Earlier this summer, Apple announced that CEO Tim Cook’s previously granted RSU for 1 million shares will be modified to vest contingent on relative TSR–per his own request. In today’s blog entry, I take a look at this development.
The Modification
Cook’s award was granted in 2011 and originally vested as to 500,000 shares in August 2016 and another 500,000 shares in August 2021. I’m sure you can guess what I thought of the original award, based on my prior entries covering Apple and mega grants (“Steve Jobs’ Affinity for Mega Grants,” April 28, 2009, and “And Another Thing,” May 5, 2009).
As modified, 100,000 shares still vest in August 2016 and 2021, regardless of performance. The remaining shares vests in increments of 80,000 per year, from 2012 to 2021, with the vesting in years 2014 to 2021 subject to a relative TSR goal (a small portion of the shares vesting in 2013 is also subject to a relative TSR goal). The TSR goal is applicable to 50% of each 80,000-share vesting tranche–so 40,000 shares vest every year regardless of Apple’s TSR and another 40,000 shares vest if specified TSR thresholds are achieved.
Why Do This?
What’s most interesting about this story is that the award was modified at the request of Cook. Past examples of companies modifying awards to vest contingent on performance conditions have been executed under threat of a failed Say-on-Pay or stock plan proposal or in response to a failed Say-on-Pay vote (“Eleven and Counting,” May 3, 2011). So why would Cook voluntary ask for his award to be modified? The stated reason (Apples’ Form 8-K, June 21, 2013) is that Apple is going to be granting performance awards to executives in the future and Cook wants to lead by example. Which could be true, but I’m a skeptic, especially when it comes to grants of stock currently worth close to $500 million. So I wondered, was the real reason:
To demonstrate confidence in Apple’s products and performance
To make other CEOs look bad
Because Cook is worried he won’t perform well if not properly motivated
Because Cook really wants his personal wealth to be better aligned with Apple’s shareholders’ wealth
After gestating on this question for a while, my suspicion is that it was a preemptive strike. In the 8-K announcing the change, Apple says:
“In outreach discussions this year with many of our largest shareholders, we heard that they believe it is appropriate to attach performance criteria to a portion of our future executive stock awards that have been entirely time-based (i.e., vesting for continued service) in the past.”
I think that Cook saw awards held by other CEO’s modified in response to shareholder pressure and thought it might be smart to get out ahead of any demands for the same thing from Apple’s shareholders. This way, he has more control over the modifications and was able to ensure that over 50% of the award still vests based solely on the passage of time.
More on Say-on-Pay and Performance Awards
Tune in tomorrow for the NASPP’s webcast “Performance Equity Design in Light of Say-on-Pay,” which will take a look at the pressure to grant performance awards that has resulted from Say-on-Pay votes and how this is changing long-term incentive programs.
Here’s what’s happening at your local NASPP chapter this week:
Las Vegas: Trevor Nelson of Merrill Lynch will present “Strategies to Overcome Common Communication Shortfalls” at the inaugural meeting of the Las Vegas chapter. (Wednesday, October 16, 11:30 AM)
San Diego: Greg Arnold of Semler Brossy will present “Equity Plan Share Authorizations.” (Wednesday, October 16, 11:30 AM)
DC/VA/MD: Abby Brown, Candice Quinn, Michael Meissner, and Lawrence Green of Squire Sanders will present “Global Compensation Practices, Disclosure Practices, and Requirements.” (Thursday, October 17, 8:00 AM)
Twin Cities: The chapter presents “Transfer Agents: The Basics and Other Things You’ve Always Wanted to Know.” (Thursday, October 17, 7:30 AM)
I’m a San Diegoan at heart, and, as I write today, I’m thinking about a picture taken last year on a beautiful beach day. The water was sparkly, reflecting the bright sun. The beaches were filled with sunbathers. Someone snapped a photo of this perfect day, and accidentally captured something amazing – the image of a shark swimming through a wave, virtually unnoticed. People were smiling, nobody seemed to have a care in the world. That day ended well – it seems no one was bitten by the shark, and people probably didn’t even understand the potential danger until they saw that image later that evening on the news. So why on earth am I talking about sharks in this equity compensation blog? Well, as you’ve probably garnered by now, I’m drawing a parallel to an issue I feel is looming, somewhat under the radar, for many companies.
