Late last week, the Corp Fin Staff issued nine new Regulation S-K Compliance and Disclosure Interpretations and updated one existing Regulation S-K Compliance and Disclosure Interpretation to provide guidance regarding the pay versus performance disclosure requirements. Here’s what Dave shared about these CDIs on TheCorporateCounsel.net:
The new CDIs address the following areas:
Question 128D.14 – Awards granted in fiscal years prior to an equity restructuring (such as a spin-off) that are retained by the holder must be included in the calculation of executive compensation actually paid.
Question 128D.15 – The change in fair value of awards granted prior to the date of an issuer’s IPO must be based on the fair value of those awards as of the end of the prior fiscal year for purposes of determining executive compensation actually paid (not based on other dates, such as the date of the IPO).
Question 128D.16 – In accordance with FASB ASC Topic 718, the effect of a market condition should be reflected in the fair value of share-based awards with such a condition. In addition, for purposes of the table required by Item 402(v)(1) of Regulation S-K, market conditions should also be considered in determining whether the vesting conditions of share-based awards have been met.
Question 128D.17 – The fair value of an award that did not meet vesting conditions during the year because the performance or market conditions were not met, but for which there is still potential for the award to vest in the future, should not be subtracted under Item 402(v)(2)(iii)(C)(1)(v) of Regulation S-K because it failed to vest in the current year.
Question 128D.18 – If retirement eligibility is the only vesting condition for a stock or option award, that condition would be considered satisfied for purposes of the pay versus performance disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible.
Question 128D.19 – A performance-based vesting condition is considered satisfied when the applicable condition is achieved; however, a provision which requires the compensation committee to certify the level of performance attained should be analyzed to determine if it creates an additional substantive vesting condition, such as an employee does not vest in the award unless and until they remain employed through the date such certification occurs, in considering whether the award is vested for purposes of the Item 402(v) of Regulation S-K disclosures at the end of the fiscal year-end.
Question 128D.20 – An issuer may satisfy the requirement in Item 402(v)(2)(iii)(C)(3) of Regulation S-K with respect to the fair value of all equity awards being computed in a manner consistent with the methodology used to account for share-based payments under GAAP by using a valuation technique that differs from the one used to determine the grant date fair value of the equity-based awards that are classified as equity in the financial statements, as long as the valuation technique would be permitted under FASB ASC Topic 718, including that it meets the criteria for a valuation technique and the fair value measurement objective.
Question 128D.21 – To comply with Item 402(v)(2)(iii)(C)(3) of Regulation S-K, the methodology used to compute the fair value amounts of all equity awards must be consistent with the methodology used to account for share-based payments in the financial statements under GAAP. It is not acceptable to value these awards as of the end of a covered fiscal year based on methods not prescribed by GAAP.
Question 128D.22 – If the assumptions disclosure required by Item 402(v)(4) would involve confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm for the issuer, the issuer may omit such information to the extent such information would be subject to the confidentiality protections of Instruction 4 to Item 402(b) of Regulation S-K. However, the issuer must provide as much information responsive to the Item 402(v)(4) requirement as possible without disclosing the confidential information, such as a range of outcomes or a discussion of how a performance condition impacted the fair value. In addition, consistent with Instruction 4 to Item 402(b), the issuer should also discuss how the material difference in the assumption affects how difficult it will be for the executive or how likely it will be for the issuer to achieve undisclosed target levels or other factors.
The Staff also updated Regulation S-K CDI Question 118.08, which addresses the approach for satisfying Item 10(e) of Regulation S-K and Regulation G with respect to non-GAAP financial measures that are presented in pay-related circumstances in the proxy statement. The same principles articulated in Question 118.08 continue to apply, where an issuer can refer to annex or cross-reference the non-GAAP financial measure disclosure in the Form 10-K, but the Staff updated the language in the CDI to replace references to “the relationship between pay and performance” with “how pay is structured and implemented to reflect the registrant’s or a named executive officer’s performance.”
