Here’s a guest blog from J.T. Ho and Bobby Bee of Orrick, which passes along some helpful informal Staff guidance on the level of detail required in PvP footnote disclosure of “compensation actually paid”:
“A common question we have received from issuers as they prepare their new pay versus performance disclosures relates to just how much footnote detail is required to explain the calculation of “compensation actually paid.” Item 402(v)(3) of Regulation S-K requires (emphasis added):
“(3) For each amount disclosed in columns (c) [Compensation actually paid to PEO] and (e) [Average compensation actually paid to non-PEO named executive officers] of the table required by paragraph (v)(1) of this section, disclose in footnotes to the table each of the amounts deducted and added pursuant to paragraph (v)(2)(iii) of this section, the name of each named executive officer included as a PEO or in the calculation of the average remaining named executive officer compensation, and the fiscal years in which such persons are included. For disclosure of the executive compensation actually paid to named executive officers other than the PEO, provide the amounts required under this paragraph as averages.”
The question is whether the footnotes, as they relate to the pension value adjustments and equity award adjustments required by Item 402(v)(2)(iii)(B)(1) and Item 402(v)(2)(iii)(C)(1), could be limited to disclosing solely the aggregate amount calculated for pension value adjustments and equity award adjustments, respectively. This would be in lieu of having the footnotes disclose each of the amounts deducted and added, pursuant to sub-Items 402(v)(2)(iii)(B)(1)(i) – (ii) and sub-Items 402(v)(2)(iii)(C)(1)(i)-(vi), to arrive at such aggregate amounts, as presented in the “Model Pay Versus Performance Disclosure” from the Compensation Standards.com Special Session: “Tackling Your Pay Vs. Performance Disclosures.”
See an excerpt of the sample footnotes below, with the crux of the question whether issuers could disclose just the final adjustment columns, for each year, in their footnote disclosures:
Pension Value Adjustment Sample Footnote:
(x)….The amounts deducted or added in calculating the pension benefit adjustments are as follows:
Year
Service Cost
[402(v)(2)(iii)(B)(1)(i)]
Prior Service Cost
[402(v)(2)(iii)(B)(1)(ii)]
Total Pension Benefit Adjustments
[402(v)(2)(iii)(B)(1)]
2022
2021
2020
Equity Award Adjustment Sample Footnote:
(y)…The amounts deducted or added in calculating the equity award adjustments are as follows:
Year
Year End Fair Value of Equity Awards
[402(v)(2)(iii)
(C)(1)(i)]
Year over Year Change in Fair Value of Outstanding and Unvested Equity Awards
[402(v)(2)(iii)
(C)(1)(ii)]
Fair Value as of Vesting Date of Equity Awards Granted and Vested in the Year
[402(v)(2)(iii)
(C)(1)(iii)]
Year over Year Change in Fair Value of Equity Awards Granted in Prior Years that Vested in the Year
[402(v)(2)(iii)
(C)(1)(iv)]
Fair Value at the End of the Prior Year of Equity Awards that Failed to Meet Vesting Conditions in the Year
[402(v)(2)(iii)
(C)(1)(v)]
Value of Dividends or other Earnings Paid on Stock or Option Awards not Otherwise Reflected in Fair Value or Total Compensation
[402(v)(2)(iii)
(C)(1)(vi)]
Total
Equity
Award
Adjustments
[402(v)(2)(iii)
(C)(1)]
2022
2021
202
We spoke with a representative from the SEC’s Office of Small Business Policy in the Division of Corporation Finance, who confirmed the SEC expects each of the amounts identified in the tables above to be included as part of the footnotes.
Issuers and service providers alike should take note of this expectation in connection with preparing and reviewing the pay versus performance disclosures.”
I apologize for the funky formatting of the tables. I wasn’t trying to pay tribute to Wonder Woman’s invisible jet – there are supposed to be row and column lines in the tables. In fact, they’re on my draft. Your guess is as good as mine as to why those lines don’t show up in published version of the tables, although I can’t rule out my own lamentable lack of skill as a cause. For the record, the Word document that J.T. and Bobby sent was perfectly formatted. Also, this kind of thing never happened when Liz was in charge. . .
FW Cook recently issued its annual Director Compensation Report, which reviewed director comp at 300 companies in order assess market practices in pay levels and the structure of compensation programs. This excerpt provides an overview of some of its key findings:
At the median, 2022 total compensation increased modestly among mid-cap and large-cap companies compared to small-cap companies, where compensation increased slightly more: the small-cap median increased 4.9% from $185,833 to $195,000, the mid-cap median increased by +1.1% from $236,000 to $238,500, and the large-cap median increased +2.0% from $294,167 to $300,000.
