The Advisors' Blog

– 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 2016 filings – including overall prevalence of RTSR, differences in usage between industry sectors, and key design elements of these plans. And here’s a memo from Compensia about relative TSR…

– Broc Romanek

I’m calling this a “bonus” edition blog because if you came to our executive pay conference two weeks ago, you’ve heard a good deal of analysis about this visionary clawback policy from SunTrust Banks (I’ve all posted a version in Word in our “Clawbacks” Practice Area). Our expert panel on clawbacks – and what you should be doing now – covered that policy, the new Well Fargo one and others in detail. Come to our proxy disclosure conference in Washington DC next year!

Anyway, one of our panelists says that reading the SunTrust policy is just like reading “Gone With the Wind” – when you read it, you will laugh, you will cry. You will experience the whole range of human emotions. It’s a well-designed clawback policy, as it covers all incentives (time & performance-based) for all incentive eligible employees. It also allows a clawback for a wide range of issues – such as misconduct, theft, termination for cause, failure to perform duties and restatements to name a few. The clawback appears partly based on the banking regulators’ 2010 guidance that has a number of good principles-based recommendations that are relevant to users of incentive compensation in all industries. The company also has an internal “Events Tracking Group” that monitors incentive payouts – and the Group reports to the compensation committee regularly. SunTrust is one of the few companies that files their clawback policy as an exhibit to their SEC filings.

If you see a clawback policy that you like, let me know & I’ll add it to our samples posted in our “Clawbacks” Practice Area. Also check out these memos on the recent SEC v. Jensen case in the 9th Circuit about clawbacks under Section 304 of Sarbanes-Oxley…and this Covington blog for a high level thought piece on clawbacks…

– Broc Romanek

Not surprising given recent court decisions in this area, this Equilar blog reports how more companies are disclosing director pay limits. Here’s an excerpt:

According to an Equilar study, 80% of companies in the S&P 100 proposed or amended an incentive plan involving directors in proxies filed between January 1, 2011 and September 30, 2016. Of those companies, 28.8% explicitly mentioned a dollar value cap on director awards, and more than half of these dollar value caps were disclosed in a proxy filed in 2016. The graph below compares dollar value pay caps that specifically mention directors to the median amount a director received in 2015 for that company.

In addition, although 41.3% of these incentive plans mentioned some sort of cap on the number of shares of an award that applied to directors, many were in the hundreds of thousands or millions and designed for executives. Just 16.3% of proposals mentioned a cap on number of shares explicitly referring to non-employee directors, and these limits were anywhere between 6,000 to 100,000 shares.

– Broc Romanek

A few days ago, as noted in this Cooley blog, Corp Fin issued two new CDIs on Form S-8 & Rule 457 (regarding filing fee calculations) and two revised ones:

– Revised CDI 126.06 of Form S-8 (also Securities Act CDI 240.16)

– Revised CDI 126.42 of Form S-8 (also Securities Act CDI 240.11; 126.42 is missing from Corp Fin’s New” page)

– New CDI 126.43 of Form S-8 (also Securities Act CDI 240.15)

– New CDI 126.44 of Form S-8

We’ll be updating our “Form S-8 Handbook“…

– Broc Romanek

A few days ago, as noted in this Wachtell Lipton memo, ISS announced changes to its pay-for-performance methodology for companies in the US, Canada, and Europe that will become effective on February 1st. Following feedback from constituents, ISS will present relative evaluations of return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth to supplement ISS’ legacy (and continued) use of TSR as the key metric for P4P.

Pay-for-performance updates for US companies include:

– A new standardized comparison of the subject company’s CEO pay and financial performance ranking relative to its ISS-defined peer group will be added to ISS’ benchmark policy proxy research reports beginning Feb. 1, 2017. Financial performance will be measured by a weighted average of multiple financial metrics including return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth. The metrics and weightings will be based on the company’s four-digit GICS industry group, and are based on extensive back-testing over multiple years. The financial performance and pay ranking information will be displayed for all companies subject to ISS’ quantitative pay-for-performance screens. While this information will not impact the quantitative screening results during the 2017 proxy season, it may be referenced in the qualitative review and its consideration may mitigate or heighten identified pay-for-performance concerns.

– Relative Degree of Alignment (RDA) assessment will only be considered in the overall quantitative concern level when the subject company has a minimum of two years of pay and TSR data. Companies that only have one year of data will receive an N/A (not applicable) concern for their RDA test.

ISS’ peer submission window will be open starting on November 28th – and will close on December 9th…

– Broc Romanek

To say that we are in a state of uncertainty is one of the few certainties I know. But I would say that the odds of at least a partial repeal of Dodd-Frank certainly improved, whether it be in the form of the “Financial Choice Act” (see this Cooley blog for a summary of the provisions) – or perhaps even a stronger rebuke to Dodd-Frank. Here are other open questions:

– How fast would a repeal come? Companies are preparing to comply with the adopted pay ratio rules now – even though disclosure wouldn’t be seen until 2018.

