A few weeks ago, I shared an analysis from Compensation Advisory Partners that looked at how companies are responding to calls for forward-looking disclosure of incentive targets. In the latest 16-minute episode of “The Pay & Proxy Podcast,” Meredith caught up with CAP’s Margaret Engel and Louisa Heywood for even more color. They discussed:

1. ISS’s 2025 focus on forward-looking goals disclosure for long-term incentive (LTI) plans

2. Compensation Discussion & Analysis disclosure requirements for performance targets

3. How the 100 largest US companies currently approach disclosures related to LTI performance targets

4. How companies will likely approach this disclosure going forward

5. How CAP and its clients are thinking about the potential shift in the treatment of time-based equity that ISS signaled may be on the horizon

As always, if you have a compensation-related topic you’d like to discuss on a podcast, feel free to ping Meredith at mervine@ccrcorp.com!

– Liz Dunshee

Last week, the WSJ reported that members of the House Ways and Means Committee are considering expanding IRC Section 162(m), which most readers of this blog know limits a public company’s deduction of compensation paid to covered employees to $1 million per year. It’s unclear from the article how exactly the budget bill might reflect an expansion of Section 162(m), but it sounds like it might expand the restriction to a broader group.

Remember that the expansion of this group — currently limited to a company’s named executive officers — is already happening. The 2021 American Rescue Plan Act amended the definition of “covered employee” to add a public company’s five highest compensated employees (even if they are not executive officers) for tax years beginning January 1, 2027 and thereafter. In January, the IRS and the Treasury Department issued proposed regulations to implement the change.

– Meredith Ervine 

We’ve recently bombarded you with considerations for compensation programs in times of great volatility and uncertainty — related to everything from 409A valuations, flexibility in pay programs, trailing average prices to determine grant sizes, handling underwater options and how to think about adjustments. This Cooley alert has even more! Here are some other things to think through — if you haven’t already.

Preserve company cash if appropriate. Market uncertainty can often strain a company’s cash resources, or at least reinforce the need for prudent cash flow management. Companies should consider whether they have the flexibility to settle awards in equity rather than cash, mindful that doing so can trigger significant securities law, accounting and disclosure consequences. In addition, companies should work with equity plan administrators to evaluate the availability of net settlement for exercise price payment or tax withholding purposes, and perhaps consider limiting the availability of at least net exercise price payment to only individuals subject to Section 16 reporting requirements.

Assess adequacy of share reserves. Companies should confirm the number of shares available under their equity incentive compensation plans, including employee stock purchase plans (ESPPs), to ensure that sufficient shares remain available for purchase, particularly if there has been a steep drop in price since the share pool was last assessed (or, in the case of an ESPP, since the commencement of the current offering period). Similarly, if there are individual or aggregate award limits under a plan based on share number, those may need to be revisited to ensure that they continue to provide adequate headroom.

Review ESPP documents. ESPP documents often contain provisions that either automatically or at the discretion of the plan administrator will cancel an offering period and start a new offering period if the stock price on the purchase date is lower than the stock price on the offering period commencement date. ESPP documents should be reviewed to determine whether they contain an automatic or permissive restart feature. Companies with plans that do not currently utilize an automatic or permissive restart feature should consider whether to include such a feature in future offerings to preserve shares.

– Meredith Ervine 

Based on a NASPP/Deloitte survey, respondents using a multi-day trailing average closing price to convert their target equity award values into a number of shares increased from 27% in 2019 to 42% in 2022. I remember many companies switching from a single closing price to an average (for example, the 30-trading-day average closing price ending the day preceding the grant date) in 2020 due to COVID volatility. I suspect some of those companies made the change and never looked back.

As this NASPP blog argues, there are a lot of good reasons to make this switch — especially with the stock price volatility we’re seeing today — but there are also some traps for the unwary. The blog uses this fictitious example to show the inconsistent outcomes that a single-day closing price can cause:

My fictitious company is granting RSUs to two employees . . . Each employee is to receive an RSU worth $10,000. Employee A’s RSU is granted on February 20, when the stock price is $34 per share. Employee B’s RSU is granted one month later, on March 20, when the stock price has dropped to $23 per share.

If we use the FMV on the grant date to determine the number of shares in each grant, employee A will receive a grant for 294 shares ($10,000 divided by $34 per share) and employee B receives a grant for 434 shares ($10,000 divided by $23 per share). Employee B’s grant is almost 1.5 times the size of employee A’s grant. Not because employee B deserves more shares but merely because employee B’s grant was timed fortuitously . . .