Director compensation structure remains consistent with prior years, with an average mix of 60% equity and 40% cash compensation, across the entire sample. Small-cap companies tend to have the highest cash weighting (average of 44%) while large-cap companies tend to have the lowest (average of 36%).
Most companies have continued to simplify cash payments by replacing meetings fees with larger board annual cash retainers (only 8% of the total sample pay meeting fees). Most companies continue to use fixed-value equity award guidelines, with full-value stock awards remaining the most common form of equity compensation and providing the most consistent means to align director pay with shareholder interests. Equity grants most commonly vest immediately, or cliff-vest after one year.
The SEC’s adoption of the Dodd-Frank clawback rules triggered a process that will ultimately result in the adoption of new clawback listing standards by the NYSE & Nasdaq. That process may take up to a year, but this Bryan Cave blog provides some key dates that companies should keep in mind as they work to implement clawback policies that comply with the listing standards ultimately adopted by the exchanges:
The new Clawback Rules apply broadly to most companies with securities listed on a national securities exchange, including smaller reporting companies, emerging growth companies, foreign private issuers, controlled companies and debt‑only issuers. Issuers should consider the below dates when considering modification of existing clawback policies to conform to the rules, or in adopting initial clawback policies.
– January 27, 2023 (i.e., 60 days following Federal Register publication): Effective date of SEC’s Clawback Rules.
– February 24, 2023 (i.e., the last business day before the 90th day post-Federal Register publication): Deadline for NYSE, Nasdaq and other national securities exchanges (the “Exchanges”) to file with the SEC proposed listing standards that will require their listed companies to develop and implement compensation recovery policies that comply with the Clawback Rules.
– November 28, 2023 (i.e., one year following the Federal Register publication): Latest date by which the listing standards of an Exchange must become effective. Any incentive-based compensation that is granted, earned, or vested wholly or in part on or after such effective date must be subject to a compliant clawback policy. Moreover, the disclosure requirements under the Clawback Rules must appear in all of a company’s proxy statements, information statements, and annual reports filed on or after the effective date.
– January 27, 2024 (i.e., 60 days following the latest date on which the Exchanges’ listing standards may become effective): Latest possible date for a listed company to adopt a compliant clawback policy if the listing standards of the applicable Exchange were to become effective on the latest possible date (i.e., November 28, 2023); note that the deadline could be significantly earlier depending on exactly when the applicable listing standards become effective.
The blog recommends that companies without clawback policies begin preparing policies that conform the requirements laid out in the SEC’s rules and that those with clawback policies review them with a view to identifying necessary changes. In addition, employment agreements and compensation arrangements should be evaluated in order to determine whether adjustments are necessary, and the impact of clawback rules on the structure of existing compensation programs should be assessed.
I’ve blogged a few times about pay transparency laws, which are continuing to proliferate (see this Seyfarth memo about new requirements that go into effect in Washington beginning January 1st). This Aon memo gives an overview of the latest regulations – and recommends steps to prepare based on your company’s current bandwidth & resources. Here’s an excerpt:
First, think about the salary ranges themselves. Are ranges well established and ready to be shared both internally and externally? Some businesses already have established and well-maintained salary structures. In fact, 90 percent of companies surveyed by Aon said they at least have salary ranges in place.
– The quick fix: Spot check the market competitiveness for certain roles relative to your peer group.
– The better approach: Start with an updated job architecture to make sure you have jobs and people in the right roles in the first place, since that serves as the foundation of pay equity. You could also conduct an accelerated salary structure design initiative, which many total rewards teams are dropping everything to complete.
Next, consider existing employees’ positions in their salary ranges. Are they currently paid in a way your organization would be able to defend? When they ask to see the range of pay for their job, will it be easy to provide and explain where they are in the range — and why? Employee questions can quickly expose any real or perceived inequities.
– The quick fix: Take your prior pay equity analysis and come up with a list of employees who make significantly less than comparable peers. Once you identify those individuals, notify the manager and develop a plan for corrective actions.
– The better approach: Revisit your Pay Equity analysis with a focus on what it is you are paying for. Is it true that only fully proficient employees are paid above the midpoint? What else drives pay? Is it tenure or experience or education or reporting to the right manager?
Then, consider manager preparedness. How ready are managers to handle these tough questions from employees? Do all managers have a solid understanding of how the pay program works? Communication will be key.
– The quick fix: Provide managers with answers and talking points for tough questions and share your plan for tackling any pay equity issues.
– The better approach: Offer simulations and role play tough conversations to make sure your managers are answering difficult questions effectively. Ensure all people leaders are well educated on the process for setting and moving pay.
