Here’s interesting analysis from Radford’s Terry Adamson:
Pop Quiz: How many stocks are included in the S&P 500? How about the NASDAQ 100?
It might seem obvious at first, but as of Wednesday, April 2, 2014, the answers are 501 and 101 respectively. When Google made the decision to split its stock on Wednesday into Class A (GOOGL) and Class C (GOOG) shares, it created two distinct publicly traded equities that both, both sit in the S&P 500 and NASDAQ 100 indices. S&P provides detail on their thinking to list both classes of stock in this recent press release and NASDAQ 100 components are summarized here.
Now you might be asking, why is this so important? Well, here’s where the complexity ratchets up for your indexed relative total shareholder return (RTSR) plan. A large number of our PeerTracker clients use plans that compete against components of the NASDAQ 100 or the S&P 500, either as a “closed group” (the components at the beginning of the performance period) or as an “open group” (the components at the end of the performance period). In both cases, clients now face a troubling theoretical dilemma– you are competing against the same company twice.
For technology companies, this might mean more incentive to compete with Google! However, more seriously, and especially for non-technology companies tracking performance against the S&P 500, it could mean the difference between meeting or exceeding performance thresholds, and it could alter the very definition of plans where performance is based on rankings within an index.
Going forward, companies with active RTSR plans face several options:
– Keep it simple, do nothing and compete against both Google equities; or
– Carve out one of the Google equities entirely from your plan, and disclose this decision in award agreements.
Under any scenario, companies now face some previously unforeseen communications and technical challenges. For clients using RTSR plans with custom peer groups that include Google, the new class of Google shares is likely less of an issue. Plan documents will most likely reference the new Class C shares by name, GOOG, meaning companies could opt to compete against only that equity.
Naturally, this is an exceedingly rare situation; but, it could prompt more companies to select bespoke custom peer groups for their next round of RTSR awards.
In November 2013, ISS reported on an escalating phenomenon of boards adopting a one-size-fits-all bylaw prohibiting any dissident nominees who had received third party compensation for standing as a candidate in a proxy contest–whether or not this compensation would have continued once the nominee was elected to the board–from being seated as a director.
It now appears that many of the boards which adopted this “one-size-fits-all” bylaw have taken these shareholder votes on directors as a referendum on boards’ unilateral adoption of the bylaw, and begun to respond.
Just prior to issuing the proxy statement for its 2014 annual meeting, the board of Schnitzel Steel rescinded the bylaw entirely. The Rockwell Automation board rescinded its bylaw two days after a third of shareholders withheld votes from directors at the 2014 annual meeting. Sixteen other issuers have now followed suit. In aggregate, more than half the companies which adopted this bylaw have rescinded it in the four months since the Provident meeting, while only one additional issuer–CST Brands–has adopted it.
The ability of so many boards to adopt and then quickly rescind the bylaw raises the question whether those boards were, in fact, so firmly committed to the idea in the first place. Interestingly, appeal of the bylaw does not appear to lie in the direct experience of having faced an activist campaign: only nine of the 34 adopters (37 percent) had even faced a public activist campaign over the past six years. Just one–International Game Technology–had gone through a proxy contest, and yet the bylaw, had it been in place, would not have barred any of the three dissident nominees in that contest from service on the IGT board.
[Broc’s note: Earlier this week, CII send this letter to the SEC regarding more disclosure when it comes to 3rd-parties paying directors. Also see my 2-minute video on this topic.]
Here’s an interesting blog by Steven Kittrell of McGuireWoods (Mike Melbinger has blogged about this too):
There is little guidance about whether and how an executive who has compensation clawed back can take a tax deduction for the amount repaid. A new case reported by BNA today involving an insider trading forfeiture may show one path to a deduction for claw backs too. The case involves Joseph Nacchio, the former CEO of Qwest. After being convicted of insider trading, Nacchio forfeited $44.6 million in 2007 that he had realized from the insider stock sales in 2001. He amended his 2007 return to deduct the $44.6 million under Code Section 165 as a loss and also claimed a credit of $18 million under Code Section 1341 for the taxes originally paid on the stock sales. In denying summary judgment for either side, the Court of Federal Claims held that Nacchio might be entitled to the credit under Code Section 1341 if he subjectively believed that he had a claim of right to the forfeited gain.
