With the “Great Resignation” comes lots of creative ideas on retention & compensation. Some companies are trying to stay ahead of the curve by offering crypto as compensation, but we’re still watching the legal framework develop around this area. Here’s a Hunton Andrews Kurth blog outlining some of the regulatory risks that companies should watch as they consider offering cryptocurrency as compensation:
– Form of Payment – Cash or Negotiable Instrument. The federal Fair Labor Standards Act requires employers to pay minimum and overtime wages in “cash or negotiable instrument payable at par.” This has long been interpreted to include only fiat currencies—monies backed by a governmental authority. As non-fiat currencies, cryptocurrencies therefore fall outside the FLSA’s definition of “cash or negotiable instrument.” As a result, an employer who chooses to pay minimum and/or overtime wages in cryptocurrency may violate the FLSA by failing to pay workers with an accepted form of compensation. In addition, various state laws make the form of wage payment question even more difficult.
– Volatility Concerns. When compared to the rather stable value of the U.S. dollar, the value of cryptocurrencies is subject to large fluctuations…Such volatility can give payroll vendors a nightmare and can, in some instances, lead to the under-payment of wages or violation of minimum wage or overtime requirements under the FLSA.
– Tax and Benefits Considerations. Aside from wage and hour issues, the payment of cryptocurrency implicates a host of tax and benefits-related issues. The IRS considers virtual currencies to be “property,” subject to capital gains tax rates. It has also confirmed in guidance materials that any payment to employees in a virtual currency must be reported on a W-2 based upon the value of the currency in U.S. dollars at the time it was delivered to the employee. This means that cryptocurrency wage payments are subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. For 401k plan fiduciaries, the Department of Labor recently issued guidance that should serve as a stern warning to any fiduciary looking to invest 401k funds into cryptocurrencies.
We’ve posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.” Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer shared their thoughts on:
– Key Issues and Considerations for Compensation Committees
– ESG & Human Capital Management Focus for Compensation Committees
– Gender and Ethnicity Pay Gaps and Pay Equity Issues
– Integrating ESG into Incentive Plans
– Latest SEC Rulemakings on Clawbacks and Pay-for-Performance
I blogged earlier this month about how say-on-pay is going in the 2022 proxy season. As a recap, we saw 3 companies failing from the Russell 3000 (so a 2.2% failure rate) and 8.9% of Russell 3000 companies received an “Against” recommendation from ISS as of March 31.
– Three Russell 3000 companies (2.1%) failed Say on Pay thus far in 2022. No companies failed since our last report.
– The percentage of Russell 3000 companies receiving greater than 90% support (71%) is similar to the percentage at this time last year (73%).
– The current Russell 3000 average vote result of 90.1% is similar to the index’s average vote last year, while the current S&P 500 average vote result of 85.6% remains well below last year’s average.
– The average Russell 3000 vote result thus far is 450 basis points higher than the average S&P 500 vote result; however, only 35 S&P 500 companies have held a Say on Pay vote thus far in 2022.
– 6% of Russell 3000 companies and 11.4% of S&P 500 companies have received an ISS “Against” recommendation thus far in 2022.
There’s been a lot of publicity around the pay inequality & high CEO pay ratios this season – that hasn’t translated into say-on-pay failures as of mid-April. With only 35 S&P 500 companies having held a say-on-pay vote so far, we’ve still got a long ways to go. As always, we’ll keep posting these stats in our “Say-on-Pay” Practice Area.
President Biden unveiled his 2023 budget proposal in late March – and John blogged over on TheCorporateCounsel.net about the proposed buyback restrictions & its potential impact on corporate buyback practices. A Meridian memo highlights two other proposed legislative topics under the proposal for companies to be cognizant of:
– Millionaire/Billionaire Individual Income Tax – 20% minimum individual income tax would be imposed on income of households with a net worth of more than $100 million (determined as assets minus liabilities). In addition, the 20% tax would be imposed on unrealized gains (including ordinary gains) of such households. Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once. The proposal would be effective for taxable years beginning after December 31, 2022.
– Increase in Top Marginal Individual and Corporate Income Tax Rates – Top marginal income tax rates for individuals and corporations would be 39.6% (up from 37%) and 28% (up from 21%), respectively. The top marginal individual income tax rate would apply to taxable income over $450,000 for married individuals filing a joint return, and $400,000 for unmarried individuals. After 2023, the thresholds would be indexed for inflation. The proposals would be effective for taxable years beginning after December 31, 2022.
A member recently posed this question in our Q&A Forum (#1408):
If an NEO at a SRC is contributing to a 401(k) plan, or a foreign equivalent, from their salary, would that be accounted for under the Salary column in the Summary Comp Table, or would it have to be separately accounted for in another column?