Stock Plan Sharks
You’ve probably heard the buzz over the past year or so about a wave of litigation surrounding say-on-pay and proxy proposals. The litigation, in short, has been brought as a series of class action suits by shareholders who want to see more information disclosed in the proxy around various proposals that are being submitted to shareholders for a vote. Many of these proposals involve stock plans (approval of a stock plan, increasing shares in an existing plan, and so on). The theory behind the lawsuits is that that shareholders have a right to be fully informed before they vote. The claim is that proxy statements lack a complete and full disclosure of material information that would aid in the shareholder’s ability to make an informed decision. In the past year there have been 21 of these cases filed. Of those, 10 cases were “successfully resolved” according to the plaintiff’s lawyer (successful meaning they resulted in a preliminary injunction or restraining order, which paved the way to an acceptable outcome). While 21 may seem to be a small number, keep in mind that this is the actual number of cases “filed” with a court. There have been many more instances where companies have received a letter from plaintiff’s attorneys, which ultimately opens a door that most companies would prefer remain closed.
Although many companies seem to have cognizance of these lawsuits, it seems that most still think “it can’t happen to us”. There have even been rumors that the litigation is dead. If you’re thinking those thoughts, think again. These lawsuits appear to be far from dead. In fact, in a unique set of circumstances at this year’s annual conference, we had both the plaintiff’s attorney and defending attorneys at front and center in these lawsuits come together to share their perspective on these suits.
The session was interesting, and I can’t do it full justice in this blog (the materials are available online for conference attendees, and the audio is available for purchase). However, I wanted to raise awareness of this concern and share some of the “red flags” that the plaintiff’s attorney shared during this session.
An Invitation to a Plaintiff’s Attorney?
Share Increases: Increasing the number of shares in an equity plan? Plaintiffs attorneys are scouring proxies to see if companies have disclosed information such as any projections that helped determined the number of shares to request.
Consultants: If the company or board hires a consultant who uses things like analysis of “share value transfer” in their assessment, and the board evaluates or relies on that information in making compensation decisions, then that information should be disclosed in the proxy.
Peer Groups: If the board determines that executive compensation should be based on peer group data points, then plaintiff’s attorneys are looking for information on the companies in the peer group, the metrics evaluated (e.g. number of employees, enterprise value), and any performance metrics, such as TSR.
Now, before you shoot the messenger – I’m not taking a stance advocating these disclosures. I’m relaying what I heard the plaintiff’s attorney identify as “red flags” when they are looking at proposals and evaluating proxy statements. If you have items going before shareholders in a vote this upcoming proxy season (yes, the proxy is months away for calendar year-end companies, but proposals are likely to be discussed in the near-term), then you absolutely want to be aware that plaintiff’s attorneys are going to look at your proxy through this lens.
Advance Mitigation
You know the sharks are out there – now what? Before I answer that, I just have to disclose that the term “shark” was borrowed from the panel’s own chosen title – so I’m not labeling anyone a shark, and I certainly appreciated the entire panel’s contribution to our conference. Now, back to the sharks and how to avoid them – there are a few suggestions that I gleaned from the presentation:
Consider including more disclosure (if it won’t hurt, it might make you appear to be a less easy target)
Advise your board of directors that a proxy proposal could result in litigation
Consider getting 3rd party advice on how to size your equity pool
Additional details, such as insight about what to do if your company is contacted by a plaintiff’s attorney can be found in the materials and audio for the conference session titled “Stock Plan Proposal and Say-on-Pay Litigation: How to Avoid the Sharks”. This is definitely an area where companies should focus some attention as they prepare for the 2014 proxy season.
Thanks to panelists Douglas Clark and David Thomas of Wilson Sonsini Goodrich & Rosati, Juan Monteverde of Faruqi & Faruqi, and John Grossbauer of Potter Anderson & Corroon for the content that I used in writing this blog.
What’s Your Biggest Challenge? The American Coalition of Stock Plan Administrators (ACSPA) wants to know what your biggest challenge is when it comes to administering stock compensation programs. Take their short survey today.
NASPP To Do List Here’s your NASPP “to do” list for this week.
Take the NASPP Quick Survey on ESPP Administration. This survey is quick: less than 15 questions and it can be completed in under ten minutes. Issuers with ESPPs only.
Order the audio from the 21st Annual NASPP Conference. Just $65 per session for NASPP members–less per session if you purchase a multi-session package.