Applying Code Section 1341 to a compensation claw back, most executives would have had a subjective belief that the incentive compensation was appropriately payable in the original year of payment. The IRS might challenge that belief in some cases, such as a claw back due to an accounting restatement based on actions by the executive.
The ability to get a credit for taxes paid in an earlier year on income that has been clawed back would soften the blow of the claw back to an executive. This also seems like the right tax result.
In this 20-second video, Cap’n Cashbags – a CEO – just hanging out with his fellow CEO pals who serve on his board’s compensation committee – talks about enhancing his pay package:
In her blog about the AgFeed fraud action, Francine McKenna explores what is meant under Section 304 of Sarbanes-Oxley when it comes down to clawbacks under that section, particularly what is the meaning of a “required” restatement under that law…
Here are the latest survey results about deferred compensation election timing:
1. Do you have a deferred compensation plan, which includes company stock, for outside directors?
– Yes – 77%
– No – 23%
2. Do you have a deferred compensation plan, which includes company stock, for executives?
– Yes – 48%
– No – 52%
3. Our deadline for allowing outside directors to make stock-based elections for the following year, if your fiscal year-end is December 31 is:
– October 1 – October 31 – 11%
– November 1 – November 15 – 5%
– November 15 – November 30 – 16%
– December 1 – December 15 – 21%
– December 15 – December 31 – 37%
– Earlier in year – 11%
4. Our deadline for allowing executives to make stock-based elections for the following year, if your fiscal year-end is December 31 is:
– October 1 – October 31 – 15%
– November 1 – November 15 – 0%
– November 15 – November 30 – 23%
– December 1 – December 15 – 15%
– December 15 – December 31 – 23%
– Earlier in Year – 23%
5. Do you allow your outside directors to make such an election near year-end for the following year, when they likely have access to year-end earnings projections and results?
– Yes – 50%
– No – 50%
6. Do you allow your executives to make such an election near year-end for the following year, when they likely have access to year-end earnings projections and results?
– Yes – 43%
– No – 57%
Here’s analysis from Mike Kesner of Deloitte Consulting: Many of you probably have heard that one of Coca-Cola’s shareholders is opposed to the company’s new stock plan share authorization, as noted in this article. While I disagree with the arguments made by the shareholder, I believe this is a cautionary tale about fungible share requests.
– Coca-Cola is requesting that shareholders approve a 500 million share request.
– The number of shares being requested represents 11.3% of shares outstanding, which is incredibly high compared to most large cap company share requests.
– Coca-Cola explains that they have been granting 60-73 million shares per year the last 3 years, and that the new authorization should last 4 years.
What they did not explain clearly is that based on a fungible share ratio of 5:1, and the current mix of options and RSUs, a grant of 60 million shares is the equivalent of around 156 million shares (given the higher stock price, they will probably grant less than 60 million shares). They could have also explained the total shares expected to be awarded will be closer to 240 million shares (or 5%-5.5% of shares outstanding, which is much more reasonable). The 500 million shares is a fiction – it assumes all LTI awards are granted as options, which is highly unlikely.
The fungible share idea works well when dealing with ISS’ Shareholder Value Transfer methodology, but some institutional shareholders only look at simple dilution when evaluating the reasonableness of a new share request.
Thus, Coca-Cola retained the flexibility to switch their LTI awards to 100% stock options and may have inadvertently alarmed shareholders that they intend on granting 11.3% of shares to employees, when in fact that is not the case. Instead, they could have asked for 240 million shares (with a sub-limit on restricted shares of 40% or 96 million shares) without setting off alarm bells about excessive dilution.
Following the theme of my wildly popular videos of “Cool Things in This ’14 Proxy Statement” (see this Prudential one, GE one & Coke one), Equilar sent along this
from Verizon focused on their use of a graphic to demonstrate the payout of their incentive award depending on their performance against their peer group. They’ve used this disclosure before, but it is certainly an interesting way for a company to showcase the payout amounts.
We have posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.”
Meanwhile, the fine executive compensation lawyers at Winston & Strawn in Chicago – Mike Melbinger & his gang – play homage to the old Hasbro TV commercial in this 40-second video: