Here’s a blog by Gibson Dunn’s Ron Mueller, Sean Feller and Krista Hanvey (also see these memos):
On March 30, 2016, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2016-09, which amends ASC Topic 718, Compensation-Stock Compensation, to require changes to several areas of employee share-based payment accounting.
In an effort to simplify share-based reporting, among other things, the update revises requirements in the following areas:
– Minimum Statutory Withholding: The new standard permits share-based withholding up to the maximum statutory tax rates, whereas currently an employer may only withhold up to the minimum statutory tax rate without causing the award to be classified as a liability.
– Accounting for Income Taxes – The revised standard will require recording the tax effects of share-based payments at settlement or expiration on the income statement, whereas ASC 718 previously provided for tax benefits in excess of compensation cost and tax deficiencies to be reported in equity to the extent of any previous excess benefits, and then to the income statement. Under the new rule excess tax benefits are also to be classified with other operating income tax cash flows as an operating activity.
– Forfeitures – Whereas accruals of compensation cost are currently based on the number of awards that are expected to vest, the revised standard allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.
– Intrinsic Value Accounting for Private Entities: Under the update, nonpublic entities will be permitted to make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value.
With respect to share-based withholding on equity awards, ASC Topic 718 currently provides that equity awards cannot provide for share withholding in excess of an employer’s minimum statutory withholding requirements in order to qualify for equity treatment under the rule. As revised, the rule will now permit withholding up to the maximum statutory tax rate without causing the award to be classified as a liability. In addition, cash paid by an employer when directly withholding shares for tax-withholding purposes should now be classified as a financing activity.
For public companies, the new rules will become effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within such annual period. For all other entities, the new rules will take effect for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.
In light of the new accounting rules, companies will want to review their equity compensation plans and award agreements to determine if they will allow for withholding up to the statutory maximum. In connection with this, issuers that are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, should review their award agreements with any Section 16 officers and, in order to obtain the exemption under Rule 16b-3 for share withholding in excess of amounts that were previously allowed, may need to provide for compensation committee approval of any new terms that allow for share-based withholding above what was previously authorized.
The big debates on CEO pay tend to focus on one thing: How high it is.
But in a recent essay in the Harvard Business Review, two London Business School professors say the real focus shouldn’t just be on the size of CEO pay, but on how it’s structured. Their argument: Research has shown, among other things, that performance incentives don’t really work for the complex nature of the jobs CEOs do, that high bonuses or stock grants can lead to unethical or even fraudulent behavior, and that lofty awards can crowd out the “intrinsic” motivation of wanting to do a good job for its own sake. Their radical solution: Don’t pay CEOs based on performance. Just give them a fixed salary instead.
We caught up with one of the authors, LBS professor Freek Vermeulen, who wrote the essay with his colleague Dan Cable, by phone while he was in Germany on a ski trip with his family. Our conversation with Vermeulen, which has been edited for length and clarity, is below.
So can you sum up your argument for those who haven’t seen the piece?
For most CEOs — and actually most top senior executives — their pay depends to a very large extent on some measure of performance. And I mean a very large extent in comparison to the rest of us. Most of us get a fixed salary and maybe a Christmas bonus. But for CEOs, it’s actually nothing unusual for 60, 70 or 80 percent of their remuneration to be dependent on performance. But we have quite a bit of research on the effects of that performance-based pay, and it isn’t very pretty. We know from research that it doesn’t have a very positive effect.
Before you get into the research, what’s the core of what you’re saying?
We know from this research that [performance-based pay] isn’t that effective. Others have been saying we need to change the measures of performance. But based on what we know from research, we say no. Actually, what you should do is something radically different. What you should do is not pay them for performance at all, but give them a fixed salary.
Here’s the intro from this Willis Towers Watson memo about a proposed settlement in the Espinoza lawsuit (this is the Facebook case that I’ve blogged about before and Mike Melbinger has blogged about a few times – but it’s worth blogging about again, particularly since the court approved the settlement today):
A recent settlement agreement in litigation challenging the compensation paid to a company’s outside directors is attracting considerable attention. The settlement in the Espinoza case (C.A. No. 9745, Del. Ch.) was filed in a shareholder lawsuit alleging that a company’s board had breached its fiduciary duties, committed corporate waste and caused unjust enrichment by paying excessive compensation to non-employee directors. Among its most notable provisions, the proposed settlement calls for the company to obtain shareholder approval of the pay of its outside directors.
Here’s the key takeaways from the memo:
This lawsuit and the proposed settlement serve as yet another reminder that companies should be diligent in developing and periodically evaluating their non-employee director compensation programs. Recall that two other recent Delaware cases (Seinfeld v. Slager and Calma v. Templeton) also involved challenges to non-employee director compensation. In both of those cases, the Delaware Chancery Court denied summary judgment and required the cases to be reviewed under the entire fairness standard (instead of the business judgment rule) because the companies’ equity plans did not impose “meaningful limits” on director compensation. (For more on those cases, see “Delaware Ruling on ‘Excessive’ Director Pay Offers Guidance for Avoiding Future Litigation,” Executive Pay Matters, June 4, 2015.)
While Calma and Seinfeld focus on the content of the shareholder-approved plan (i.e., were there meaningful limits on director compensation in the plan such that shareholders could understand the magnitude of compensation to be paid), Espinoza focuses on the approval process.