The DOJ and SEC have been very clear that they want to make bad actors pay for unethical behavior. This Farient Advisors blog discusses the flip-side: how companies can pay good actors for ethical behavior. After all, an ounce of prevention is worth a pound of cure. Here’s an excerpt:
Overall, about 10% of large cap S&P 500 companies incorporate E&C measures in their executive compensation programs. These measures are most used in highly regulated sectors such as financials (50% prevalence), health care (33% prevalence), and energy (25% prevalence). While most large-cap companies have E&C programs, they may not be considered such a key part of their corporate or sustainability strategy that they are sufficiently material as a component of incentive compensation.
The blog goes on to note that there’s a lot of variability in how companies incentivize culture, and some approaches may be less effective than others:
E&C measures vary from those that promote compliance versus others that penalize for violations. Edison International will cut short-term incentive award payouts for executives in the event of any major non-compliance event at the company. Interestingly, Signature Bank reported using a measure for maintaining a “culture of high ethical standards” as part of its strategic priorities in its 2022 incentive plan, just months before it collapsed in the wave of bank failures that followed the downfall of SVB.
E&C measures are typically used qualitatively in STI plans usually as part of a broader scorecard and using both upward and downward payout leverage. About one-fifth (21%) of companies using an E&C measure apply only downward payout leverage — i.e., the measure will only shift payouts downward and cannot increase them. While 68% of companies use E&C measures with upward and downward payout leverage, the measures are typically part of a scorecard that includes other metrics, and it is unlikely that the E&C measures individually are providing much (if any) upward leverage.
The notion of compliance metrics hasn’t escaped the regulators, who also have some ideas about what that could look like. About a year ago, the DOJ adopted a policy that says prosecutors may give credit to companies that provide incentives to promote compliance. Here’s an excerpt from the DOJ’s memo:
Affirmative incentives include, for example, the use of compliance metrics and benchmarks in compensation calculations and the use of performance reviews that measure and reward compliance-promoting behavior, both as to the employee and any subordinates whom they supervise. When effectively implemented, such provisions incentivize executives and employees to engage in and promote compliant behavior and emphasize the corporation’s commitment to its compliance programs and its culture.
Despite that carrot, and despite the underlying business benefits of promoting ethics & compliance, governance-related compensation metrics that would support those goals tend to get less attention than newer flavors of metrics for environmental & social goals. Maybe that’s because ethics seems like a difficult thing to quantify. If you’re looking to overcome that hurdle, check out Farient’s blog for a chart with specific examples of metrics and other good info.
In 2022, more than 70% of S&P 1500 CEOs achieved target or above-target payouts for annual incentives, according to a new analysis from ISS Corporate Solutions. This trend has held steady for half a decade – with more than half of CEOs achieving payouts at or above target in two consecutive years during that period. Here are other key findings from ICS’s announcement:
– Company size significantly impacted the value of payouts, with S&P 500 companies reporting a median of $2.3 million in incentive payouts last year, compared with $925,000 for those in the S&P 600. Despite the difference in absolute dollars, however, each S&P 1500 market cap grouping has exhibited similar payout growth, with median payouts growing 19 percent since 2018.
– Over 90 percent of S&P 1500 companies CEOs with an annual incentive award were issued a payout of at least threshold – the minimum payout that can be achieved – during the study period, save for 2020 during the pandemic.
– A near 30-point spread in payouts exists between the industry segments with the highest and lowest payouts. In 2022, only 57 percent of CEOs in the Automobiles & Components industry achieved at or above target payouts, while 85 percent of chief executives in the Financial Services industry achieved that feat.
Item 402 of Regulation S-K requires companies to discuss how difficult or how likely it will be for the company to achieve target performance only if the target levels aren’t disclosed. Nevertheless, many companies indicate in their CD&A that target goals are intended to be “rigorous.” ICS questions whether this terminology is accurate when targets are consistently achieved – and says that the “best practice” payout range is 50-60%.
