The Advisors' Blog

On Friday – after much anticipation & nail-biting – Corp Fin issued 15 “Regulation S-K” CDIs to address common questions under new Item 402(v), which is the “pay versus performance” disclosure rule that was adopted in late August and for which disclosure will be required in proxy statements filed this spring. Dave Lynn is going to be covering these interpretations in-depth in the next issue of The Corporate Executive – if you aren’t already subscribed to that essential newsletter, email sales@ccrcorp.com and arm yourself with expert analysis to tackle these disclosures.

To help you see which CDIs are relevant to you, I’ve paraphrased each of them below – and thanks to the direct links that Corp Fin provided, you can also use this list to easily read your favorites in full:

1. Question 128D.01 – Item 402(v) information is not required in Form 10-K, and will not be deemed incorporated by reference, except to the extent that the registrant specifically does so.

2. Question 128D.02 – When calculating Compensation Actually Paid, companies need to include the change in value of a first-time NEO’s awards during the executive’s tenure as a NEO – even if the NEO received those awards as an employee, before being an NEO.

3. Question 128D.03 – Footnote disclosure of each of the amounts deducted and added pursuant to Item 402(v)(2)(iii) – for years other than the most recent fiscal year included in the Pay Versus Performance table – would be required only if it is material to an investor’s understanding of the information reported in the Pay Versus Performance table for the most recent fiscal year, or of the relationship disclosure provided under Item 402(v)(5). However, in the registrant’s first Pay Versus Performance table under the new rules, the registrant should provide footnote disclosure for each of the periods presented in the table.

4. Question 128D.04 – Aggregation of pension value adjustments and equity award adjustments isn’t permitted in the required footnotes.

5. Question 128D.05 – For purposes of pay versus performance disclosure, companies can use a “peer group” disclosed in CD&A, even if it is not used for “benchmarking” in the CD&A.

6. Question 128D.06 – If the class of securities was registered under Section 12 of the Exchange Act during the earliest year included in the “Pay Versus Performance” table, the “measurement point” for purposes of calculating TSR and peer group TSR should begin on such registration date.

7. Question 128D.07 – Companies need to present the peer group total shareholder return for each year in the table using the peer group disclosed in the CD&A for such year, including if the CD&A peer group changed from 2021 to 2022.

8. Question 128D.08 – GAAP “net income” is required in the Item 402(v) table.

9. Question 128D.09 – The Company-Selected Measure can be any financial performance measure that differs from the financial performance measures otherwise required to be disclosed in the Item 402(v) table, including a measure that is derived from, a component of, or similar to those required measures.

10. Question 128D.10 – It’s appropriate to use stock price as Company-Selected Measure only if it directly links compensation actually paid to company performance – e.g., as a market condition applicable to an incentive plan award – not if it just has a significant impact through affecting the fair value of a time-based share award.

11. Question 128D.11 – The Company-Selected Measure cannot be a multi-year measure – it must relate to the most recently completed fiscal year.

12. Question 128D.12 – In a “bonus pool” where payouts depend on achievement of a financial performance measure along with discretion, companies must identify that financial measure in the Tabular List and provide the required disclosure about the Company-Selected Measure and the related relationship disclosure.

13. Question 128D.13 – Companies can aggregate the compensation of multiple PEOs for purposes of the narrative, graphical or combined comparison between CAP & TSR, net income, and the Company-Selected Measure – to the extent the presentation will not be misleading to investors. Remember that separate columns for each PEO are required in the table.

14. Question 228D.01 – If a company changes its fiscal year during the time period covered by the Item 402(v) Pay Versus Performance table, provide the disclosure required by Item 402(v) for the “stub period,” and do not annualize or restate compensation.

15. Question 228D.02 – For purposes of the requirement in Item 402(v)(2)(iv), a company that has emerged from bankruptcy and issued a new class of stock under the bankruptcy plan may provide its cumulative total shareholder return and peer group cumulative total shareholder return using a measurement period that begins when the post-bankruptcy class of stock began trading.