– What will be the fate of the SEC’s disclosure effectiveness project? It’s seemingly non-partisan. But the SEC may be busy with rulemakings mandated by this shift in power to deal with projects they started themselves for quite some time…

– Does the sole sitting SEC Commissioner – Mike Piwowar – become the SEC Chair? There is precedent for a non-lawyer in that role (ie. Arthur Levitt; Piwowar is an economist). Piwowar almost certainly will become interim Chair once Chair White vacates her seat. It might take a while for a Trump Presidency to tap new agency heads, as that is the norm. As noted in this WSJ article, former Commissioner Paul Atkins is heading up the President-elect’s transition team that oversees the SEC, CFTC & other financial regulators that historically operate independently of the White House…

– I used to think a “risk factor” for political instability & unrest was reserved only for non-US jurisdictions. Will we see some in the US now?

Poll: A Dodd-Frank Repeal?

Please participate in this anonymous poll:

– Broc Romanek

Recently, Corp Fin posted this no-action response to Apple about “engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.” The retail investor proponent – Jing Zhao – appears to have represented himself in rebutting the company’s (i)(3), (i)(6) and (i)(7) arguments. Corp Fin’s response to the ordinary business argument is that “the proposal focuses on senior executive compensation.”

The proponent’s supporting statement cites Professor Thomas Piketty of France, the darling of the income inequality movement. There likely will be more income inequality-oriented proposals in the coming years…

In this no-action letter, Apple also lost its battle to exclude a proxy access shareholder proposal from Jim McRitchie…

Poll: How Many Comp Consultants Should Apple Hire?

Keying off the shareholder proposal mentioned above, please participate in this anonymous poll:

– Broc Romanek

Here’s a teaser for this Semler Brossy report:

To date, 1,972 Russell 3000 companies have held Say on Pay votes and 93% have passed with above 70% support. 31 companies (1.6%) have failed Say on Pay thus far in 2016; no additional companies have failed since our last report. Proxy advisory firm ISS has recommended ‘Against’ Say on Pay proposals at 12% of companies it has assessed thus far in 2016. Our special topic this week features a breakdown of Say on Pay results for S&P 500 companies compared against all other companies in the Russell 3000. So far in 2016, smaller companies are receiving higher average Say on Pay support compared to larger companies despite having a slightly higher failure rate. This development is a reversal from prior years when larger companies had noticeably stronger Say on Pay results.

– Broc Romanek

Here’s the intro from this Reuters article:

Over the past two years, a growing number of U.S. banks has capped their directors’ earnings, but the ceilings are so high that they primarily serve to fend off potential shareholder litigation rather than control the pace of pay increases. Most of the caps are typically 2-3 times what directors now get paid, according to data and filings reviewed by Reuters.

– Broc Romanek

Here’s some information from Vicki Westerhaus of Stinson Leonard Street that should help you consider whether to adopt ASU 2016-09 & how to implement maximum share withholding (also see this Mike Gettelman blog on TheCorporateCounsel.net summarizing the discussions on this topic at last week’s NASPP conference):

1. Stock Exchanges

Last week, Nasdaq issued new FAQ #1269 confirming that an amendment to an equity compensation plan to allow for increased withholding to satisfy tax obligations, such as from the minimum tax rate to the maximum tax rate, would not be considered a material amendment to the plan, so we now have confirmation from both Nasdaq and NYSE that stockholder approval of the amendment is not required. (NYSE earlier this year issued a similar FAQ on its website clarifying that an amendment to allow tax withholding above the minimum tax withholding is not a material amendment.) [This note from Exequity’s Ed Hauder also delves into the NYSE & Nasdaq’s guidance (or lack of guidance).]

2. Insider Trading Policy Issues

Whether a change in withholding rates can implicate insider trading issues is a grey area and can depend upon whether shares withheld are sold into the market in a broker-assisted transaction or withheld in a transaction involving only the company/issuer. Many insider trading policies include carve outs for tax withholding, although companies should consider mandatory vs. voluntary (at award recipient’s discretion) alternatives.

From an insider trading standpoint, mandatory withholding is arguably a more conservative approach because there is no decision to be made by an award recipient. If a company allows an insider to choose between satisfying his or her withholding obligations by paying cash or withholding shares, the appearance of manipulation is possible, especially if a person knows company stock will likely fall as a result of an upcoming announcement. By removing the choice, a company can help avoid the appearance of insider trading. A middle ground could be a combination of methods, such as a default tax payment method (e.g., withholding at applicable supplemental rates only) with no changes permitted during a blackout period. Companies also should consider adding Rule 10b5-1 language with respect to tax withholding provisions in grant agreements to help secure an affirmative defense against allegations of insider trading.

3. Section 16 Issues

An insider’s election to have increased share withholding to satisfy tax withholding obligations in excess of the minimum statutory withholding rate would be nonreportable for Section 16 purposes, so long as the amount withheld applies only to the tax obligation generated by the underlying award transaction. If an insider elects to have shares withheld in an amount above the tax obligation, the excess amount would be deemed a reportable derivative security. The actual withholding of shares for tax purposes would continue to be a reportable event, subject to an exemption from the short swing profit provisions of Section 16(b), if the share withholding was approved by a properly composed Compensation Committee or Board.

4. Applicable IRS Rules

As noted above, under current IRS rules, awardees are not permitted to have discretion to determine the applicable tax withholding percentage. Instead, companies must either apply the withholding rate generated by a grantee’s current Form W-4 filing or apply the applicable flat supplemental rate. A grantee, however, may file a revised W-4 from time to time to change the number of exemptions, but as noted above, to avoid the appearance of possible insider trading, a grantee should not file a revised W-4 during a blackout period.