Finally, address the bigger philosophical question around transparency. Once companies comply with the laws in each jurisdiction, should they just treat everyone the same whether their state requires it or not? Or should organizations do the bare minimum as required?
– The quick fix: Ensure compliance with local pay transparency laws where necessary and develop plans in anticipation of further legislation.
– The better approach: Be a leader in the movement. Regardless of current requirements, take proactive measures: perform a pay equity analysis, identify existing gaps, revisit your job architecture and salary levels to improve your rewards programs, and implement continuing manager training. Even if your organization is not subject to specific pay transparency laws, lay the foundation for future disclosure and consider whether proactive disclosure makes sense for your business. For example, are your competitors disclosing salary ranges? Do leaders think it will be beneficial for talent acquisition efforts to have this level of pay transparency?
When the SEC adopted the new Dodd-Frank clawback rules back in October, I blogged about the two new checkboxes that the rules add to the Form 10-K cover page, and said:
Hopefully someone smarter than me will clarify, but it does not seem immediately clear from the release whether these checkboxes will be required for Form 10-Ks that are filed in 2023, after the SEC rule is effective but before companies have to make any other disclosure about policies.
Our members have continued to ask about this in our Q&A Forums over the past couple of months. It doesn’t make a lot of sense to require these checkboxes before the listing standards become effective and before the new clawback disclosures are required. To my knowledge, though, the Staff hasn’t come out with guidance to confirm that.
In the meantime, companies are trying to figure out how to handle the cover page in light of the rules being effective on January 27th. Please participate in this anonymous poll to share what you plan to do (and please email me if you’ve heard anything from the Staff!):
BlackRock Investment Stewardship is out with its its 2023 voting guidelines & Global Principles, which include sections on executive compensation. Here are a few things to note (also see this commentary from February):
– Goals, and the processes used to set these goals, should be clearly articulated and appropriately rigorous.
– BIS does not have a position on the use of sustainability-related criteria, but in our view, where companies choose to include them, they should be as rigorous as other financial or operational targets.
– Where compensation structures provide for a front-loaded award, we look for appropriate structures (including vesting and/or holding periods) that motivate sustained performance for shareholders over a number of years.
– When evaluating performance, we examine both executive teams’ efforts, as well as outcomes realized by shareholders. Payouts to executives should reflect both the executive’s contributions to the company’s ongoing success, as well as exogenous factors that impacted shareholder value.
– When evaluating special awards, we consider a variety of factors, including the magnitude and structure of the award, the scope of award recipients, the alignment of the grant with shareholder value, and the company’s historical use of such awards, in addition to other company-specific circumstances.
– Where executive compensation appears excessive relative to the performance of the company and/or compensation paid by peers, or where an equity compensation plan is not aligned with shareholders’ interests, we may vote against members of the compensation committee.
– In cases where there is a “Say on Pay” vote, BIS will respond to the proposal as informed by our evaluation of compensation practices at that particular company and in a manner that appropriately addresses the specific question posed to shareholders. Where we conclude that a company has failed to align pay with performance, we will vote against the management compensation proposal and relevant compensation committee members.
– BIS will generally support annual advisory votes on executive compensation.
One point that was made consistently at our fall conference and at our November “special session” on the pay vs. performance rules was that it will be much easier to use a line-of-business index for the TSR comparative disclosure, versus a “benchmarking” peer group. This blog from Infinite Equity shows just how cumbersome the disclosure can get when you have to manually re-balance the market weights and disclose year-over-year changes to a custom index.
This excerpt shares some pros & cons – check out the full blog for illustrative tables & calculations:
Given the additional calculations and complexities involved when creating a peer index some companies may be best served to select an in-line industry index based on the reasons laid out below:
– Rebalancing and weighting of peers is internally adjusted by the publishers of the index, i.e. no manual rebalancing
– If the peer group changes year over year the company does not need to track TSR performance against both the old and current index
In contrast selecting the CD&A peer group as the comparator group provides increased visibility and alignment with how executive compensation is determined, despite the additional rigor involved. However, ultimately it is up to the company to decide the approach that is best for them.
Yesterday, the SEC adopted amendments to “modernize” Rule 10b5-1 insider trading plans and related disclosures. Here’s the 2-page fact sheet and here’s John’s blog on TheCorporateCounsel.net about the primary aspects of the rule.
As contemplated by the proposal, the amendments also add a new subsection (x) to Item 402 of Regulation S-K, which creates new tabular disclosure requirements in Form 10-Ks, proxy & information statements for option awards that are granted close in time to the release of material nonpublic information. Item 402(x) also require narrative disclosure about related policies and procedures. Here’s more detail from the SEC’s adopting release:
– Narrative Disclosure: As proposed, the final rule will require companies to discuss their policies and practices on the timing of awards of stock options, SARs and/or similar option-like instruments in relation to the disclosure of material nonpublic information by the company.
– This includes how the board determines when to grant such awards (for example, whether such awards are granted on a predetermined schedule); whether, and if so, how, the board or compensation committee takes material nonpublic information into account when determining the timing and terms of an award, and whether the company has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation.
– Item 402(x)(1) does not require a company to adopt policies and practices on the timing of awards of stock options, SARs and/or similar option-like instruments if it has not already done so, or to modify any such existing policies.
– Tabular Disclosure: If, during the last completed fiscal year, stock options, SARs, and/or similar option-like instruments were awarded to an NEO within a period starting 4 business days before the filing of a periodic report on Form 10-Q or Form 10-K, or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information (including earnings information), and ending 1 business day after a triggering event, the company must provide the following information concerning each such award for the NEO on an aggregated basis in the tabular format set forth in the rule:
• The name of the NEO;
• The grant date of the award;
• The number of securities underlying the award;
• The per-share exercise price;
• The grant date fair value of each award computed using the same methodology as used for the registrant’s financial statements under generally accepted accounting principles; and
• The percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and one trading day following the disclosure of material nonpublic information.
– A Form 8-K reporting only the grant of a material new option award under Item 5.02(e) does not trigger the tabular disclosure.
– The new narrative and tabular disclosures will need to be tagged in Inline XBRL format.
– A registrant that is a smaller reporting company or emerging growth company may limit the disclosures in the table to its PEO, the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year, and up to two additional individuals who would have been the most highly compensated but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year.
The final rule shortens the time period during which an option or similar award would trigger the tabular disclosure – the SEC had proposed requiring disclosure for any grants made 14 days before MNPI was released, but reconsidered after reviewing comments on that point. That means things are a little easier than they could have been, but the new table and narrative will still require planning and thinking.
The final rules will become effective 60 days following publication of the adopting release in the Federal Register, which typically takes about a month. For the Section 16-related aspects of the rules, Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.
Companies will be required to comply with the new disclosure requirements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023. The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies. That’s pretty convoluted, but for this equity award disclosure, I think it works out to all companies first providing it in the Form 10-K/proxy statement that’s filed in spring of 2025, for awards granted during 2024. Please correct me if I’m wrong! You can email me at liz@thecorporatecounsel.net.
Join us tomorrow at 2pm Eastern for the webcast, “SEC Clawback Rules: What To Do Now.” We’ll be hearing practical guidance from Cooley’s Ariane Andrade, Hunton Andrews Kurth’s Tony Eppert, Orrick’s JT Ho, Pay Governance’s Mike Kesner, and Kirkland’s Abigail Lane about what to do to prepare for the SEC’s new Dodd-Frank clawback rules that go into effect next month. Among other topics, this program will cover:
– Overview of rules
– Differences from existing requirements & practices
– Specific action items
– Compliance timeframe
– State law issues
– Interplay between ISS guidelines, institutional investor expectations and DOJ enforcement policies
– Enforcement of clawbacks
– Disclosure implications
We’re also continuing to post memos on this topic in our “Clawbacks” Practice Area. As a member of CompensationStandards.com, you get access to the live webcast, plus the on-demand archive & transcript, and all of the other resources on this topic – which we’ll be continuing to update as the compliance date nears.
FW Cook has released its Annual “Top 250 Report” – which examines the long-term incentive practices & trends of the 250 largest companies in the S&P 500. This year’s report also looks at how incentives have changed over a three- and six-year lookback period. This excerpt lays out the key findings for metrics & payout ranges:
While annual incentive plan design varies among companies and industries, practices are converging towards a balanced approach that incentivizes profitable growth and achievement of key non-financial measures. Common design features include:
• Two or three financial measures (70% prevalence; up from 58% in 2016).
• A profit metric (93% prevalence; up from 92% in 2016) with a weighting of 40% or more and at least one other financial metric that aligns with a company’s short-term priorities.
– Revenue is the most common secondary financial metric (57% prevalence; up from 46% in 2016), followed by cash flow (29% prevalence; up from 25% in 2016).
• A non-financial component (78% prevalence; up from 73% in 2016), with the use of standalone strategic measures or team-wide scorecards (58% prevalence; up from 42% in 2016) surpassing individual performance measurement (43% prevalence; up from 38% in 2016).
– The increase in use of strategic measures since 2016 is primarily driven by the heightened focus on Environmental, Social, and Governance (ESG) objectives and the resulting addition of ESG measures in annual incentive plans (72% of Top 250 companies in FW Cook’s 2022 Top 250 ESG Report).
• Payout ranges from 0% or 50% of target for threshold performance to 200% of target for maximum performance.