– Liz Dunshee

We’ve posted the transcript for our recent webcast – “The Latest: Your Upcoming Proxy Disclosures” – in which Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn covered the waterfront of issues to consider as you prepare your upcoming proxy disclosures – with lots of attention to pay vs. performance. Check out the transcript for info on:

1. Pay vs. Performance Disclosures

2. Meeting Format

3. Clawbacks

4. Say-on-Pay Trends

5. Showing “Responsiveness” to Low Say-on-Pay Votes

6. CD&A Updates

7. CEO Pay Ratio Considerations

8. Perquisites Disclosure

9. Shareholder Proposals

10. ESG Metrics & Disclosures

11. Proxy Advisor & Investor Policy Updates

12. Status of Other Pay-Related & Human Capital Management Rulemaking

– Liz Dunshee

A few pay versus performance disclosures are starting to roll in! This is something that we’ve all been eagerly awaiting – and I send my condolences to those who have had to be brave and take the first leap. These are from smaller companies – we continue to await a large-cap example. Thanks to Aon’s Corporate Governance & ESG Advisory Group for alerting us!

– CSI Compressco Information Statement (pg. 8) – The most “mainstream” of these examples.

– Praxis Precision Medicines Form 10-K (pg. 136) – It is unclear to me why the company included this disclosure in a Form 10-K – as this Goodwin FAQ points out, the SEC rules only require pay vs. performance disclosure in proxy & information statements; it isn’t required in Form 10-K even when other Item 402 disclosure is included. But I didn’t read this filing or the company’s filing history in-depth to understand whether there is a reason they might have wanted to go ahead with it here.

– Panbela Therapeutics Form S-1/A (pg. 72) – Seems to have missed some of the disclosure requirements, but has the distinction of being the first to report under the new rule.

– Liz Dunshee

When say-on-frequency votes roll around every sixth year, one of the questions that has been asked repeatedly in our “Q&A Forum” is what voting standard to apply. State law and governing documents typically state that all matters are governed by majority votes (with the exception of the election of directors, which at some companies is still determined by a plurality vote). But on this “multiple choice” ballot item, you may end up in a situation where none of the options receive majority approval.

Last week on TheCorporateCounsel.net, Dave pointed out that you don’t need to prescribe a particular standard in the proxy statement:

How do I determine which frequency “wins” the vote?

The Say-on-Frequency proposal is unusual because the issuer is not asking the shareholders to “approve” a specific proposal or resolution. Instead, shareholders are being to select one of three frequency options or abstain from voting. In footnote 121 of the adopting release from 2011, the Commission stated: “Because the shareholder vote on the frequency of voting on executive compensation is advisory, we do not believe that it is necessary to prescribe a standard for determining which frequency has been ‘adopted’ by the shareholders.”

Notwithstanding that disclosure leeway, as John shared in his response to Question #858 on our Form, when your board moves on to actually determine the frequency with which it will submit the say-on-pay resolution, the directors likely do need to consider which of the say-on-frequency options received a plurality vote. That’s because Glass Lewis has embedded the plurality concept into its policy on say-on-frequency. The proxy advisor says that it will recommend votes against all members of the comp committee if the board adopts a say-on-frequency other than the one approved by a plurality of the company’s stockholders.

As I blogged last fall, more than 90% of Russell 3000 companies conduct an annual say-on-pay vote – so this has become a largely irrelevant exercise, but we have to do it anyway.

See Dave’s blog – and the November-December 2022 issue of The Corporate Counsel newsletter – for even more reminders on annual season items. Dave also shared guidance on handling the Form 8-K for this voting item. We also have practical guidance on this topic in the “Say-on-Pay Disclosure Issues” chapter of the Lynn & Borges’ Executive Compensation Disclosure Treatise.

– Liz Dunshee

Last week, ISS further updated its “Equity Compensation Plans” FAQs – to provide more info about their burn rate calculation. Question 15 now includes this additional color:

The VABR calculation values grants in each fiscal year separately, based on the applicable QDD date and associated QDD data in that fiscal year. In calculating grant valuations in a specific fiscal year, the “stock price” in the formula above (both in the numerator and the denominator) refers to the 200-day average stock price as of the applicable QDD date in that fiscal year. The option valuation inputs are similarly as of the applicable QDD date in that fiscal year.