This analysis is a good reminder to choose your words carefully. But it also raises questions about what constitutes “rigor.” When it comes to forecasting year-over-year growth or performance improvements, it is possible that the targets are challenging even if they tend to be achievable. Moreover, CD&As often indicate a philosophy of attracting & retaining executives while also paying for performance. I’m curious whether any of you have thoughts on the best practice payout range and the rationale behind it. If you step back and look at the big-picture goal of motivating executives to consistently deliver strong performance, and consider the “Type A” personalities involved, I’m not sure that orchestrating below-target payouts will do the trick.
I previously noted that the SEC’s Investor Advisory Committee would meet September 21st to consider recommendations on human capital management disclosure. Here’s an excerpt from the recommendations that the IAC approved at the meeting:
First, the IAC recommends that the Commission strengthen current Item 101(c) under Regulation S-K pertaining to human resources disclosures by requiring disclosure of the following:
1. The number of people employed by the issuer, broken down by whether those people are full-time, part-time, or contingent workers;
2. Turnover or comparable workforce stability metrics;
3. The total cost of the issuer’s workforce, broken down into major components of compensation; and
4. Workforce demographic data sufficient to allow investors to understand the company’s efforts to access and develop new sources of talent, and to evaluate the effectiveness of these efforts.
Second, the IAC recommends that the Commission consider narrative disclosure, in the Management Discussion & Analysis, of how the firm’s labor practices, compensation incentives, and staffing fit within the broader firm strategy. Such a discussion would address what portion of labor costs management views as an investment and why, including how labor is allocated across areas designed to promote firm growth (e.g., R&D) and those necessary to maintain current operations rather than increase sales revenue (e.g., compliance). Our recommendation here is consistent with the recommendation put forward in a June 2022 rulemaking petition submitted by former SEC commissioners and senior officials as well as professors of accounting and securities law.
The IAC is an Advisory Committee – this recommendation doesn’t obligate the SEC to take action one way or another – so I can’t speculate on whether the rules that the Commission is expected to propose will track with these recommendations. But the SEC likely will consider these recommendations as a data point in its calculus of the type of data that is needed for investor protection (with “needed” being a controversial word here).
This Cooley blog shares questions from Commissioner Hester Peirce and other details from last week’s meeeting – along with context on how these recommendations fit with FASB work and other developments over the past few years. At our “Proxy Disclosure & 20th Annual Executive Compensation Conferences,” our panelists discussed these recommendations and the compensation committee’s evolving role in human capital oversight. They also talked about HCM complexities and disclosure controls for HCM-related data. Visit our “Human Capital Management” Practice Area for checklists and other resources, and remember that you can still register for access to our Conference archives (and get on-demand CLE credit) if you weren’t able to attend.
I blogged a couple weeks ago on TheCorporateCounsel.net that Corp Fin posted a “Dear Issuer” letter to flag common XBRL deficiencies that the Staff is noticing. One of the reasons the Staff issued the comment letter at this time is because of the new pay versus performance tagging requirements and its impression that investors will be using this data. Here are the two sample comments that highlight where required XBRL tags are being missed:
– Pay versus Performance: Disclosure under Regulation S-K Item 402(v) must be in Inline XBRL, in accordance with Item 405 of Regulation S-T and the EDGAR Filer Manual. Please ensure that you have provided the appropriate Inline XBRL tagging for all the required Item 402(v) data points.
– Pay versus Performance: Refer to the [relationship disclosures] graph. Although it is permissible to combine one or more sets of relationship disclosures under Regulation S-K Item 402(v)(5) into one graph, table, or other format, note that you must still provide separate XBRL tags for each required item. Please ensure that you have provided the appropriate Inline XBRL tagging for all the required Item 402(v) data points.
At our 20th Annual Executive Compensation Conference on Friday, our “SEC All-Stars” discussed the complexities of XBRL tagging requirements creeping into proxy statement disclosures – and the consequences of missing them. The SEC’s “Semi-Annual Report to Congress on Machine Readable Data for Corporate Disclosures” points out that both Corp Fin and the Enforcement Division are using machine readable data. The Appendix to the Report shows that Schedule 14A/14C now require tags for these items:
• Disclosure required by Item 402(v) of Regulation S-K (pay versus performance) must be tagged in Inline XBRL.
