A couple of weeks ago, I blogged about planning opportunities that may arise for RSUs and performance awards under the “Generic Legal Advice Memorandum 2020-004” issued by the IRS in May. NASPP Executive Director Barbara Baksa shared these additional thoughts:
The GLAM doesn’t change existing law (and can’t be relied on a precedent), although it does certain clarify it. It is an internal IRS memorandum to clarify the tax treatment to other persons at the IRS (in this cause, auditors). It was issued to support an update to the audit procedures in the Internal Revenue Manual relating to when taxes need to be deposited for RSUs and SARs when the IRS’s next-day deposit rule is triggered. Thus, the process Troutman Pepper recommends was always possible under the Internal Revenue Code (provided all awards are paid out within the 409A short-term deferral period) but the GLAM clarifies and draws attention to this opportunity.
Particularly for performance awards, it’s not uncommon for companies to have a short administrative delay before issuing the shares after the comp committee certifies performance. A delay of more than a day or so would generally also delay the taxable event for the award (if it didn’t, there would be no way for the tax deposit to be timely). According to a 2019 NASPP/Deloitte Survey, only 44% of companies pay out performance awards immediately upon certification by the comp committee, even though the awards are considered fully vested at that time. The remaining respondents are delaying payout for anywhere from a week to over six months (24% pay out awards within a couple of weeks of certification and 20% within a month).
The NASPP has seen a general trend to consolidate RSU vest dates for grants to non-insiders. This is most often accomplished by consolidating grant dates (e.g., everyone hired during a quarter receives a grant on the same date), but I’m not aware that this practice has extended to Section 16 insider grants—most likely because, under most companies’ procedures, insider grants generally have to be approved by the comp committee and are thus tied to the committee’s meeting schedule. The procedure Troutman Pepper suggests provides an interesting solution that I expect would be helpful to a number of companies. It will be interesting to see if companies adopt it.
Scrutiny of pandemic-related pay decisions is mounting, as mass layoffs and furloughs draw even more attention to the gap between executive pay and pay of the average worker. Last week, ISS released takeaways from its “2020 US Compensation Proxy Season Review.” Among the findings:
COVID-related compensation decisions expected to dominate next year’s proxy season landscape. As the pandemic arrived in the US during the 2020 compensation cycle, related changes will not be fully disclosed until the 2021 proxy season. Looking ahead, compensation topics in the 2021 proxy season are likely to be defined by mid-year adjustments to incentive programs and use of discretion or one-time awards.
That finding is emphasized by the AFL-CIO’s annual “Executive Paywatch” – which was updated last week and highlights 20 CEOs – primarily of retail companies – who furloughed a majority of their workers yet had a pay ratio of more than 1000 to 1. The unions suggest that CEO salary cuts were “symbolic” and, with base salary making up less than 10% of the average CEO’s total compensation, were more than offset by equity awards.
Although the ISS review found that the rate of say-on-pay failures decreased this year, it also found that median say-on-pay support levels dropped to the lowest level since mandatory voting began in 2011. That might foreshadow a trend as we head into next year and need to explain pandemic-related decisions.
We’ll be addressing these difficult issues at our “Proxy Disclosure & Executive Pay Conferences” – coming up virtually September 21st – 23rd. Register today to get the latest essential & practical guidance, direct from the experts. Here are the agendas – 15 panels over 3 days, plus interactive roundtables to discuss pressing topics.
We’ve posted the transcript for the recent webcast: “Executive Compensation Planning in a Down Market.” Tony Eppert, Richard Harris and Jamin Koslowe shared their takes on these topics:
1. Actions companies have already taken in response to recent economic volatility
2. How compensation plans are affected by a down market
3. Prevalence of changes & exceptions to stock ownership guidelines
4. Suggested modifications to Rule 10b5-1 plans
5. What to think about during fall compensation planning season
Liz blogged recently about purpose-related pay goals as discussion about shareholder vs. stakeholder primacy continues. A recent Directors & Boards article from Seymour Burchman and Seamus O’Toole of Semler Brossy says Covid-19 is accelerating the move toward stakeholder-centricity. Creating accountability to all stakeholders sounds great, but it’s obviously a bit of a balancing act. The article walks through an example of one company that prides itself in its stakeholder-centric approach and outlines four key principles for reinforcing stakeholder-centricity through compensation:
– Emphasize the long-term: It’s impossible to attend to all stakeholders equally in the short term so companies need to make near-term trade-offs while optimizing outcomes for all over the long-run and says the company emphasized an ownership culture with greater equity compensation, broad participation and policies that promote longer holding periods. The company steered clear of overlapping three-year performance cycles as the overlaps effectively create a series of one-year cliffs that emphasize short-term thinking.
