Here’s something that Meredith blogged yesterday on TheCorporateCounsel.net:
We got word last week that NYSE sent an email blast to listed issuers regarding the new clawbacks listing rules. After reminding companies that issuers must adopt a Dodd-Frank clawback policy no later than December 1st, NYSE noted that it is also requiring each listed issuer to confirm via Listing Manager, by December 31st, either that it adopted a policy by December 1st or that it is relying on an applicable exemption. NYSE plans to require such confirmation for initial listing applications as well for companies applying to list their securities on or after October 2nd. The email noted a subsequent communication with more details would be sent in the fourth quarter.
On a related note, at the “Dialogue with the Director” session on Friday at the ABA’s Business Law Section Fall Meeting, Corp Fin Director Erik Gerding was asked who should field interpretive questions regarding Dodd-Frank clawback requirements — the SEC or the stock exchanges. While “both” may not be the answer we wanted to hear, Erik’s suggestion — that interpretive questions first be directed to the relevant stock exchange and then its response be conveyed to the Commission — makes a lot of sense.
We’ll be discussing what you need to do about clawback policies – and Dave Lynn will also be interviewing Erik Gerding about the latest Corp Fin updates – at our upcoming “Proxy Disclosure & 20th Annual Executive Compensation Conferences“. The conferences are coming up virtually next week, September 20th – 22nd.
We’ve got a terrific lineup of speakers who will be delivering practical takeaways & action items. Here’s the 3-day, action-packed agenda for both Conferences, which are bundled together (here’s the agenda specifically for the Executive Compensation Conference). Make yourself look good by getting insights direct from the experts! And for the lawyers out there, get CLE credit while you’re at it! This year, we are also offering on-demand CLE credit for the archive replays, so you can come back for that after the Conference if you miss any sessions.
A recent Bloomberg article noted that SEC Chair Gary Gensler is taking longer than his predecessors to finalize the plethora of rules on his agenda. Out of the rules that have already been proposed, over two dozen are still in the queue to be adopted.
Moreover, the article points out that the “human capital management” proposal – which is on the Commission’s “Reg Flex” Agenda for the latter part of this year – could be dead on arrival if it isn’t published for comment soon. Here’s an excerpt from the article that explains why:
A federal law, the Congressional Review Act, would let a Republican-controlled House and Senate in the next Congress quickly revoke regulations the SEC and other agencies issued in late 2024, if they avoid a presidential veto.
Gensler only has to finalize the climate rule within about a year to sidestep the Congressional Review Act, however. Other agenda items are more likely to encounter that challenge if they’re in the earlier stages of the rulemaking process.
One such agenda matter is a plan to require companies to report more details about their workforces. The SEC is looking to release a formal proposal by October. But the agency usually takes at least a year to turn a proposal into a rule, increasing the risk of a Republican Congress easily overturning it under the CRA.
During the “Dialogue with the Director” session on Friday at the ABA’s Business Law Section Fall Meeting, Jay Knight, Chair of the Federal Regulation of Securities Committee, asked Corp Fin Director Erik Gerding about the SEC’s forthcoming proposals. Erik didn’t comment on timing, but he did note that for all of the SEC’s rulemaking, the focus is on helping investors get the information they say the need in order to make investment & voting decisions.
It just so happens that investors will be weighing in on what they need when it comes to human capital at next week’s meeting of the SEC’s Investor Advisory Committee. The agenda allocates 20 minutes to discussing a recommendation on human capital management disclosure. I’m not in the forecasting business, but at the very least, this shows that the topic is still moving along – and has reached the stage of the IAC making an advisory recommendation. Stay tuned.
We’ve got a terrific lineup of speakers who will be delivering practical takeaways & action items – essential info for all of us who are grappling with the SEC’s ambitious regulatory agenda. Here’s the 3-day, action-packed agenda for both Conferences, which are bundled together (here’s the agenda specifically for the Executive Compensation Conference). Make yourself look good by getting insights direct from the experts! And for the lawyers out there, get CLE credit while you’re at it!
The Conferences are virtual, September 20th – 22nd. You can also add registration for our “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271.
This recent Fenwick alert discusses considerations when establishing a new 401(k) plan. I almost missed this one — with our focus on executive and director compensation, we don’t often highlight complications with widely available plans unless we’re discussing something specific to executives, like NEO compensation disclosures. But this alert has a detailed discussion on shielding the compensation committee from liability that warrants some attention here.
