avoid unexpected surprises and factor any potential headwinds into their incentive programs.

WTW notes that these challenges come at the same time that companies may be needing to use more of their share pool to attract talent. This off-season will be a good time to monitor investor sentiment on dilution and provisions that are considered “problematic.”

– Liz Dunshee