– Explicitly tie pay to outcomes for all stakeholders: balance investor-focused metrics for the bonus with stakeholder-oriented goals such as employee engagement, customer retention and supplier satisfaction.
– Balance metrics with discretion: the board set specific priorities and definitions of success but allowed for discretion in actual assessments and payouts and allowed updates of priorities to ensure continued alignment with strategy.
– Stick to your guns: Let cash-based incentives awards follow stakeholder outcomes even when short-term financials are weak and pull back on pay when stakeholder priorities aren’t achieved. Boards need to build the credibility to diverge from “one-size-fits-all” status quo on pay, which will require them to be consistent and transparent in their compensation decisions.
The last point about sticking to your guns is probably the most difficult aspect of aligning compensation with stakeholder interests because as the article points out, investors and proxy advisors may grow impatient as their guidelines tend to be more aligned with shareholder interests. Internal and external communication will likely be key to keeping focus on stakeholder interests.
A recent Pearl Meyer blog suggests companies start thinking about next year’s proxy statement now. It seems early but with all the challenges companies have faced in 2020, the blog suggests companies plan ahead for content changes to ensure CD&A narratives are responsive to expectations from investors and others. The blog includes several suggestions to get ahead of the game – here’s what it says about CD&A drafting:
There is no doubt CD&As will have more content this next year, so making sure that all stakeholders who are involved in the development process are clear on the overall proxy production timeline, roles for drafting and reviews, and the protocols for approval. Consider building reviews of content ideas, narrative outlines, and even preliminary working drafts into your Q3 and Q4 compensation committee meetings, so you’re not dealing with a CD&A fire drill come Q1.
Over on TheCorporateCounsel.net I blogged about ISS’s “Annual Policy Survey”, which it announced late last week. Like last year, ISS is using a single survey with a limited number of questions to help streamline the process. Even though the process is streamlined, it still covers a broad range of topics, including compensation topics related to pandemic adjustments. Check out the survey to see all topics covered, but here are two compensation-specific questions:
(1) As a result of the many impacts of the COVID-19 pandemic, many decisions regarding executive compensation and performance expectations, including both short-term and long-term, will be made by boards and by shareholders during the remainder of 2020 and throughout 2021.
Which of the following most closely reflects your organization’s view of executive compensation in the wake of the pandemic? Possible responses include, in addition to a free-form answer:
– The pandemic is different from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executive compensation.
– The pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into compensation decisions to adjust pay and performance expectations, and should be clearly disclosed to shareholders.
– The impact of the pandemic is not substantially different from other major market downturns, such as the financial crisis of 2007-2008, and decisions regarding performance and executive pay should reflect actions taken to promote a return to profitability and financial health over a reasonable timeframe without significant short-term adjustments to performance expectations or executive compensation.
(2) With respect to short-term executive incentives, many companies have announced changes to their immediate annual incentive or bonus programs in response to the COVID-19 pandemic and the resulting general economic downturn.
Regarding short-term/annual incentive programs, which of the following best represents your organization’s view of what is a reasonable company response under most circumstances? Possible responses include, in addition to a free-form answer:
– Making mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities
– Suspending the annual incentive program and instead making one-time awards based on committee discretion
– Both the first and second response could be reasonable, depending on circumstances and the justification provided
– Companies should avoid mid-year adjustments and make payouts based on the original program design
As always, the policy survey is just the first step as ISS formulates its 2021 voting policies. In addition to the survey, ISS will gather input via regionally-based, topic-specific roundtables and conference calls. From there, interested market participants can comment on the final proposed changes to the policies.
A couple months back, the IRS released “Generic Legal Advice Memorandum 2020-004” – which addresses the timing of tax withholding on options, SARs and RSUs. This Troutman Pepper memo explains that under the memo, the tax date for RSUs is the date the employer “initiates payment” – i.e., when it instructs the transfer agent to transfer shares to the employee’s account.
