The Advisors' Blog

– Broc Romanek

On TheCorporateCounsel.net, we’ve been providing a ton of coverage on Corp Fin’s new CDIs in the non-Gaap area – as well as Corp Fin’s latest comments on the topic. This memo by Willis Towers Watson delves into the debate of how non-Gaap measures are implicated in pay plans…

– Broc Romanek

Here’s news from this note by Paul Hastings’ Mark Poerio:

Law360 reports that a Delaware Chancery Judge approved the settlement of shareholder derivative litigation under which Citrix agreed to limit annual stock awards to directors to $795,000 (roughly two times the highest past levels), to submit that limit to a shareholder vote next year, to make enhanced proxy statement disclosures about the determination of director compensation, and to use an independent consultant to assist with peer data and the annual determination of proper cash and equity-based compensation.

– Broc Romanek

1. Nice scoop by John about a possible SEC Enforcement sweep over non-GAAP disclosures.

2. The SEC proposes to mandate links to exhibits! A capital idea that was long overdue. I’ll be blogging more about my own ideas on this – & may even submit my 1st personal comment letter to the SEC about a rulemaking!

3. Corp Fin has been able to get out a slew of proposals despite the limitations of having only three sitting SEC Commissioners! Bravo!

4. While I was gone, John did a helluva job with the Penske file – but he clearly isn’t Penske material (I didn’t even know that Mr. Tuttle was finished interviewing)…

5. Switzerland is awesome! Great vaca. Wasn’t planning on running off a steep cliff & paragliding. But it happened…here’s the 3-minute video to prove it!

– John Jenkins

This Proskauer blog discusses the 9th Circuit’s recent decision in SEC v. Jensen – which upheld the SEC’s authority to clawback CEO & CFO incentive comp under Section 304 of Sarbanes-Oxley without demonstrating personal misconduct:

The U.S. Court of Appeals for the Ninth Circuit recently held that the Sarbanes-Oxley Act’s disgorgement provision – which requires disgorgement of certain CEO and CFO compensation when an issuer restates its financial statements “as a result of misconduct” – applies even if the CEO and CFO were not personally involved in the misconduct. Although several district courts had previously reached that same conclusion, but the 9th Circuit’s decision in Jensen appears to be the first appellate ruling on the issue.

The 9th Circuit also held that Rule 13a-14 provides the SEC with a right of action against officers who certify false or misleading financial statements. We’re posting memos in our “Clawbacks” Practice Area.

– John Jenkins

This blog from Cooley’s Cydney Posner highlights a call for companies to reconsider their growing reliance on long-term incentive pay in executive compensation programs. Here’s an excerpt:

 In this Bloomberg article, a compensation consultant argues that most current compensation plans are just “a hodgepodge of reactions to ‘accounting rules, tax law, shareholder requirements, and legal considerations.’” These plans, he believes, have “no empirically demonstrated validity.” Instead, based on behavioral economics, this compensation consultant contends that CEOs should be paid with more near-term incentives.

The Bloomberg article notes that investors like long-term incentive based pay – which is increasingly tied to stock price performance, but at least one compensation consultant says that this approach simply does not make sense:

Investors like this arrangement because it suggests that executives have the same goals they do. Yet it flies in the face of what little we know about behavior and pay. Consider a CEO whose board promises her a $5 million pot if company shares rise a certain amount over three years. Behavioral economists argue that the executive won’t weigh the true value of the award because of our tendency—demonstrated in dozens of academic studies—to prefer a dollar today to two dollars some time from now. In theory, this means the board could extract the same effort from the CEO with, say, $3 million doled out at closer intervals.

– John Jenkins

Here’s a blog from Andrew Abramowitz noting that one well-known VC firm – Andressen Horowitz – is recommending a 10-year option exercise period for departing employees. Why do this?  Andressen Horowitz puts it this way:

While everyone wants to do what’s best for the lifeblood of the company — the former, current, and potentially future employees — the 90-day exercise essentially pits cash-rich employees against cash-poor ones. And that isn’t right. Employees who have vested their hard-earned options should not have to forfeit their stock simply because they don’t have the financial resources to exercise their options and pay the resulting taxes.