• Disclosure required by Item 402(w) of Regulation S-K (registrant’s action to recover erroneously awarded compensation) must be tagged in Inline XBRL.
• Disclosure required by Item 402(x) of Regulation S-K (registrant’s policies and practices related to the grant of certain equity awards close in time to the release of material non-public information) must be tagged in Inline XBRL.
• Disclosure required by Item 408(b)(1) of Regulation S-K (registrant’s insider trading arrangements and policies) must be tagged in Inline XBRL.
• Filing fee exhibits must be tagged in Inline XBRL.
We are wrapping up Conference week! Today is our “20th Annual Executive Compensation Conference” – Wednesday & Thursday were our “2023 Proxy Disclosure Conference.” Both conferences are paired together, and they’ll also be archived for attendees until next September. You can still register to view today’s event! Email sales@ccrcorp.com or call 1-800-737-1271. If you miss these conferences or our “2023 Practical ESG Conference,” you can purchase access to the archives (and, for the Proxy Disclosure and Executive Compensation Conferences, you may be able to earn CLE credit for watching on-demand sessions as well). Just email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that. Here’s more info for people who are attending:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform, then follow the “Proxy Disclosure/Exec Comp” tab to see the agenda for today, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the conference platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. If you have any other questions about accessing the conference, please email Victoria.
– How to Watch Archives & Access Transcripts: If you registered to attend the Conference through CCRcorp, you will be able to access the conference archives on the conference platform next week, and unedited transcripts will be available beginning about 1-2 weeks after the event. If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP. Archives and transcripts will be available on-demand until September 20, 2024, so they’ll be available for you to reference as you navigate challenging proxy season issues well after the live Conferences have concluded.
– How to Earn CLE for Live Sessions: We are applying for up to 16 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these CLE FAQs carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts approximately every 20-30 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– New this Year! On-Demand CLE: We will be offering on-demand CLE credit for the session replays, in states where that is available. There are some nuances to receiving that credit, so make sure to check out the on-demand CLE FAQs that follow the general CLE FAQs in order to be able to take advantage of that.
– Thanks To Our Sponsors! Thank you to our gold sponsors, Fredrikson and Morrison & Foerster, our silver sponsor, Kirkland & Ellis, and our media partner, Newsfile! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Please visit their pages!
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform, then follow the “Proxy Disclosure/Exec Comp” tab to see the agenda for today, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the conference platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. If you have any other questions about accessing the conference, please email our Operations Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to Watch Archives & Access Transcripts: If you registered to attend the Conference through CCRcorp, you will be able to access the conference archives on the conference platform next week, and unedited transcripts will be available beginning about 1-2 weeks after the event. If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP. Archives and transcripts will be available on-demand until September 20, 2024, so they’ll be available for you to reference as you navigate challenging proxy season issues well after the live Conferences have concluded.
– How to Earn CLE for Live Sessions: We are applying for up to 16 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these CLE FAQs carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts approximately every 20-30 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– New this Year! On-Demand CLE: We will be offering on-demand CLE credit for the session replays, in states where that is available. There are some nuances to receiving that credit, so make sure to check out the on-demand CLE FAQs that follow the general CLE FAQs in order to be able to take advantage of that.
– Thanks To Our Sponsors! Thank you to our gold sponsors, Fredrikson and Morrison & Foerster, our silver sponsor, Kirkland & Ellis, and our media partner, Newsfile! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Please visit their pages!
It is not too late to register for our Conferences today! You can sign up for today’s “2023 Proxy Disclosure Conference” and tomorrow’s “20th Annual Executive Compensation Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271. If you miss these conferences or our “2023 Practical ESG Conference,” you can still purchase access to the archives (and, for the “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences,” may be able to earn CLE credit for watching on-demand sessions as well). Just email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that.
