The Advisors' Blog

– Broc Romanek

As we continue to post memos about the tax reform bill, I thought I would highlight this Winston & Strawn memo that came out yesterday given that time is of the essence. Mike Melbinger is also quoted in this MarketWatch article about how executive pay arrangements & disclosure will change going forward…

– Broc Romanek

We have posted the transcript for our recent webcast: “Your Upcoming Pay Ratio Disclosures.” Tune in for our next pay ratio webcast on January 10th: “The Latest: Your Upcoming Pay Ratio & Proxy Disclosures.”

– Broc Romanek

Last week, ISS updated these three documents (updates noted in yellow):

– U.S. Equity Compensation Plans: FAQs
– U.S. Compensation Policies: FAQs
– Pay-for-Performance Mechanics

– Broc Romanek

This MSCI study on CEO pay and company performance indicates that CEO pay was “poorly aligned” with total shareholder return over a 10-year cumulative period for three-fifths of the companies reviewed. That’s a lot…also see this blog…

– Broc Romanek

Among our memos that we have posted about tax reform are some that deal with likely possibility of changes to Section 162(m) – and how to plan for the loss of deductibility. Here’s an excerpt from this Latham & Watkins memo on the topic:

Due to the proposed reduction in the corporate tax rate under both versions of the Bill, deductions taken in 2017 could be more valuable to companies than those taken in 2018.Companies may want to consider securing compensation deductions in 2017, if possible. For example, companies that normally would not be able to deduct 2017 bonuses (such as those that require employment on the date of payment in 2018) may have an opportunity to secure a deduction in 2017 for that compensation by accelerating payment of cash bonuses into 2017. Alternatively, companies could establish a minimum bonus liability under bonus plans by year-end to secure 2017 deductions. Similarly, companies could consider accelerating the vesting and/or payment of equity awards that otherwise would have been vested and/or paid in 2018 into 2017.

Companies would need to ensure actions would not run afoul of the Section 162(m) performance-based compensation requirements, such as the need to certify actual performance through the performance period prior to payment, or constitute impermissible accelerations under Section 409A. Various technical requirements under tax and accounting rules also apply to ensure the acceleration of the timing of the deduction will be honored.

– Broc Romanek

Yesterday, the SEC announced an enforcement action against Provectus for insufficient controls surrounding the reporting & disclosure of travel and entertainment expenses submitted by its executives. The former CEO swindled millions using fake or non-existent documentation – the former CFO’s take was closer to $200k.

Here’s an excerpt from the SEC’s press release:

The SEC separately charged Dees in federal district court in Knoxville, Tennessee, alleging that, while Dees was Provectus’ CEO, he treated the company “as his personal piggy bank.” According to the complaint, Dees submitted hundreds of falsified records to Provectus to obtain $3.2 million in cash advances and reimbursements for business travel he never took. Instead, he concealed the perks and used cash advances to pay for personal expenses such as cosmetic surgery for female friends, restaurant tips, and personal travel.

As noted in this blog by Steve Quinlivan, the company itself was not hit with a penalty – perhaps due to the board’s cooperation in the investigation. Steve notes that a somewhat similar case drew a $750k penalty from a company about 30 months ago. We’ve added this case to our list of perk enforcement actions in our “Perks” Practice Area…

– Jesse Brill

Here’s a big sleeper for you. The November-December issue of “The Corporate Executive” has a lead piece about how many companies are not disclosing all their non-deductible, non-complying 162(m) compensation. This is a big deal, particularly because it all will need to be disclosed under the coming tax reform legislation which – when you add up all the bonuses, RSUs, options & all other performance-based compensation – will be huge, embarrassing numbers. Like pay ratio, once companies appreciate the magnitude & sensitivity of this sleeper, they will all be concerned about how to address this sensitive disclosure.

On page 2 of that important lead article in “The Corporate Executive,” it’s mentioned that an excellent series of tables will be posted on CompensationStandards.com – these tables are now posted (courtesy of Deloitte Consulting’s Mike Kesner & Ed Sim). They provide examples of the possible cost to companies of 162(m) non-deductible compensation.

As you will see, the tables highlight the large numbers that many companies with 162(m) non-compliant compensation apparently are failing to disclose right now. You now have a “heads up” on the impact of what companies will no longer be able to deduct under new 162(m) — and what they will need to be disclosing going forward…

If you’re not a subscriber to “The Corporate Executive,” try a 2018 no-risk trial now & receive this November-December issue for free…

– Broc Romanek

It can be tricky to build – and maintain – a solid executive pay peer group (or groups). ISS looks at industry profile, size & market cap – but that doesn’t always yield a representative group. This recent Equilar memo gets into the details of current trends and offers some ideas for comp committees. Here’s a teaser:

Companies most often disclosed similar industry classifications as criteria for peer group inclusion, with 442 companies in the Equilar 500—an index of the 500 largest U.S. public companies by revenue—naming this as a deciding factor in peer assessment. Revenue followed as the second-most popular peer group criteria, with talent being another common factor.

“Over the past few years, we have seen peer group development often include an increased focus on operating characteristics of a company, such as profit margin or percent foreign revenue, in addition to standard size screens such as revenue or market capitalization,” said Margaret Engel and Matt Vnuk of Compensation Advisory Partners.

Over the years, I have blogged quite a bit about using peer groups to set executive pay. Check out our “Peer Group Practice Area” and “Benchmarking” Practice Area for more resources…

– Broc Romanek

Here’s the annual review of say-on-pay for the “Bay Area Tech 120” from Compensia…

– Broc Romanek

Here’s the ending from this Forbes article:

Coming back to the polling results, it is not clear what a fair or just CEO:Median Worker Pay ratio actually is, or what people think it should be. Ordinary workers are more concerned with putting food on the table for their families and being treated fairly relative to their coworkers. When it comes to CEO pay, however, we think the real moral of the story is not only that the numbers be disclosed, but that we consider them in the context of fair treatment and shared value.

High CEO pay may be perfectly fine in situations where companies are doing well financially and all workers are sharing in that. Or where workers themselves feel fairly compensated and make more than a living wage. Where the red flags exist are where too many people do not make a living wage, where CEOs are taking too much of the pie at the expense of workers, or where there is some other obvious injustice or imbalance. Boards of Directors setting executive compensation packages would do well to keep this in mind. Going forward, we’ll continue to track CEO pay ratios, and hope that companies will disclose these numbers, providing transparency on the issues Americans care most about, whether they’re required to or not.