While this recommendation applies to startups, innovations in Silicon Valley tend to migrate to publicly-traded companies pretty quickly, so this is something to keep an eye on.  The Andressen Horowitz piece is worth reading in its entirety, because it discusses many of the potential pitfalls of this extended exercise period as well. In addition, see this DLA Piper memo on the topic.

This evolving view toward the appropriate post-departure exercise period for options may be part of a broader evolution in Silicon Valley’s equity compensation practices.  As this NY Times article recently observed, some Silicon Valley companies are taking a more liberal approach to allowing employees to dispose of a portion of their stock prior to an IPO – while at the same time requiring employees to agree to more explicit restrictions on their remaining shares.

– John Jenkins

If you have an interest in the evolution of executive compensation – from a period when pay practices caused little concern to where we find ourselves today –  then take a look at this new article entitled  “Executive Pay: What Worked?”

The authors provide a history of executive pay practices from the 1930s forward – and argue that it wasn’t high marginal tax rates that kept executive pay in check throughout the mid-20th Century, but a combination of factors that included strong labor unions, “team first” social norms bred from the Depression and World War II, and less emphasis on individual management talent during the heyday of The Organization Man and his colleague, The Man in the Grey Flannel Suit.

The article makes a pretty compelling argument – and its description of the complex social and economic forces influencing compensation also serves as a reminder that there’s likely no magic bullet that will “fix” executive pay.

– John Jenkins

A recent Equilar blog reviewing S&P 500 CFO pay trends notes rising overall compensation and a strong push for performance based awards. Median CFO compensation has grown substantially in recent years, reflecting the growing responsibilities of senior financial executives:

The chief financial officer (CFO) role has evolved alongside overall economic growth, political dynamics and corporate governance reform, and these financial executives are paramount to every company’s success. In response to these growing responsibilities, median CFO reported total compensation in the S&P 500 increased 18.7% from $2.9 million in 2011 to $3.4 million in 2015.

As overall CFO compensation has grown, so has the portion of pay that’s at-risk:

A stronger push toward pay for performance brought on by shareholder scrutiny, Dodd-Frank and Say on Pay has led to more CFO pay being at-risk, as opposed to fixed. Overall, 78.7% of S&P 500 companies granted performance awards to their CFOs in 2015, up from 64.1% in 2011. Meanwhile, time-based options awards became less prevalent over the study period, with the number of companies offering this type of equity decreasing by nearly 20%.

– Broc Romanek

Here’s the registration information for our popular conferences – “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference” – to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.

Discounted Rates – Act by September 9th – Only Two Weeks Left!: 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 reduced rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by September 9th to take advantage of the 10% discount.

– Broc Romanek

Yesterday, as the latest in Corp Fin’s disclosure effectiveness project, the SEC posted an 8-page “request for comment” on the disclosure requirements in Subpart 400 of Regulation S-K. The scant press release named three topics in particular – management, certain security holders & corporate governance – but it didn’t use the buzz word of Item 402’s executive compensation (probably because the title of Subpart 400 in S-K is “management, certain security holders & corporate governance”).

Item 402 is indeed open for comment! In fact, Item 402 was already open for comment as the SEC made clear in the S-K concept release that it welcomed comments on all aspects of S-K (even though that release focused on business & financial information). Some from the SEC have been saying that Item 402 is a lower priority for the disclosure effectiveness project.

Maybe if enough folks request changes in the 402 area, the SEC will propose something there – but I doubt it given the magnitude of that undertaking & the fact that Item 402 got its last overhaul a mere decade ago (which is why Item 402 is a lower priority for this project). The “request for comment” notes that the comments received will assist the SEC in “carrying out the study of Regulation S-K required by Section 72003(a) of the FAST Act” – that’s probably why the SEC decided to issue this “request for comment” on top of the earlier S-K concept release (as Ning Chiu explains in her blog).

As I have blogged before, we have no idea why this is a “request for comment” – and not a “concept release” – but given the short length of the “request for comment,” the difference must allow the SEC to avoid the regulatory trappings of a full-blown concept release.