This new document adds to the FAQs that John blogged about last month. The updated ISS FAQs document highlights all year-over-year changes. We’ll be posting it in our “Proxy Advisors” Practice Area.

– Liz Dunshee

Recently, the Corp Fin Staff issued a series of Compliance & Disclosure Interpretations to address some of the open questions on the Dodd-Frank clawback rules. Dave blogged last week on TheCorporateCounsel.net about each topic:

– Exchange Act Rule CDI 121H.01 – Dave wrote that, just in the nick of time, the Staff has clarified that “while the check boxes and other disclosure requirements will be in the rules and forms in 2023, we do not expect issuers to provide such disclosure until they are required to have a recovery policy under the applicable listing standard.”

Many interpret this CDI to mean that you are not required to mark the checkboxes, but you still need to put the text of them on the cover page – to match the new version of Form 10-K that’s posted on SEC.gov. However, there’s a concern among some practitioners that it could be misleading (particularly for the first checkbox) to put the text on the cover page and not mark the box if there had been a restatement. So, does the Staff want companies to put the text of both checkboxes on the cover page and include a note to say that it’s not applicable to this Form 10-K? Or not include them at all, despite the Form?

By the end of the Northwestern Pritzker School of Law’s Securities Regulation Institute last week, this issue earned its own name: “The Great Checkbox Debate of 2023.” Despite what some folks apparently heard or wanted to hear, Corp Fin Director Erik Gerding did not publicly give a response beyond what was in the CDI. We hope that the Staff is able to clear this up with further guidance – but as I blogged last week, they are not going to be making Enforcement referrals on foot-faults. This is a fleeting issue and it’s probably not worth getting too worked up about it.

– Exchange Act Rule CDIs 121H.02 and 121H.03 (as well as Exchange Act Forms CDIs 110.08 and 112.03) – As Dave blogged, these CDIs address how the term “named executive officer” is to be interpreted for foreign private issuers filing on Forms 20-F and 40-F, given that foreign private issuers do not provide disclosure under Item 402 of Regulation S-K, which includes the definition of “named executive officer.” This interpretation will come into play when a company completes the financial restatement that triggered the company’s clawback policy and needs to provide related disclosure about recovery of erroneously awarded compensation from NEOs.

– Exchange Act Rules CDI 121H.04 – This CDI says that the clawback rule is intended to apply broadly. Your Rule 10D-1-compliant clawback policy could reach compensation in compensation plans other than tax-qualified retirement plans – such as long term disability, life insurance, SERPs, or any other compensation that is based on the incentive-based compensation. See Dave’s blog for more detail.

– Liz Dunshee

As Dave blogged yesterday on TheCorporateCounsel.net, soon-to-be-official Corp Fin Director Erik Gerding said the Staff is planning to issue CDIs to clarify some of the common questions arising from the Commission’s pay versus performance disclosure rules. In his blog, Dave listed several topics that would be candidates for additional guidance.

One other point that was reiterated several times by Erik and Cicely LaMothe – who is the Acting Deputy Director of Corp Fin’s Disclosure Program – is that these forthcoming CDIs will cover the “first batch” of interpretive questions that the Staff is receiving. The Staff also recognizes that in this first year of disclosure, everyone is doing their best to figure things out – so Corp Fin won’t be playing “gotcha” on close calls.

There will be a review process for these filings – but the intent is not to be punitive, it will be to identify areas for improvement in Year 2. This will be an iterative process where the Staff will be looking for us to continue to improve disclosures in years to come.

– Liz Dunshee

John blogged last month about the striking performance benefits that appear to be associated with CEO pay cuts. Since that blog ran, we’ve received a few posts on our “Q&A Forum” about how to disclose voluntary pay reductions. Here’s one (#1,431):

If an NEO declines a portion of his salary for the most recent fiscal year, shouldn’t the full salary amount (which was determined by the Compensation Committee before his election to decline a portion) be reported in the SCT?

Wouldn’t the same be true for the value of cash incentive awards and equity awards which had been established/granted by the Compensation Committee prior to the NEO declining a portion of them? Does it matter if the payout on the awards (based on achievement of various metrics) had not yet been determined at the time he declined?

