– Broc Romanek
Here’s the news from this blog by Ning Chiu:
In a recent speech, Chairman Clayton discussed completing the rulemaking mandates under Dodd-Frank, in light of his mission to allocate the SEC’s resources to both fulfilling statutory requirements and meeting day-to-day needs. The complexity of the mandates coupled with “mission-critical demands” are key variables that influence the objective of finishing the rules.
In terms of how the SEC should proceed on the remaining Dodd-Frank rules, Clayton declared that the executive compensation rules were particularly challenging, in part because “we are writing on an already very colorful canvas and different constituencies see the rules as serving different, and sometimes inconsistent, goals.” He favors a “serial approach” and pointed out that the recent interpretative guidance on the pay ratio rules managed to comply with the statute, reduce compliance costs and remain practical. With those “themes” in mind, Clayton is actively trying to determine how to address the remaining executive compensation rules.
He indicated that market developments may, or should, play a role. For example, developments from shareholder engagement “have, at least in part, mitigated some of the concerns” that led to the statutory mandate in the first place. He cited to the clawback rule as an example, noting that several companies are already making their clawback policies public and some of them “go beyond what would be required” under Dodd-Frank. Some companies have actively clawed back compensation from their executives. Clayton believes that the SEC’s rulemaking priorities, as well as the rules, “should reflect these observable developments.” He also stated that the SEC intends to be flexible “in timing, in sequence, and in content” as they finalize the rules.
While that may suggest that the clawback rule, which is arguably the most complicated of the remaining three (the others being pay-for-performance and pledging disclosure), may not be an key agenda item at the SEC, Clayton pointedly concluded that “it is the SEC’s obligation to complete the rules mandated by Congress in Dodd-Frank, and I intend to do so.”
– Broc Romanek
In this memo, Exequity explores the usage of relative total shareholder return (RTSR) within long-term incentive plans across S&P 500 companies using data from 2017 filings – examining overall prevalence of RTSR, differences in usage between industry sectors, and key design elements of these plans.
– Broc Romanek
Here’s the intro from this blog by Cooley’s Cydney Posner:
In this recent academic study, “Social Responsibility Criteria in Executive Compensation: Effectiveness and Implications for Firm Outcomes,” the authors examined the impact of the integration of elements of corporate social responsibility, such as environmental and social performance, into executive compensation performance criteria. In the decision-making process, executives tend to gravitate toward the achievement of short-term goals and to respond more readily to more prominent direct stakeholders, such as customers and shareholders.
But CSR metrics typically have a long-term pay-off and involve less direct stakeholders, such as the environment and the local community. The question is: is the inclusion of CSR performance metrics in executive comp programs effective to motivate executives to achieve those longer-term CSR goals, engage with CSR stakeholders and enhance long-term value creation?
– Broc Romanek
Here’s a teaser for this memo by FW Cook:
While the performance-based compensation exception to the $1 million compensation limit under Section 162(m) for “covered employees” is a thing of the past (absent grandfathered contracts) for federal income tax purposes, practitioners are realizing that Section 162(m) may continue to be a consideration for state taxes. For administrative ease, the great majority of states conform many elements of their state tax codes to the federal tax code. However, it is rare for any state to conform to the federal code in all respects.
– Broc Romanek
We’re excited to announce that we have just posted the registration information for our popular conferences – “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
Early Bird Rates – Act by April 13th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 13th to take advantage of the 20% discount.
– Broc Romanek
As noted by the memos in our “Stock Options” Practice Area, Section 6039 of the Internal Revenue Code requires companies to furnish a written statement to any employee (or former employee) who either exercised an incentive stock option during 2017 – or first transferred legal title to shares acquired under a Section 423 ESPP during 2017.
These statements on Forms 3921 and 3922 must be furnished to employees no later than January 31st – and companies must file returns with the IRS on Forms 3921 and 3922 no later than February 28th (if filed on paper) or April 2nd (if filed electronically)…
In our “Regulatory Reform” Practice Area, we continue to post oodles of memos about the impact of tax reform on executive pay arrangements…
– Broc Romanek
We have posted the transcript for our recent webcast: “The Latest: Your Upcoming Pay Ratio, Tax Reform & Proxy Disclosures.”
– Broc Romanek
We have already posted the audio for the webcast – “Tax Reform: What’s the Final Word?” – if you wanted to hear Winston & Strawn’s Mike Melbinger, Choate Hall’s Art Meyers and PricewaterhouseCoopers’ Ken Stoler talk about how the new tax legislation will impact executive pay arrangements. For this program, we simply took the audio archive from a NASPP webcast that took place yesterday – and made it available to you now.
Please print out this “Course Materials” deck (45 pages!) in advance of listening to the audio. We’ll be posting the transcript in a week or so.
– Broc Romanek
Tune in tomorrow for the webcast – “Tax Reform: What’s the Final Word?” – to hear Winston & Strawn’s Mike Melbinger, Choate Hall’s Art Meyers and PricewaterhouseCoopers’ Ken Stoler talk about how the new tax legislation will impact executive pay arrangements. Please print out this “Course Materials” deck (45 pages!) in advance.
– Broc Romanek
If you want to really test your say-on-pay fate, include a 280G gross-up in your executive agreements. Section 280G of the Internal Revenue Code can impose an excise tax on executives who get a pay-out in connection with a change-in-control event – and the gross-up provision says that the company will pay that tax on the executives’ behalf. It’s often worth millions of dollars.
For obvious reasons, shareholders & proxy advisors strongly dislike these provisions. They’ve become rare since the implementation of say-on-pay since they usually result in an automatic “against” vote. But it looks like some companies have found a workaround – just wait until merger time to reintroduce the gross-up. Here’s an excerpt from this Equilar analysis:
Considering how much gross-ups have declined in prevalence, it’s surprising to see 25% of companies still paying them at merger time, including 15% of the companies specifically choosing to add them back in during the merger negotiation. The most common explanation from companies for adding gross-ups was that a significant stock price increased the value of equity acceleration to the point that it pushed the total change in control payment over the safe harbor amount.
The question then is whether companies face any consequences for going back on their implied 280G pledges. Data shows that there is a little pushback, but mostly zero consequences. For mergers that require a special shareholder vote, investors get one last opportunity to sound off on pay in the form of a Say on Golden Parachute vote. This vote is non-binding, has no consequences for failure, and companies typically cease to exist shortly after the vote. In other words, the vote is toothless. That said, golden parachute voting results for this limited study show that adding in gross-ups has a strong negative effect on approval rates – average approval ranges from 54-65% for companies with gross-ups compared to 88% for companies with no gross-up.