It recommends that companies avoid delegating responsibilities for the 401(k) plan to the compensation committee. Instead, a 401(k) plan committee should be established, and individuals with appropriate experience and sufficient time to handle day-to-day administration should serve on that committee. Here are specific considerations from the alert related to that practice:
– Ensure that the compensation committee charter, the board resolutions and the 401(k) plan documentation do not name the compensation committee as the plan administrator or charge it with responsibility for either performing fiduciary functions and/or delegating fiduciary responsibility to individuals and/or a committee appointed by the compensation committee. Empowering the compensation committee with fiduciary oversight responsibilities with respect to a 401(k) plan can potentially result in the entire board and its members being held personally liable as ERISA co-fiduciaries in the event of a 401(k) plan litigation.
– The entire board should retain sole responsibility to appoint and remove 401(k) plan committee members. This responsibility should not sit with the compensation committee. The board’s fiduciary responsibilities should be limited to this function and high-level monitoring of the actions taken by the 401(k) plan committee in fulfillment of the 401(k) plan committee’s duties. The board’s non-fiduciary responsibilities should be limited to making decisions from a business perspective, such as concerning plan design and the budget allocated to the plan.
– Ensure that the various plan documents that address the delegation of fiduciary responsibility are clear and consistent. Inconsistent documentation can result in co-fiduciary liability of the board and/or its members for the actions or inactions of other plan fiduciaries.
Beyond the board’s role, the alert also makes some helpful suggestions regarding the composition of the 401(k) committee, the frequency of meetings, involvement/observation by in-house counsel, indemnification and insurance coverage.
Executive compensation practices, disclosures, and the regulatory environment have evolved considerably since Dodd-Frank, and Say-on-Pay has become a key process for shareholder-board dialogue. With the new Pay-versus-Performance disclosure requirement and soon-to-be-effective listing standards on clawback policies, all the generally applicable executive compensation rules mandated by Dodd-Frank will be in place. We are entering a new era for Say-on-Pay!
Tune in tomorrow at 2 pm Eastern for the free webcast – “The Evolution of Say-on-Pay: Where We Started; Where We Are Now; What’s Next” – co-hosted by ISS Corporate Solutions and CCRcorp – to hear ISS Corporate Solutions’ Cameron Abrahams O’Neill & Valeriano Saucedo, yours truly and our own John Jenkins as moderator, as we examine the history of Say-on-Pay, current trending topics in executive compensation, a look back at the 2023 U.S. Proxy Season, and the future of pay-for-performance and pay practices.
Cybersecurity has been on my mind lately. As Dave blogged on TheCorporateCounsel.net, in late July the SEC adopted amendments to its rules that will require periodic disclosures regarding cybersecurity risk management, strategy and governance, as well as current disclosure on Form 8-K of material cybersecurity incidents. The compliance timeline is tight — with periodic disclosures required starting with annual reports for fiscal years ending on or after December 15, 2023 and the 8-K incident disclosure required starting December 18, 2023 (for non-SRCs) — so the rules require immediate attention.
It’s not a topic we often blog about here, but this WSJ article about another cyber development got my attention. Companies are starting to use cybersecurity metrics in their annual bonus plans for top executives.
The practice is inching up among the biggest U.S. companies, with nine of the Fortune 100 companies linking a portion of short-term bonuses for named executive officers to a cyber goal in 2022, according to new research from accounting and consulting firm EY. That is up from zero in 2018, EY said. ISS ESG, the data arm of proxy-advisory firm Institutional Shareholder Services, found 86 of the more than 15,000 public companies it tracks globally did so last year.
The article cites Equifax as an example of a company that incorporates cyber goals, which was part of a multiyear plan following the company’s 2017 breach. Here’s a snippet from Equifax’s 2023 CD&A:
In 2018, the Committee added a cybersecurity performance measure as one of the metrics under the AIP, in order to promote a Company-wide focus on data security and reinforce our overall security program goals. Non-financial goals have proven to be an effective tool for motivating executives to execute on our key strategic initiatives.
Given the significant progress we made in strengthening our data security program, the positive feedback we received from shareholders on incorporating cybersecurity performance in the executive compensation program and the continued importance of prioritizing cybersecurity in our strategic priorities, beginning in 2021, the Committee determined to move cybersecurity from a single Companywide AIP performance metric to a required component of the non-financial goals that comprise up to 20% of the AIP opportunity for all bonus-eligible employees.
As a result, Equifax employees who participate in the AIP have a mandatory security-focused performance goal as part of their individual objectives, which is designed to support the highest level of performance under our global cybersecurity awareness program. Employees are required to identify one or more pre-determined security goals, established by the Security Department, that are most appropriate to their role and scope of responsibility.
I’m loving this Forbes article from friend of the site Bruce Brumberg. Kids these days might think that acronyms were invented for texting, but the stock compensation crowd knows there is a whole language around awards & tax! The sheer number of definitions in Bruce’s article made me LOL. Here’s a sampling:
WYSIWYG: Types Of Grants
SBC: stock-based compensation, pay that involves company stock rather than cash.
