The SEC is now moving fast on the last of its Dodd-Frank rulemakings! Yesterday, as noted in this press release, it released additional analysis from its “DERA” (former nickname of “RiskFin”) Division related to its pay ratio proposal. Comments on this new analysis are due by July 6th (coincidentally, the same deadline as the P4P proposal). As I blogged yesterday, the SEC has become more cautious during its rulemaking process since a 2011 court decision struck down part of the SEC’s proxy access rule after finding the economic analysis was incomplete – so the practice of releasing additional economic analysis for public comment is becoming fairly common.
In addition to reading this review of the SEC’s new analysis (& this MarketWatch piece), check out my example that helps illustrate the SEC’s new findings:
– If the standard deviation of compensation (meaning the variability among positions) is 55%, and the exclusion of non-US, part time and seasonal jobs results in the elimination of 20% of the workforce from the calculation, the ratio would decrease by 15%
– Thus, a ratio of 300:1 would become 255:1
– If the standard deviation is only 25% – and the exclusion removes 20% of the workforce from the calculation – the impact is only 6.5%, thus the 300:1 ratio might drop to 281:1
Today is the last day left at the reduced rate. The SEC’s new pay-for-performance & hedging proposals – not to mention the coming clawback proposal and final pay ratio rules – are causing a stir – and you should prepare now. These rules will be among many topics that Corp Fin Director Keith Higgins & other experts will be talking to at our popular Conferences — “Tackling Your 2016 Compensation Disclosures” — to be held October 27-28th in San Diego and via Live Nationwide Video Webcast on TheCorporateCounsel.net. Act by the end of today, Friday, June 5th for the phased-in rate to get more than 20% off.
The full agendas for the Conferences are posted — and include the following panels:
– Keith Higgins Speaks: The Latest from the SEC
– The SEC’s Pay-for-Performance Proposal: What to Do Now
– Creating Effective Clawbacks (& Disclosures)
– Pledging & Hedging Disclosures
– Pay Ratio: What Now
– Proxy Access: Tackling the Challenges
– Disclosure Effectiveness: What Investors Really Want to See
– Peer Group Disclosures: The In-House Perspective
– The Executive Summary
– The Art of Communication
– Dave & Marty: Smashmouth
– Dealing with the Complexities of Perks
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Investors Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 75 Minutes
Two days ago, Senator Elizabeth Warren wrote this 13-page letter to SEC Chair White expressing her unhappiness with the pace of the SEC’s rulemaking. Warren isn’t happy – and even used the Reg Flex Agenda as one reason why she feels that White hasn’t been truthful with her (see my blog from two days ago about how that is meaningless). Pretty wild stuff.
Though the SEC has recently reported it now expects to complete the rule by next spring, Ms. Warren said that deadline—revealed in a list of agency projects published by an arm of the White House—appears to contradict what Ms. White said in a face-to-face meeting last month with Ms. Warren. In that meeting, the SEC chairman predicted the SEC would complete the rule “by fall,” Ms. Warren wrote. “I am perplexed as to why you told me personally that the rule would be completed by the fall of 2015 when it appears that you were or should have been aware of additional delays,” Ms. Warren wrote.
The big news comes from this WSJ article, which says that the SEC will “soon” propose the clawback rules required by Section 954 of Dodd-Frank. If it happens as rumored, this surely is Exhibit A that the SEC’s Reg Flex Agenda is meaningless (as I hammered home in this blog yesterday) – because the SEC’s new Reg Flex Agenda had an April ’16 date for this activity. Here’s my quote in the WSJ piece:
Broc Romanek, a former SEC attorney who edits the websites CompensationStandards.com and TheCorporateCounsel.net, said the SEC should make sure it implements the new clawback requirements in a way that makes practical sense for companies and allows them discretion in determining whether it is economically efficient for them claw back pay, given legal, administrative or other expenses that may be involved. “It would not be ideal if a company is forced to spend more resources clawing back than [what] they would get in return,” he said.
The critical issue is whether the proposed clawback rules will be principles-based or prescriptive (remember how the recent P4P rule proposal was proscriptive, which was surprising to some). “Principles-based” means “just disclose what you have that you treat as a clawback.” And there are lots of tough questions about how a financial misstatement impacts compensation that may be indirectly – but not directly – based on financial performance, such as stock options (ie. how much is the stock price influenced by a restatement, as compared to performance criteria that is tied to EPS which is much more directly influenced). Remember this blog from last year: “Clawbacks & The New Revenue Recognition Rules: On a Collision Course?”
Whether the proposal is prescriptive or principles-based will in turn impact how much the rules drive a certain type of conduct – the more prescriptive, the more the SEC is making a judgment call and companies will have to come in line with what the SEC determines to be encompassed. And remember as to timing, the SEC’s rulemaking will just be the first step – because SEC will be proposing rules that the stock exchanges then have to adopt standards to implement…
I continue to see so many people citing the SEC’s Regulatory Flexible Agenda as an indication for when the agency will propose and adopt rules. Don’t believe that – it’s not true! As I’ve blogged about before, all kinds of whacky and aspirational stuff makes it into the Reg Flex Agenda, which then winds up as part of the OMB Unified Agenda (in this blog, Keith Bishop explains what the OMB Unified Agenda is). And then the timelines for proposing & adopting rules are rarely accurate.
