The FTC’s non-compete ban, set to be effective September 4, but the subject of pending litigation, presents a number of complications for employers. This Morgan Lewis blog, the fourth in a series on compensation-related implications of the ban, addresses potential impacts on the timing of taxation under Sections 83, 3121(v), and 457(f) of the Code.
Here’s an excerpt discussing Section 83:
Under Section 83 of the Code, transfers of property in connection with the performance of services, including certain equity awards, are generally included in the gross income of the person performing the services at the then-fair market value of the property in the first taxable year in which the property is not subject to a substantial risk of forfeiture (i.e., when it is substantially vested) or is transferable. A person may make an election to accelerate the taxation to the date of grant, based on the fair market value of the property at grant, if such person makes an “83(b) election” within 30 days of the date of grant.
If no 83(b) election is made, based on a facts and circumstances test set forth in the Treasury regulations promulgated under Section 83, a substantial risk of forfeiture can in some circumstances be supported by an enforceable requirement that the transferred property be returned to the employer in the event that the employee breaches his or her postemployment noncompete covenant (without any continuing employment condition required).
Currently, if an enforceable noncompete covenant is used to support a substantial risk of forfeiture as permitted under the regulations, the result is that taxation of the property subject to Section 83 would be postponed until the noncompete covenant lapses (or until the property becomes transferable, if sooner).
If the Final Rule becomes effective, companies should reevaluate their reliance on noncompete covenants to create a substantial risk of forfeiture for purposes of postponing taxation on Section 83 transfers. To the extent that the Final Rule invalidates a noncompete covenant that was used to support a substantial risk of forfeiture, such property would cease to be subject to a substantial risk of forfeiture and would become immediately taxable under Section 83.
We’ve posted the transcript for our recent webcast “Top Compensation Consultants Speak” with Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer. They discussed:
– Year 2 of Pay vs. Performance
– Incentive Plans – Setting Goals and Considering Adjustments
– Trends in Strategic and Operational Metrics
– Clawback Policies – What HR Teams and Compensation Committees Are Focusing on Now
– Human Capital Management – Recent Considerations and Disclosure Trends
– Potential Impact of the FTC’s Noncompete Ban
During the program, Jan shared this tip on using strategic and operational metrics:
The real test is: “can you look to those nonfinancial metrics to be leading indicators?” One of the shortcomings of financial metrics is that they are, by definition, backward-looking because they are reporting what has already happened. The beauty of marrying financial metrics with nonfinancial metrics in incentive plans, if you do it wisely, is that you can pick nonfinancial metrics that are leading indicators that you can show will result in those financial results two, three, five years from now.
Members of this site can access the transcript of this program for free. If you are not a member of CompensationStandards.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
In the latest 15-minute episode of the “Pay & Proxy Podcast,” I’m joined by Paul Hodgson of ESGAUGE (Paul is also a freelance writer and researcher for ICCR and Ceres). Paul shares data on 2024 proxy statement disclosures regarding DEI metrics in compensation plans — particularly in light of the 2023 SCOTUS decision in Students for Fair Admissions v. Harvard. Specifically, Paul discusses:
How DEI metrics are used in compensation programs generally
How 2024 disclosures compared to 2023 disclosures among Russell 3000 companies that use DEI metrics
Examples of companies that made disclosures more precise
Why the 2025 proxy season may show more dramatic changes
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at mervine@ccrcorp.com!
Thanks, I assume, to the “Marvel Cinematic Universe,” sci-fi concepts from the big screen are popping up all over now, and even public company board members aren’t immune. This Equity Methods blog says that, for restatements covering the grant date of an award, some board members have been asking some hypothetical, divergent timeline-type “what if” questions:
When a restatement spans many fiscal years, it may encompass not only when performance was measured, but also the grant date. Naturally the question will arise as to what the grants would have looked like if the stock price was lower at the issuance date—in other words, how liberal can the analysis be in the parallel universe constructed? For example, if the adjusted stock price is 20% lower, then ostensibly one or more of the following applies:
– More stock could have been granted at a fixed value – The starting price point would have been lower – The hurdle prices may have been set lower
But the Equity Methods team says, “while the logic makes sense, and board members often ask about it, we don’t believe it’s actionable. The intent of the rule is to accept the grant as is and to focus on the outcomes. Consistent with this, the language in the rule doesn’t permit an open-ended construction of a parallel universe. Rather, it hones in on the calculations performed at the time compensation was received.”
So, sorry, folks, the multiverse isn’t going to save us this time. The blog says, “the parallel universe produced by a recovery analysis applies only to the exercise of measuring final performance and payout outcomes.”
Even BlackRock isn’t immune to low say-on-pay. According to Reuters, BlackRock narrowly avoided a true say-on-pay failure with only 58% of votes cast supporting the advisory proposal at its annual meeting. Reuters previously reported that ISS and Glass Lewis had recommended against say-on-pay at the company. ISS took issue with “the process used to determine annual cash incentive awards,” and Glass Lewis cited “the structure of the sizable retention awards granted to a handful of executive officers during the year.”
BlackRock’s statement in the article that it “looks forward to engaging with shareholders” tees up a helpful reminder for this time of year. While proxies typically cite a majority of the votes cast standard under state law, there are serious implications to receiving a say-on-pay vote significantly under the close-to-90% norm. Specifically, receiving less than 80% support triggers certain engagement expectations for Glass Lewis and receiving less than 70% support triggers similar expectations for ISS. Failure to engage with shareholders and show responsiveness can result in the proxy advisors recommending against the reelection of compensation committee members or the entire board in subsequent years.