Using even just a 30-day average would have smoothed out the differences between the two grants considerably. The 30-day average for Employee A’s grant is $33 per share. The S&P 500 was fairly stable for the 30 days leading up to February 20, so the 30-day average doesn’t have a big impact on Employee A’s grant. It would be for 303 shares instead of 294 shares.

But using a 30-day average has a significant impact on Employee B’s grant. The 30-day average on March 20 is $30. This reduces the size of Employee B’s grant to 333 shares, which is more comparable to the grant that Employee A received just a month before. The current value of both grants is also more comparable. After six months, when the stock has recovered to $34 per share, the value of employee A’s grant is worth a little over $10,000 and Employee B’s grant is worth a little over $11,000.

Using averages also means that grant sizes are more predictable, making it easier to forecast share usage and less likely that the company will use its plan shares more quickly than anticipated. It does, however, complicate things a bit — what you communicate to your executives will match the target values you describe in your Compensation Discussion & Analysis section of your proxy statement (which will also explain the average price used for the conversion), but it will not match the company’s accounting expense or the grant date fair value reported in the proxy statement tables for named executive officers. But communication and disclosure shouldn’t drive business decisions, and the blog suggests you do your own analysis.

What do you do right now? NASPP is updating their survey, and if you want to participate (to access to the full survey results), it closes this Friday — May 9!

– Meredith Ervine 

The Trump Administration moved quickly in its first 100 days to implement the “deregulation” part of its regulatory agenda. We’ve shared a number of deregulation developments on TheCorporateCounsel.net, including:

– The first deregulation Executive Order saying that whenever an agency promulgates a new rule, regulation, or guidance, it must identify at least 10 existing rules, regulations, or guidance documents to be repealed;

– The second deregulation Executive Order and subsequent memo saying all agency heads should prioritize repealing regulations that could be struck down as overreach or otherwise unlawful under recent Supreme Court cases, and do so without notice and comment where consistent with the Administrative Procedure Act’s “good cause” exception (likely to be litigated);

– A letter from members of the House Financial Services Committee to then Acting Chairman Uyeda calling on the SEC to withdraw several final and proposed rules — notably including two Corp Fin rules, one being Pay Versus Performance; and  

– Most recently, the Trump Administration’s new suggestion box for the public to “submit your deregulatory vision” — i.e., a new online form on Regulations.gov run by the General Services Administration and the Office of Management and Budget where the public can submit ideas for bothersome rules and regulations they’d like to see on the chopping block.

In his blog on the suggestion box, Dave asked, “Which SEC rules and regulations are you going to drop a dime on to the GSA/OMB?” So let’s run an anonymous quick poll!

This poll is all just fun and games, but I should note that some of these rules are Congressionally mandated, in which case it’s not likely that they’d be done away with completely, but I’m sure there are tweaks we’d all welcome!

– Meredith Ervine 

A recent study from a group of finance professors reinforces the rationale for director stock ownership guidelines. Based on analyzing 5,000+ companies from 2008 – 2021, the authors found that director equity is correlated with a lower likelihood of a stock price crash – but the strength of the correlation depends on the characteristics of the board and the company. Here are a few risks that directors who have “skin in the game” are likely to avoid:

1. Over-Investment

Prior studies have linked over-investment—particularly in low-return projects—to crash risk. When directors are inattentive, managers may engage in empire building or value-destroying acquisitions. We find that higher DEC is associated with significantly lower levels of abnormal investment, consistent with enhanced board oversight discouraging inefficient capital allocation.

2. Financial Misreporting

We use future financial restatements flagged as fraudulent (from the WRDS non-reliance dataset) as an indicator of opaque reporting. Firms with more equity-compensated directors are significantly less likely to restate their financials due to fraud, suggesting improved monitoring of accounting practices.

3. Bad News Hoarding

Delayed disclosure of adverse information is a central cause of crash risk. Using a standard event-study approach, we find that cumulative abnormal returns around earnings announcements are more negative when firms report bad news—especially when DEC is low. However, this stock price decline is significantly muted in firms with high DEC, indicating that bad news is more likely to be released in a timely and incremental fashion, rather than building up and triggering a crash.

Collectively, these findings support the enhanced monitoring view: DEC reduces managerial opportunism and strengthens governance.

There’s no one-size-fits-all. The analysis found that the benefits of director equity compensation were greatest at companies that had entrenched management, more opaque financial reporting, and transient institutional investor ownership – and when directors were well-qualified and not overcommitted. The data also seemed to show that the benefits of director equity ownership were most pronounced, and stock price crashes less likely, among boards that had a relatively higher proportion of women directors.

– Liz Dunshee