Earlier this week, the IRS released proposed regulations under Section 162(m) aimed at providing more color for the 2017 Tax Cuts and Jobs Act changes to 162(m). Mike Melbinger’s blog from Tuesday provides a nice summary of some of the good news in the proposed regs along with some of the not-so-good news.
If you’re looking for additional guidance on the proposed regs, check out our “162(m) Compliance” Practice Area on Compensation Standards where we’ll be posting memos.
Recently in our Q&A Forum (#1294), one of our members articulated a question that seems to be on everybody’s mind:
Our 2019 CD&A was 23 pages long, or 50% longer than the first proxy statement I drafted 25 years ago. Most of us who draft CD&As can likely agree that they are too long and contain much more detail than most investors want or need. Very few investors, whether retail or institutional, actually read them or if they do read them, get beyond the first five pages. Investors become frustrated by trying to extract and understand the most important information, even with the help of graphics and plain English. For issuers with significant institutional ownership, the CD&A is largely irrelevant to ISS and Glass Lewis when determining their say on pay vote recommendations.
Would you please point me to a CD&A that is concise (say 10-12 pages, assuming that there is one) yet effective in satisfying the SEC’s rules and explaining an issuer’s executive compensation program and outcomes to investors and the proxy advisory firms? If there is no such thing, why can’t there be?
John gave this answer:
Levi-Strauss comes to mind – as does PPG. Mark Borges blogged about both companies’ comp disclosures and you should check out some of the other companies that he highlighted in his always-informative “Proxy Disclosure Blog.”
We blog quite a bit around here about private jets – it’s a “perks” quandary that keeps on giving. Here’s more proof of how tricky it can be: a recent Reuters article asserts that CEO jet use adds millions to a company’s tax bill through lost deductions – mostly unbeknownst to investors due to lack of disclosure. Here’s the logic:
Among S&P 500 companies that pay for their CEOs to use the company jet for private trips, the estimated median value of those trips increased 11% last year to $107,286 from $96,532 in 2017. The value of those trips is taxable income for the CEO.
The argument about lost tax deductions stems from an IRS rule limiting a company’s deductions on personal jet use to the estimated value of the personal flight, which is frequently based on the price of a first-class ticket on a commercial flight – not the actual cost of flying the company jet.
This means companies lose tax deductions when companies pay for private trip use – because these trips include pilot and flight attendant salaries, maintenance costs, insurance, depreciation of the jet, etc. These costs are usually fully deductible when the jets are used for business purposes but aren’t taken into account when companies value a personal trip based on the price of a first-class ticket.
As the article points out, SEC rules don’t require disclosure of lost deductions – so most investors aren’t getting the full picture of the cost when companies pay for personal travel on company jets. Two companies disclosing the value of lost tax deductions resulting from personal use of company jets are Visa and Comcast – to the tune of $4.7 million for Visa and $8.8 million for Comcast.
For more on deductibility, see Mike Melbinger’s blog that covers how independent security studies can impact this.
A few months ago, Liz blogged about CII’s overhaul of its executive compensation policy – urging companies to reduce complexity of their incentive plans. Predictably, the suggestion that some companies may benefit from shifting away from metric-based incentives has generated a lot of discussion.
A recent memo from Pay Governance lays out a point-by-point response to CII’s policy, asserting that the practices outlined in the policy would weaken the link between pay & performance – against the wishes of many shareholders – and cautioning against oversimplification. This excerpt touches on one point of agreement, though:
We argue that companies must do a better job of communicating their incentive plan designs to participants and the investor community, explaining how particular plans are aligned with business strategy to improve company performance and influence executives to execute business plans that will create long-term shareholder value.
Last month, I announced on TheCorporateCounsel.net that Lynn Jokela has joined us as an Associate Editor for our sites. She brings a wealth of experience – here’s her bio. I’m now excited to share that Lynn will be making her blogging debut next week. Lynn’s email uses the domain from our parent company – it’s ljokela@ccrcorp.com – so keep an eye out for that in your inbox!
Our friend Bruce Dravis recently sent us a note about his research on the complementary relationship between stock buybacks & equity compensation – and a related panel that the ABA’s Corporate Governance Committee held at the Business Law Section meeting in September:
Given some of the leaders in the Democratic presidential polls, the political critique of buybacks could be a hot topic in 2020. The ABA panel looked at ways the political and academic critiques of buybacks miss the boat – particularly with respect to the assumption that dollars spent on buybacks just leak out of the capital markets and evaporate.
In the Fortune 100 companies sampled – $1.23 trillion of transactions — about 37% of buybacks reversed share dilution created by equity compensation, with 61% of the dollar cost of such repurchases offset by option exercise proceeds and tax benefits. While the other two-thirds of buybacks are “pure play” repurchases that affirmatively reduce share counts, a sizable chunk of buyback activity supports the employee compensation benefit.