ESO: employee stock option, a right that a company awards to purchase a specific number of its shares for a specified price (exercise price) and period (often up to 10 years). Employee stock options are different from listed or exchange-traded options.
NQSO or NSO: nonqualified stock option, the basic and most common type of ESO. NQSOs do not qualify for special tax treatment under the Internal Revenue Code (IRC).
He goes on to detail ISO, RSU, PSU, LTI, ESPP… you get the picture. Then this:
OMG: Taxes
OI: ordinary income. Salary, wages, interest, and types of income taxed at ordinary tax rates. Most forms of stock compensation generate ordinary income, and tax withholding applies.
CG: capital gain, income that arises from the sale of a capital asset, such as the sale of shares acquired from your equity comp. Capital gains and losses may be short-term (held 12 months or less) or long-term (held longer than 12 months). Short-term capital gains (STCG) are taxed at the rates of ordinary income. Long-term capital gains (LTCG) are taxed at 0%, 15%, or 20%, depending on your taxable income during the year.
AMT: alternative minimum tax. The alternative minimum tax system runs parallel to ordinary income tax. Under the AMT system, your alternative minimum taxable income (AMTI) is similar in concept to adjusted gross income (AGI) for ordinary income tax. When you exercise ISOs and hold the shares beyond the calendar year of exercise, the spread is part of your AMTI and you can trigger the AMT, depending on a number of other factors.
FICA: Federal Insurance Contributions Act. Together, Social Security and Medicare taxes are called FICA taxes because they are collected under the authority of the Federal Insurance Contributions Act. You know them from your paycheck and the Form W-2 you use for your tax returns. FICA taxes, also know as the federal payroll taxes, apply when you exercise NQSOs or SARs and at the vesting of restricted stock and RSUs.
FMV: fair market value. The FMV of a company’s stock is used to determine the amount of taxable income to report for an exercise of NQSOs and SARs and for the vesting of restricted stock/RSUs. The FMV is also used to set the exercise price of stock options on the grant date.
IRC: The Internal Revenue Code, possibly the most complex tax system in human history, is the body of legislation that governs all federal taxation in the United States, including the taxes that apply to stock compensation. For example, IRC Section 422 governs the taxation of ISOs, while Section 423 sets the rules for tax-qualified ESPPs.
Again, it goes on, and I imagine it’ll come in handy the next time my tax/benefits colleagues are throwing around their IRC lingo. Bruce’s “Stock Compensation Glossary” is also available in app form, with a “term of the day” & quiz!
We’re nearing the end of August, and that means asset managers are sharing voting details for the past year. BlackRock shared in its 4th annual “voting spotlight” that where it did not support director elections or management proposals, compensation was one of the most common reasons. In the Americas, the BlackRock Investment Stewardship team voted against 243 directors based on compensation concerns.
In addition, both BlackRock & Vanguard have confirmed that they still aren’t fond of special awards. From BlackRock:
As we note in the BIS Global Principles, we are not supportive of one-off or special bonuses unrelated to company or individual performance. Where discretion has been used by the compensation committee or its equivalent, we look to the board to disclose how and why the discretion was used, and how the adjusted outcome is aligned with the interests of shareholders.
As a result, BIS supported executive pay at fewer companies that made out-of-plan awards in 2022-23 proxy year because, in our view, these awards were increasingly unrelated to company performance and the financial interests of long-term shareholders like our clients.
At one company’s 2023 annual meeting, the Vanguard-advised funds voted against Say on Pay because of concerns about the relative size of the pay program and the lack of performance conditions in a one-time equity grant. The CEO’s five-year employment agreement provided for a $50 million special award of time-vesting restricted stock units. When evaluating these awards, we generally look for rigorous performance criteria as a requirement for vesting, as opposed to only the passage of time.
If the title of this blog looks familiar, it’s because investors & proxy advisors said pretty much the same thing last year. BlackRock also commented earlier this year on how complex performance-based pay programs may be leading to more special awards – and I shared points to think about before heading down the “special award” path.
All that said, both asset managers were generally supportive of say-on-pay and other management compensation proposals over the past year. Vanguard also had this to say about the SEC’s new “pay versus performance” rule:
During engagements, company leaders and directors shared how they planned to modify their disclosures to improve the usefulness of their compensation-related disclosures to shareholders. On behalf of the Vanguard-advised funds, we support consistent, comparable disclosure.
I’ve blogged before about calls by Norges Bank to simplify executive pay by doing away with performance programs and simply linking it to long-term share ownership. Some experts think this approach makes more sense than using ESG metrics – or any metrics, for that matter.
