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.
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.
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.
A few days ago, ISS announced the latest release of its governance ratings product – which also was renamed to “QualityScore” from “QuickScore.” Here’s the 139-page technical document. Not much new in the executive pay area – here’s one:
Does the company employ at least one metric that compares its performance to a benchmark or peer group (relative performance)? This factor will consider whether the company has a pre-established metric in any short- or long-term incentive plan that is measured relative to an external group such as a peer group, index or competitors.
In addition to board diversity and board refreshment areas being added, one area that appears to have been updated involves proxy access – with subscribers now being able to view the details of a company’s proxy access bylaw provision.
Last year, ISS included a question on proxy access, but that was “zero weighted” & was included for informational purposes only. This year, it counts. The QualityScore will give credit to a company for having proxy access – but the existence of any “problematic provisions”- e.g. counting mutual funds under common management as separate shareholders under the aggregation limit, requiring a pledge to hold shares past the annual meeting date, providing the board with broad & binding authority to interpret the proxy access provision or combinations of other problematic provisions – could be deemed sufficient to “nullify the proxy access right” & result in no credit being given. See this Gibson Dunn blog for a larger summary of the changes.
As noted in this blog from Davis Polk’s Ning Chiu, the data verification period began yesterday – and runs through November 11th. QualityScores will be published on November 21st.
By the way, with this rebranding to “ISS QualityScore,” it now has made more name changes than Jefferson Airplane. My favorite was GRid 2.0…although CGQ was nice…
Here’s an excerpt from this blog by Allen Matkins’ Keith Bishop:
Companies often include a choice of law provision in their equity and other compensation plans. Some companies include a choice of law in the award agreement, either in lieu of, or in addition to, the plan document. Specifying applicable law helps to ensure that plans are consistently interpreted and applied. Uniformity may be particularly important for companies with employees in multiple jurisdictions. Occasionally, I see award agreements or plan documents that also include a choice of forum clause. Companies often specify Delaware law and courts even when they have no employees in Delaware – apparently because the they are incorporated in Delaware.
A recently enacted California statute will soon cast a shadow on these provisions. New California Labor Code Section 925 will prohibit an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:
– Require the employee to adjudicate or arbitrate outside of California a claim arising in California.
– Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
Any provision of a contract that violates this statute will be voidable by the employee. If a provision is rendered void at the request of the employee, the matter must be adjudicated in California and California law must govern the dispute. In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees. The law will apply to any contract entered into, modified, or extended on or after January 1, 2017. There is an exception for contracts with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement.
Section 925 doesn’t expressly invalidate contractual provisions specifying non-California law. Such provisions are voidable (not void) and only when they deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
This legislation started life as a “spot bill”. A “spot bill” makes trivial changes to a statute as a placeholder for future substantive changes. The author amended the bill to prohibit choice of law and forum provisions in consumer contracts. After a Senate Judiciary Committee informational hearing in March, the author amended the bill again to add similar prohibitions in employment agreements. Later, the consumer contract prohibitions were dropped.
On October 11, the New York Department of Financial Services (the “NYDFS”) issued guidance, announced in a press release by Governor Andrew Cuomo, emphasizing that its regulated banking institutions must ensure that any incentive compensation arrangements tied to employee performance indicators are subject to effective risk management, oversight and control.
The NYDFS release provided that the guidance was prompted by the recent joint enforcement actions by the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Los Angeles City Attorney’s Office against Wells Fargo Bank for unsafe or unsound sales practices, including the unauthorized opening of deposit or credit card accounts. According to the NYDFS, the action against Wells Fargo demonstrates that misaligned incentive compensation, coupled with a lack of effective oversight and internal risk controls, may harm customers and adversely affect a banking institution’s safety and soundness.
Yesterday, ISS released draft policy changes for comment in 15 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 10th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).
For US companies, there are several significant proposals to be aware of:
Director elections:
1. Director election vote recommendations for directors at companies that impose undue restrictions on shareholders’ ability to amend bylaws:
– ISS proposes to amend its director election policy to include a provision to issue adverse vote recommendations on governance committee director elections where companies have placed “undue” restrictions on shareholders’ ability to amend the company’s bylaws.
– Examples of these restrictions include the outright prohibition on the submission of binding shareholder proposals, or share ownership requirements or holding periods in excess of SEC Rule 14a-8.
– Adverse vote recommendations will continue until the restrictions are completely lifted.
2. Director election vote recommendations for directors that have taken unilateral board actions or maintain unequal voting rights:
– ISS proposes to clarify its director election policy to state that, upon a company holding an IPO with a multi-class capital structure with unequal voting rights or other problematic governance provisions, ISS will generally issue adverse director vote recommendations unless there is a “reasonable” sunset provision on the unequal structure or the problematic provisions.
– The key change is that ISS will no longer consider the results of shareholder votes on problematic features when issuing vote recommendations; instead, ISS will only consider the inclusion of “reasonable” sunset provisions.
US-listed cross-market companies (companies listed in the US, but incorporated outside):
1. General share issuance proposals at companies listed in the US, but incorporated outside the US:
– ISS proposes to recommend in favor of general share issuance authorities up to 20 percent of currently issues capital, as long as the duration of the issuance authority is reasonable and clearly disclosed.
2. Executive compensation proposals at companies listed in the US, but incorporated outside the US:
– ISS proposes to implement, on a case-by-case basis, US policy in the evaluation of all compensation proposals on the ballots of companies listed in the US, but incorporated elsewhere.
– For proposals where there is no applicable US policy, the ISS policy from the country requiring the ballot item will be used.
– For clarification, say-on-pay proposals from most markets will be evaluated under the US Management Say-on-Pay voting policy.
Here’s news from this memo from Frederic W. Cook & Co.:
The Financial Accounting Standards Board (FASB) on October 5, 2016 directed its staff to draft a proposed Accounting Standards Update (ASU) for vote by written ballot that would narrow the scope of modification accounting in FASB Accounting Standards Codification (ASC) Topic 718 (Topic 718). The proposed change would be beneficial for companies and compensation professionals because it would permit some changes to outstanding share-based payment awards to escape the complexities and potential incremental costs of accounting for modifications under Topic 718.
A member asked that I conduct a poll on how long it will take FASB to generate a draft – since they sometimes move like a glacier. What’s your guess?
Today is the “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference”; yesterday was the “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” (video archive is now posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with 180 pages of talking points & practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”