John responded:
If it’s just a contribution from the NEO, there’s no separate reporting, because the amounts contributed to the 401(k) plan were already reported in the salary column. If the company is making matching contributions, those are reported in the “All Other Compensation” column.
With new SEC rules, record support levels for shareholder proposals, and relentless regulatory & investor scrutiny, your proxy disclosures – and the actions that support them – are more important than ever. The Proxy Disclosure & Executive Compensation Conferences will inform you of what you need to know to protect your company and board. Get practical guidance about rule changes, staff interpretations, emerging disclosure risks, investor and proxy advisor positions, executive pay expectations, the board’s role, and more. Check out the agendas – 17 sessions over three days.
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– What data points are useful in driving DEI strategy & progress;
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– How to account for intersectionality;
– Data traps to avoid; and
– How to use data to develop a unique business case for your corporate DEI initiative.
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A group of 60 PE firms, banks, pension funds and others have signed on to Ownership Works – a non-profit with the goal of creating $20 billion in wealth for lower income & diverse employees over the next decade. This WSJ article says that the organization is the brainchild of Pete Stavros of KKR – and counts Apollo, KKR, Warburg Pincus, CalPERS and the Washington State Investment Board among its members.
NYSE-listed Harley Davidson is listed as a case study. The company announced last year as part of its earnings & strategic plan that it would grant stock to all 4500 employees worldwide, which is also called out in the company’s recent proxy statement. Where are the shares coming from? In Harley’s case, they’re coming from the equity incentive plan, and are part of the reason the company is seeking an increase to the authorized number of shares this year. Ownership Works has a FAQ for that too, which suggests they aren’t pushing for a particular format of plan:
Many companies already share ownership with senior leaders in the form of a management equity plan. Achieving broad-based ownership may require allocating additional equity to an all-employee equity plan and/or a shift in the amount allocated to more senior executives. When well implemented, shared ownership programs should, over time, pay for themselves by maximizing shared wealth creation.
With the PE firms in this coalition committing to institute employee ownership at a minimum of 3 portfolio companies and the pension fund participants pledging to “encourage asset managers to consider it when appropriate,” there may be more “asks” coming for enhanced employee ownership. That’s on top of the interplay between stock ownership & pay equity attracting more attention. If you don’t already have a broad-based employee stock plan, it’s worth perusing the Ownership Works resources and keeping your compensation committee up to speed about the alternatives.
The last two years were rocky in the executive compensation world as compensation committees tried to design the right incentives during a pandemic. And in 2021, ISS put out its updated FAQ for pandemic-related pay adjustments, and suggested that pay programs should go “back to normal.” With the pandemic (slowly) fading out, Pay Governance looked at how it has changed the compensation world. Below is an excerpt of the 2021 compensation practices that they expect will have persisted from 2020:
– Wider performance curves. Many companies widened their performance curves to minimize the chance of a zero or maximum payout given the uncertainty in setting performance targets. This uncertainty persisted at the beginning of 2021, and a widening of the performance curve allowed companies to retain the basic structure of existing plans but with far less pay/performance leverage.
– Semi-annual short-term incentive performance periods. Companies in industries facing the greatest level of uncertainty continued or adopted a “1st half/2nd half short-term incentive plan whereby 6-month goals are set at the beginning and the middle of the performance year to allow for a “resetting” of targets at mid-year based on more current financial outlook.
– Inclusion of qualitative metrics. After unprecedented levels of discretionary adjustments applied in 2020, some companies added or increased the weighting of qualitative metrics to allow the Compensation Committee to exercise discretion within predefined guardrails (e.g., +/- 20%).
– Above target annual incentive plan payouts. Given the limited visibility at the beginning of 2021 amid the continued impact of COVID-19 (e.g., supply chain pressures, “The Great Resignation,” etc.) and 2020 annual incentive plan payouts, the majority of which were below target or zero, many companies may have established relatively conservative financial targets for their 2021 annual incentive plans. Early indications are that above target (or maximum) annual incentive payouts are being reported by companies that were more resilient than forecasted and capitalized on better-than-expected market opportunities in 2021.
With CEO pay bouncing back in 2021, what’s director compensation looking like? We’ve previously blogged about director pay at S&P500 companies and how equity compensation seems to comprise the biggest bulk of total compensation.
Pearl Meyer recently held a webcast with NACD and surveyed the 148 director attendees. 67% of respondents don’t expect to reduce the board equity grant value because of declining stock prices. In addition, for new board members, 49% provide pro-rated equity grants based on the new director’s start date and the annual granting date. Pearl Meyer ends with an interesting idea – if executives get inducement equity grants in a competitive market, why not directors?