A member responded:

When this has come up in the past with a bonus, we included the full amount and explained in the footnote that the amount was declined.

John also chimed in:

That’s what I’ve seen as well. There’s usually some sort of discussion in the CD&A about what base salary the Comp Committee has approved if an NEO has declined a pay increase. See this Logitech proxy statement.

There will be a few disclosure examples to follow on this general topic as we move through this year and next year, including Intel and Apple. In the proxy statement that Apple recently filed, the company disclosed that Tim Cook had recommended a 40% reduction in his target total compensation for 2023, and what the compensation committee expects to do in future years. See this excerpt from page 11 (and this WSJ article):

Mr. Cook’s 2023 target total compensation is $49 million, a reduction of over 40% from his 2022 target total compensation. Taking into consideration Apple’s comparative size, scope, and performance, the Compensation Committee also intends to position Mr. Cook’s annual target compensation between the 80th and 90th percentiles relative to our primary peer group for future years.

– Liz Dunshee

This recent Wachtell Lipton memo is a good reference point if you need to quickly summarize the main executive compensation issues that companies & boards need to watch in the coming proxy season. Here are two key items:

Proxy Advisors. Last November, ISS added to its list of problematic pay practices that may result in a negative say-on-pay recommendation “severance payments made when the termination is not clearly disclosed as involuntary.” ISS has historically criticized payment of severance when ISS concludes (whether or not correctly) that the nature of a termination is not a severance qualifying event; the recent guidance raises the profile and significance of 8-K disclosure for NEO separations.

Last December, Glass Lewis revised the threshold for the minimum percentage of a long-term incentive grant that should be performance-based from 33% to 50%, and indicated that it will raise concerns with executive pay programs where less than half of an executive’s long-term incentive grant is subject to performance-based vesting conditions.

Other than the aforementioned items, neither ISS nor Glass Lewis issued any significant compensation-related policy updates for the 2023 proxy season, though both firms announced voting policy updates in a number of other key areas including board diversity. For a detailed discussion of these updates, see our December 6, 2022 memorandum, “ISS and Glass Lewis Issue Final 2023 U.S. Voting Policies.”

Equity Award Considerations in a Reduced Stock Price Environment. Many issuers experienced significant stock price declines in 2022, especially in the tech sector. These declines should be taken into account by compensation committees as they consider 2023 annual equity grants. A reduction in market value will result in awards covering a larger number of shares and may put pressure on individual and aggregate share limits under a company’s shareholder approved equity plan. If plan limits are insufficient to make ordinary course annual equity grants, companies may consider granting cash-settled awards outside of a shareholder-approved plan in the form of phantom equity or stock appreciation rights; however, cash-settled awards will result in variable, or “mark-to-market,” accounting. Companies seeking approval for new equity plans or new share reserves at their annual meetings may also need to re- calibrate the size of their requests to reflect the reduced value of shares.

– Liz Dunshee

Many companies experienced a bumpy ride on their “say-on-pay” votes last year. What should companies expect this year?  This CAPIntel article says that this year may present some challenges as well:

In 2023, Say on Pay results are likely to be shaped by the unique sociopolitical and economic environment companies face today, the impacts of which have not been felt equally across industries. Amid the threat of recession and a tight labor market, many companies felt obligated to take special actions during 2022 for retention purposes, as stock price declines due in part to the Fed’s anti-inflationary measures negatively impacted executives’ equity holdings. Shareholders and proxy advisors may not view such actions as favorably as in previous years if paired with dramatic drops in stock price, especially towards year-end, given the potential for misalignments in pay-for-performance.

Similarly, some companies may trigger pay-for-performance concerns in cases where above-target bonus payouts based on strong financial metric performance for most of 2022 are coupled with year-end share price decreases. Companies in hard-hit industries, such as technology and financial services, may also draw increased scrutiny from the proxy advisors over their efforts to reign in COVID-era overexpansion with sweeping layoffs. However, as in previous years, we expect pay-for-performance misalignment to continue to be the main driver for ‘Against’ recommendations from proxy advisors in the broader market.

– John Jenkins