Under most RSU agreements, the share transfer is baked in to occur on the vesting date. But for some awards – e.g., performance awards that provide for a payment during a specified period after certification of year-end financial results – there is more flexibility, and the memo clarifies that there are tax consequences to that decision. Here are some planning opportunities that the memo highlights:
– Having a single payment date for administration of tax reporting and withholding for RSUs andPSUs that vest on multiple prior days during a year,
– Timing the payment date to be during an open trading window (e.g., three days after public release of quarterly or annual financial statements), and
– Timing the payment date in coordination with dividend record dates (e.g., so that the shares delivered in settlement will qualify to receive the dividend).
For example, assume an employer has time-vesting RSUs that vest on February 12, 14, and 15during 2021. Assume there is also a PSU award with a 2018-2020 performance period that the compensation committee, at its meeting in February 2021, determines was earned at target.Assume the employer plans to file it’s 10-K at the end of February, with an open trading window under their insider trading policy starting on March 4. If the award agreements include language permitting the employer to pick a payment date within a specified administrative period (e.g., on a day no later than March 15, 2021), the employer could select March 4 as the payment date for all of these awards and initiate payment on that date. This single payment date for the various awards could provide several potential benefits, such as:
– Simpler administration for tax reporting and withholding (e.g., by having a single stock price to value all of the awards for tax purposes);
– If share withholding is used to cover taxes for Section 16 officers, simpler Form 4 filing requirements (with a single Form 4 reporting those share withholding transactions for each Section 16 officer); and
– If tax withholding is to be covered through employee-directed broker sales of shares subject to the awards, simpler compliance with insider trading policy requirements (i.e., by having the sale transactions executed during an open window).
Last year, I blogged that CalPERS would begin voting “against” compensation committee members in the same year that it votes against say-on-pay or compensation plans. That policy is now in effect, and the country’s largest public pension fund doesn’t appear to be letting up in its scrutiny of executive pay. This “Financial Planning” article says the fund has voted against 52% of pay plans so far this year, consistent with its voting record last year. In regards to the new policy, it reports:
The pension also voted against 2,716 directors who sit on compensation committees and are responsible for setting executive pay.
While the say-on-pay vote is merely advisory, votes against directors can be embarrassing and be fodder for activist investors seeking to argue that the company’s leadership is out of touch with shareholders.
Last week marked the 10-year anniversary of President Obama signing the Dodd-Frank Act into law. The SEC continues to track its progress on the mandatory rulemaking provisions. When it comes to executive pay, we have this legislation to thank for rules on compensation committee independence, pay ratio, hedging disclosure, Chair/CEO structure disclosure – and the biggie, Say-on-Pay.
Of the remaining open items, clawback rules seem the most likely right now to make it to the finish line. Here’s what’s still on the “to-do” list:
– Pay-for-performance disclosure – proposed in 2015 – and now possibly appears to be abandoned in favor of “private ordering”
– Proposed rules that would require institutional investors to annually report how they vote on executive pay
– Prohibitions on certain executive pay arrangements at financial institutions and related disclosure – proposed in 2011, and then re-proprosed in 2016
As Mike blogged, the SEC’s Reg Flex Agenda implies that we might also see action on these other compensation-related items in the near future:
– Amendments to Rule 701/Form S-8
– Modernization & simplification of Regulation S-K Items 101, 103 and 105
We’ll be covering all of the latest developments on these topics at our Proxy Disclosure & Executive Pay Conferences – coming up virtually on September 21st-23rd. Here are the agendas – 18 panels over three days, including panels devoted to clawbacks, proxy advisors and pay-for-performance. Register today to get a discounted rate and ensure you get the information you need!
We’ve posted the transcript for the recent webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.” Mark Borges, Dave Lynn & Ron Mueller shared their latest takes on these topics:
1. Virtual Annual Meetings
2. Say-on-Pay Results
3. Performance-Based Compensation Disclosure
4. Director Compensation Disclosure
5. CEO Pay Ratio
6. Pandemic-Related Disclosure
7. Hedging Disclosure
8. Perquisites Disclosure
9. Shareholder Proposals
10. Proxy Advisors
11. Status of SEC Rulemaking