In the panel, Prof. Jesse Fried also spoke to his research on “short-termism” – including how investors recycle buyback dollars in the capital and investment markets.
Given the huge amount of money spent on buybacks in recent years, Bruce is probably right that they’ll continue to draw scrutiny – whether fairly or unfairly, and even if the true issue is less about buybacks themselves and more about some perception of market manipulation to benefit insiders. This recent WaPo article takes issue specifically with insider sales after a buyback announcement. It picks up on the thread of SEC Commissioner’s Rob Jackson’s critiques – even if the post-announcement sales are made under a 10b5-1 plan or during an open window.
Yesterday, in addition to posting its annual “Diversity Report,” Intel made waves by also publishing on its website the pay data that it recently filed with the EEOC. The data covers over 50,000 US workers and provides much greater detail than the other “pay equity” and “pay gap” info that we’ve seen to-date. Here’s a few points that the company calls out with the disclosure:
– This is pay data from the years of 2017 and 2018. Therefore, it does not align with Intel’s 2019 Diversity and Inclusion Representation numbers.
– The data in this report is collected from employees’ W2 box 1 earnings, which includes all taxable income and has not been normalized for factors such as hire date, shift differentials, commissions and employee retirement contributions. For example, employees hired after the start of the year will appear to have lower earnings due to their W2 only including pay information collected from their start date. Similarly, if employees contribute more to their 401(K) then their box 1 earnings for the year will be lower.
– Intel is committed to global pay equity and uses best-in-class analysis on an ongoing basis to ensure fair pay irrespective of gender or race/ethnicity. Intel has recently achieved gender pay equity globally and continues to maintain race/ethnicity pay equity in the U.S. We will continue to perform pay equity assessments moving forward and close any identified gaps. Pay Equity is defined as the average pay gap between employees of different genders or races/ethnicities in the same or similar roles after accounting for legitimate business factors that can explain differences in pay such as performance, time at grade level and tenure.
Companies aren’t required to make the EEOC data public – and as I’ve blogged, this might be the only year the EEOC collects the “Component 2” pay data (at least in this form). For Intel, this disclosure follows a settlement a couple months back with the Department of Labor to resolve pay discrimination allegations – and so far, the company is facing some criticisms about pay disparities that the data highlights (see this Bloomberg article for lots of graphs). But the article also suggests that shareholders who are focused on narrowing pay gaps are happy with Intel’s transparency.
This Willis Towers Watson memo identifies 20 questions to ask yourself when reviewing annual incentive plan design. They’re organized into these five categories:
1. Eligibility: Determine annual incentive plan eligibility based on market norms alongside one’s ability to impact the achievement of financial and nonfinancial objectives
2. Metrics and levels of metric measurement: Take time to understand your sector and your company goals, then select metrics accordingly
3. Performance ranges: Set the right target goals and calibrate the optimal performance ranges; use predictive analytics to model performance targets and ranges that are best fit for purpose through forecast performance simulations
4. Funding: Ensure you have the proper incentive plan funding mechanism in place and communicate how your plan is funded, in good times and bad
5. Calculation of payout: Work to ensure that pay and performance are within a realizable range of alignment
Last year, I blogged about Citigroup being the first US company to disclose its “unadjusted pay gap” – which compares the median earnings of women & minorities in the US to the median pay of men & non-minorities and can be an indicator of these groups’ opportunities for advancement. Citi’s voluntary disclosure came in response to a shareholder proposal from Arjuna Capital.
Of course, global companies may already have to disclose similar info in other countries – e.g. the UK, Australia, Germany and Iceland – and I’ve blogged that there’s been a lot of back & forth on an EEOC reporting requirement here in the US.
Citi’s move didn’t exactly open the floodgates to information sharing. But Arjuna and other shareholders have persisted – and last week Starbucks become the second US company to add website disclosure of its gender & minority pay gap in exchange for Arjuna’s withdrawal of a proposal. It’s very simple & concise.
The gaps in the US were zero dollars! Understandably, Starbucks is getting a lot of positive press for that.
Meanwhile, Microsoft sent a similar Arjuna proposal to a vote last week – where it garnered almost 30% approval. This press release says that Arjuna intends to file median pay gap proposals at more than a dozen companies during the upcoming proxy season – it’ll be “naming names” next month. See this blog I ran last spring for a recap of Arjuna’s efforts to-date and a link to their “Scorecard” that contains example language from resolutions.
For resources about preparing for these types of proposals, the expanding role of the compensation committee, stakeholder expectations and intersecting legal requirements, visit our “Gender Pay Equity” Practice Area or use the search feature for this blog…
Here’s an interesting piece from Exequity that explores the usage of relative total shareholder return (RTSR) within long-term incentive plans across S&P 500 companies using data from 2019 filings. There are nifty charts that show overall prevalence of RTSR, differences in usage between industry sectors, and key design elements of these plans…