– How to Attend: We have emailed a direct access link for the Conferences to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform, then follow the “Proxy Disclosure/Exec Comp” tab to see the agenda for today, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the conference platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. You can also email Victoria if you have any other questions about accessing the conference.
– How to Watch Archives & Access Transcripts: If you registered to attend the Conference through CCRcorp, you will be able to access the conference archives on the conference platform next week, and unedited transcripts will be available beginning about 1-2 weeks after the event. If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP. Archives and transcripts will be available on-demand until September 20, 2024, so they’ll be available for you to reference as you navigate challenging proxy season issues well after the live Conferences have concluded.
– How to Earn CLE for Live Sessions: We are applying for up to 16 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these CLE FAQs carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts approximately every 20-30 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– New this Year! On-Demand CLE: We will be offering on-demand CLE credit for the session replays, in states where that is available. There are some nuances to receiving that credit, so make sure to check out the on-demand CLE FAQs that follow the general CLE FAQs in order to be able to take advantage of that.
– Thanks To Our Sponsors! Thank you to our gold sponsors, Fredrikson and Morrison & Foerster, our silver sponsor, Kirkland & Ellis, and our media partner, Newsfile! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Please visit their pages!
It is not too late to register for our Conferences today! You can sign up for today’s “2023 Proxy Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271. If you miss these conferences or our “2023 Practical ESG Conference,” you can purchase access to the archives (and, for the “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences,” may be able to earn CLE credit for watching on-demand sessions as well). Just email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that.
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Practical ESG Agenda” tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone.
If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the Conference Platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. If you have any other questions about accessing the conference, please email our Operations Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: Conference attendees will be able to access the archives of the “2023 Practical ESG Conference” on the conference platform next week. Unedited transcripts also will be available there, beginning about 1-2 weeks after the event.
– Thanks To Our Sponsors! Our sponsor, Morrison Foerster, helped make our “2023 Practical ESG Conference” possible, and we are proud and grateful to have their support. Please visit their page!
It’s not too late to register for our Conferences today. You can sign up for today’s “2023 Practical ESG Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271. You can still sign up online for our “2023 Proxy Disclosure Conference” & “20th Annual Executive Compensation Disclosure Conference” – or you can register via email or phone. Remember, you can also still bundle the conferences together to get a discounted rate!
As Liz highlighted this spring, investors seem to be evaluating equity plan proposals more critically, and, more recently, I blogged that, per Glass Lewis, repricings may have been partly to blame. This recent Semler Brossy alert gives another reason for the low support (and high failure rates) among the Russell 3000 in 2023:
Importantly, the bar for passing ISS’ EPSC has meaningfully increased over the last decade, with a recent increase in 2023. S&P 500 companies needed a score of 53 in 2015, but now require a 59 in 2023. The threshold score for non-S&P 500 companies in the Russell 3000 is slightly lower than for S&P 500 companies, but the required threshold score has similarly increased over the last few years.
Negative returns in the 2022 equity markets and increasing interest rates have also likely increased shareholders’ attention around a company’s burn rate. For companies with a depressed share price, more equity is needed to fulfill the dollar amount of equity promised to their employees. And, with higher interest rates, the cost of equity has risen for companies. These two external factors occurring simultaneously—alongside tightening EPSC guidelines—made 2023 a challenging year for equity plan requests.
What does this mean for companies that may need to seek approval of a new plan or a plan amendment next year?
The good news is that passing ISS’ EPSC means there is very little risk of failing an equity plan vote. There are always benefits to conducting shareholder outreach, but this process will not be a “make or break” action if a share request is sized within EPSC guidelines. The downside to sizing a request within EPSC guidelines is that the next equity plan request could come sooner than wanted.
The alert goes on to suggest some steps to take if the share request is above EPSC guidelines, including: understanding how the requested size compares to your significant shareholder guidelines as well as whether you fall below investor burn rate/dilution “caps;” having talking points and hard data showing responsible share usage, appropriate governance provisions and benchmarking of equity grants; using outreach meetings to get feedback and show responsiveness; and clearly telling your story in the proxy proposal with historical and expected future burn rate and any other important context.