The internal process at the SEC (and other agencies) is complicated – maybe one day I’ll explain it in detail (eg. pet projects get thrown in that have zero chance of moving; timelines thrown in simply to fill out the form). But trust me, it has NEVER been a reliable source for when things might move at the SEC. But go ahead and keep citing it if it makes you happy – even though it will likely prove you wrong in the end (as it does over and over). I find it funny how the Reg Flex Agenda is now a newsworthy item after being completely ignored for decades.
I’ve posted a bunch of memos on this development that’s covered in this blog by William Tysse:
In a Chief Counsel Memorandum issued last month, the IRS concluded that an executive retention arrangement violated Section 409A despite the employer’s efforts to correct the arrangement before the retention bonus vested.
The arrangement in question provided for a retention bonus that vested after 3 years of employment and was then payable over the two years after vesting. However, under the terms of the arrangement, the employer had the discretion to accelerate the payments and pay them in a lump sum on the first anniversary of the vesting date. The employer, recognizing that the arrangement failed to comply with Section 409A’s anti-acceleration rule, attempted to correct the arrangement by amending it to remove the employer’s ability to accelerate the payments. The amendment was made in the same taxable year in which the retention bonus vested, but before the actual vesting date.
The IRS ruled that the correction was ineffective because it occurred in the same year in which the retention bonus vested. The ruling is consistent with the IRS’s proposed Section 409A income inclusion regulations, which provide limited relief for corrections of Section 409A errors that occur before the year in which the deferred compensation vests, provided the correction is not part of pattern or practice to avoid Section 409A. Interestingly, the employer in question may have been able to correct the error in this case under the more formal correction procedure for 409A document failures set forth in Notice 2010-6.
The memorandum is a reminder that the options for correcting Section 409A problems after arrangements have been put in place are limited and few, and therefore retention agreements, long-term incentive agreements, employment agreements, severance agreements, change in control agreements and the like, all of which may be subject to Section 409A, should be reviewed for Section 409A compliance issues prior to adoption.
The latest memo from Pay Governance is unique and bears reading. Here’s the key findings:
1. Sustainable investing now represents approximately 11% of the invested assets under management in the US.
2. Some sustainable investors or shareholder activists file shareholder resolutions to influence corporate environmental and social (E+S) policy, and certain E+S proposals have garnered shareholders support levels at or above 30%.
3. ISS recommends “for” about 70% of such proposals, but voting investors appear to diverge from ISS with generally low levels of support on most proposals.
4. Additionally, ISS appears to recommend “for” proposals requesting additional E+S reporting and “against” proposals that would place operational limitations on corporate issuers.
5. Shareholder proposals seeking to require the inclusion of E+S metrics in executive incentive plans are almost always rejected by ISS and the majority of shareholders.
6. Despite the fact that some companies do maintain limited E+S metrics in annual incentive plans, executive incentive programs continue to focus on financial metrics that are direct drivers of shareholder value creation.
ISS is evaluating equity plan ballot proposals under a new “scorecard” approach this season, which we previously discussed. Through May 12, ISS has supported 85.9% of equity plan proposals covered under its S&P 500 and Russell 3000 models, higher than in past years. In 2014, of the 808 companies in those indexes that were reviewed, a little over 80% received favorable recommendations for their plans.
About 300 companies evaluated this year met the minimum thresholds. The primary reasons the plans faced “against” recommendations include excessive plan costs, which were often reason alone to warrant a negative view.
In terms of vote results, only 11% of companies that have held meetings received less than 80% of votes in favor, a significant decrease from the prior year. No plan has yet failed.
Of note, as ISS Corporate Solutions looks across equity plan proposals, is that five years seems to be the median plan duration. Plans with duration in excess of six years receive no points under the scorecard approach. In addition, a majority of companies have adopted at least a three-year minimum period between the grant date and vesting date for awards to CEOs, which provides for partial credit under the ISS scorecard. Longer time periods are becoming more common for stock appreciation awards and time-based full value awards, but are still rare for performance-based awards.
In addition, more than 62% of companies met the ISS criteria for having a clawback policy, which must be more restrictive than the Sarbanes-Oxley clawback that covers only the CEO and CFO. Full points are awarded for a policy that allows recovery from all or most equity awards in the event of certain financial restatements.
Finally, few large companies are permitting practices such as repricing and have liberal change-in-control vesting.
Also check out this blog about a new study about when the SEC should require unbundling…
CEO pay comes up a lot in the news. The stories often include someone complaining that it’s too high. Then there’s someone on the other side, defending CEO pay. But that’s usually that’s where the stories stop.
On today’s show: an actual story about CEO pay, with a beginning, middle, and an end. It’s the story of two guys who tried to cut the pay of the CEO at a small pneumatic tool company on Long Island.
Meanwhile, this Bloomberg piece entitled “Executive Pay Gluttony” covers some of the history of executive pay…
We have posted the transcript for the popular webcast: “P4P: What Now After the SEC’s Proposal.” We have also posted over 50 memos on the SEC’s proposal – including this one from Orrick with a sample table and disclosures…