This year, although Norges recognizes that few have embraced this structure, it tightened its voting policies to identify companies that are “most materially misaligned” with the firm’s preferred approach. This resulted in voting against say-on-pay at 1 in 10 companies during the first half of the year! Here’s an excerpt from their recent 23-page voting report:
Overall, we voted against at least one proposal – including director elections – at nearly 6 percent of all companies based on concerns about CEO pay. The most common concerns were the use of one-off awards like ‘golden hellos’, awards that are paid out over too short a timeframe, and/or cases where we considered the board had not taken enough steps to respond to concerns from shareholders regarding pay in previous years.
We developed a new framework for assessing US packages, leading us to vote against CEO pay at 82 companies where we assessed the package to be unduly costly and where we had significant concerns about structure, out of a total of 142 US companies where we voted against CEO pay.
Here’s more detail on the new framework:
We are using a new framework for evaluating US packages, looking at absolute value, peer comparisons and dilution. We do not vote against pay packages based on size alone. Our aim is to identify the structures we view as most problematic and misaligned with long-term value. For 2023, we applied this stricter assessment to packages worth 20 million dollars or more, leading us to vote against more than half of packages above this level.
Norges notes that it also voted against a small number of directors based on its assessment that the board did not adequately respond to a say-on-pay vote that received low support in the prior year.
Meredith blogged last week about trends in measurement techniques for ESG incentives. This 16-page memo from FW Cook – which looks at ESG incentive trends in the largest 250 US-listed companies in the S&P 500 – reinforces that there’s no universal approach. But there are common considerations & risks to consider (the memo lays out 9 of those).
What most caught my eye, though, was an acknowledgement that comp committees are pausing to make sure that what they’re doing in this area is having a positive business impact. Here’s what the memo says about emerging trends:
Our study observed a leveling-off of ESG measure prevalence, a possible signal that the momentum to emphasize ESG performance in incentive compensation has indeed slowed. This year’s study findings also align with our experience in seeing less focus and “airtime” in Compensation Committee meetings on this topic over the past year for reasons including:
• More challenging economic conditions turning focus to business improvements,
• Less pressure from institutional investors,
• Internal pushback regarding goal-setting calibration,
• Increasing politicization of the topic, and
• Board member/investor concerns over “greenwashing.”
Companies that already include ESG measures are assessing how to respond to pressure from institutional investors and proxy advisory firms to include more rigorous/quantifiable measures and increase disclosure transparency around performance achievement and corresponding impact on company value. Many large institutional investors have been vocal that they do not hold strong views about whether ESG measures should be included in compensation plans. Investors are primarily concerned with how ESG measures are implemented, expecting clear targets that have a strong tie to long-term strategy while also being measurable and transparent.
The memo explains that proxy advisors are similarly focused on ESG incentives being tied to pre-determined, quantitative targets that are transparently disclosed, rather than requiring or expressly encouraging ESG metrics.
The challenge for companies is finding a way to balance investors’ desire for transparent, quantitative metrics with the unique challenges presented by committing to numerical targets for DEI & other multi-faceted ESG-related incentives.
We’ll be discussing this important topic at our upcoming “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which are coming up virtually September 20th – 22nd. In particular, the panel “ESG Metrics: Beyond the Basics” – with Orrick’s JT Ho, Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, and Pay Governance’s Tara Tays – will delve beyond the surface of “ESG is good” vs. “ESG is bad” and give practical guidance on what to do at this juncture. The conference is coming up quickly and so are year-end comp committee meetings! So register now. You can sign up online, by emailing sales@ccrcorp.com, or by calling 1-800-737-1271. Plus, you can bundle this conference with our “2nd Annual Practical ESG Conference” and get even more step-by-step guidance to conquer the “ESG overwhelm” that many of us our facing. That event is happening virtually on September 19th.
As Liz blogged last year, nearly all big companies use long-term incentive plans to encourage performance over periods greater than one year – usually three. But sometimes macro forces or a company’s specific circumstances make setting appropriate and rigorous multi-year performance goals extremely challenging. This Thoughtful Pay Alert from Compensia discusses best practices for adding PSU awards to long-term incentive programs, particularly for life sciences and technology companies. The alert notes that companies will sometimes choose to use a one-year performance period but will usually structure the awards in one of the following ways so that they still encourage long-term performance and retention:
– a one-year performance period with any earned shares subject to an additional time-based vesting requirement of anywhere from two to four years to increase the focus on long-term value sustainability and retention; or
– multiple (typically three consecutive) one-year performance periods with the performance objectives for each period to be established at the beginning of each year and any earned shares “banked”; to be distributed to executives at the end of the entire three-year performance period.
Per Compensia’s research, when a company uses a single, one-year performance period, the additional time-based vesting period is typically three (36%) or four (36%) years for life sciences companies and three years (81%) for technology companies.