While the factual circumstances surrounding Espinoza were unique, the settlement still serves as a reminder that companies should evaluate the limits in their plans with respect to the amount of compensation that directors can award to themselves. If the plan does not impose any “meaningful limits” on director compensation, the company should consider adding them. Companies may also consider whether benchmarking their director cash and equity compensation programs against their peer group is warranted and, if so, they need to be certain that the peer group is appropriate.
Furthermore, companies should review their committee charters and make changes to the process for evaluating and approving director compensation, if necessary. Shareholder ratification of a self-dealing transaction (such as when directors award themselves pay) must be accomplished formally by a vote or by written consent in order to shift the standard of review from the entire fairness standard to the more favorable business judgment rule.
This Semler Brossy report notes that – so far this year – 129 Russell 3000 companies have had say-on-pay votes and 93% have passed with above 70% support. Two companies (1.6%) have failed say-on-pay: Nuance Communications and Tetra Tech. Proxy advisory firm ISS has recommended ‘against’ say-on-pay proposals at 9% of companies it has assessed thus far in 2016. The report also examines proxy access vote results in the Russell 3000.
– 88% disclose ownership guidelines or holding requirements and 61% disclose both
– Most companies with ownership guidelines established accumulation periods, with 5 years being the most common
– 84% base ownership requirements on a multiple of base salary that varies by position, with 5x or 6x being the most common for CEOs
– Holding requirements most often require retention of company stock acquired through exercise of stock-based awards only until stock ownership guidelines are satisfied
Yesterday, Corp Fin issued this CDI 301.01 about how a proxy card should “clearly identify and describe the specific action on which shareholders will be asked to vote” for both management & shareholder proposals. The CDI provides six examples of what not to do. This is one of those examples that doesn’t satisfy Rule 14a-4(a)(3): “A shareholder proposal on executive compensation.” The CDI doesn’t clarify whether it applies to VIFs – but it likely does. Here’s an excerpt from this Gibson Dunn blog:
The CD&I does not indicate that a shareholder proponent’s title or description of its own proposal is necessarily determinative of how that proposal should be identified on the company’s proxy card. For example, if a shareholder captions her proposal as “Proposal on Special Meetings,” that description presumably still may not satisfy Rule 14a-4(a)(3). Thus, a company remains ultimately responsible for determining how a shareholder proposal is described on the company’s proxy card.
Because the Staff’s interpretation was based on Rule 14a-4, it applies only to how proposals are addressed on a company’s proxy card. Nevertheless, we would expect the Staff to hold similar views in interpreting the requirement under Rule 14a-16(d)(6) that a company’s Notice of Internet Availability contain a “clear and impartial identification of each separate matter intended to be acted on.” Similarly, to the extent that companies are involved in reviewing and commenting on the form of voting instruction card that is distributed to street name shareholders, best practice is to conform the descriptions of proposals on the voting instruction card to the descriptions on the company’s proxy card. Companies also are subject to the general standard of avoiding misleading statements when identifying or describing proposals within the body of the proxy statement.
Notably, the SEC does not have a rule on the form and content of the state law notice that appears at the front of companies’ proxy statements. Thus, if a company has determined that a generic description of shareholder proposals is sufficient for the notice page of the proxy statement under state law, such as stating that the shareholder meeting agenda includes a “shareholder proposal, if properly presented,” the C&DI does not prevent that practice. As a result, the description (if any) of those proposals on the notice page may differ from how each proposal is identified on the proxy card.
Coincidentally, this follows my blog on TheCorporateCounsel.net last week about this topic…
This study – “Controlled Companies in the Standard & Poor’s 1500: A Follow-up Review of Performance & Risk” – was commissioned by the IRRCi and performed by ISS. It finds that controlled companies generally underperformed non-controlled firms over all periods reviewed in terms of total shareholder returns, revenue growth, and return on equity, according to a new study. The study also finds that average CEO pay is significantly higher at controlled companies with multi-class stock structures: three times higher than that at single-class stock controlled firms and more than 40 percent higher than average CEO pay at non-controlled firms. In addition, director tenure typically runs longer, board refreshment is generally slower, and boardrooms are less diverse at controlled companies.
As I blogged before, the Nasdaq proposed a change to its listing rules that, if adopted, would require listed companies to publicly disclose “golden leash” arrangements. For technical reasons, the SEC rejected the original rule proposal – but the Nasdaq filed a revised proposal last week (see this Dorsey memo and Cooley blog). The newly-proposed rule is substantively similar to the previously-proposed rule – and if the newly-proposed rule is approved by the SEC, it will become effective on June 30, 2016. Page 18 of the new proposal indicates that the SEC will establish the due date for comments.
Interestingly, footnote 9 (previously footnote 5), remains largely intact. That footnote indicates that Nasdaq is considering whether to propose additional requirements regarding third-party payments to directors and candidates, including whether these directors should be prohibited from being considered independent under Nasdaq rules or prohibited from serving on the board altogether. The resubmission adds that a proposal on this topic, if any, would be made in a separate rule filing. The resubmission also notes that, under the subjective prong of the definition of independent director, any “individual having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director” is not considered to be independent. Implicit in this addition to the footnote is the view that, even if Nasdaq elects not to seek to enhance the definition of independence in this regard, directors may already be obligated to consider this type of third-party payment when assessing director independence.