On September 18, the SEC proposed highly anticipated rules governing the ratio of CEO to median employee pay that public companies will be required to disclose in their proxy statements. In today’s blog, I provide a summary of the proposed rules.
Background
We’ve known this was coming since the Dodd-Frank Act was signed into law. The Act requires the SEC to adopt rules mandating that public companies disclose the ratio of CEO pay to that of the median pay of all other employees (see my blog entry “Beyond Say-on-Pay,” August 5, 2010). It’s taken a while for the SEC to propose the rules because, well, it’s a complicated topic and the SEC has a lot on its plate these days, including a host of other rulemaking projects under Dodd-Frank and the Jobs Act, not to mention investigating Rule 10b5-1 plans.
You Win Some
The Act requires that the ratio of CEO pay to median employee pay be based on “compensation” as defined for purposes of the Summary Compensation Table. So, in a worst case scenario, you could have had to prepare an SCT for all employees just to figure out the median employee compensation.
And, if you want, you can certainly still do that. But, for most companies, it’s about all they can do to put together the SCT for the 5+ execs for whom disclosure is required. So, instead, the proposed rules allow companies to figure out which employee represents the median based on any consistent, systematic method (e.g., based on W-2 income), then determine only that employee’s compensation as per the SCT. The pay ratio disclosure would then simply be the CEO’s pay as compared to the pay of the one employee that represents the median.
You Lose Some
That was the good news. The bad news is that the SEC has interpreted “all employees” to be literally all employees. That includes part-timers, seasonal, and temporary employees, and both US and non-US employees employed as of the last day of the company’s fiscal year. Pay for employees that were hired during the year can be annualized, but annualization is not permitted for seasonal or temporary employees. Likewise, location-based cost-of-living adjustments or full-time adjustments for part-time employees are not permitted.
More Information
For more information, see the NASPP Alert “SEC Proposes CEO Pay Ratio Disclosure Rules.” The proposed rules were issued just days before the NASPP Conference, so speakers at the Conference were able to address them during their presentations. In particular, Keith Higgins, the Director of Corporation Finance at the SEC, discussed the proposed rules in his keynote during the Proxy Disclosure Conference, and Mike Kesner of Deloitte provided a tutorial on the proposed rules in the session “Pay Disparity Workshop & How to Ensure Your Pay Practices Pass.” You can purchase the video of the Proxy Disclosure Conference or purchase the audio for Mike’s session.
Comments on the proposed rules can be submitted to the SEC until December 2, 2013.
Here’s what’s happening at your local NASPP chapter this week:
Seattle: Jim Sillery, and Kathi Myers of Buck Consultants present “Achieving Equity Effectiveness – A New Perspective.” (Wednesday, October 9, 7:30 AM)
Orange County: Fred Whittlesey ofCompensation Venture Group and Jon Burg of Radford present “Value and Valuation: Making Sense of Long-Term Incentive Data.” (Thursday, October 10, 11:30 AM)
Earlier this week, Barb blogged about the government shutdown as the deadline passed and it became apparent that yes, the government would indeed be closing its doors – at least temporarily. As I watched this all unfold (from the suburbs of DC), I couldn’t help but breathe a huge sigh of relief that our wildly successful 21st Annual Conference concluded last week – allowing us full opportunity to enjoy all that our nation’s capital has to offer. This week is a different story – all those museums: closed. All the monuments: closed. The national parks: closed. Even the tour bus service that some of us used to shuttle to a vendor event last week: closed. With so many of you thrilled to be in DC and talking about how you hadn’t been there in years, I’m thankful that our timing was indeed perfect.
Fast forward to this week, and we’re now in the middle of that government shutdown. In today’s blog I’ll share a few updates on where things stand:
Most of the regulators that we interact with as stock plan administrators are using their websites to communicate with their employees and the public. If you’re wondering about the status of an agency, try their web site. The SEC and IRS both have notices on their home pages.
The SEC’s EDGAR filing system is still operational and the SEC confirms it will remain so during the shutdown. Translation: no reprieve for company filings.
The law is still the law during a government shutdown. One approaching deadline is the October 15th tax filing deadline for taxpayers who filed extensions earlier this year. Filings are still due when they are due, regardless of the government status. You may have inquiries from employees about whether they still need to file their tax returns by October 15th. Now’s not the time to start giving tax advice, but you can certainly remind employees that all laws remain intact, including IRS filing deadlines and requirements.
This has nothing to do with stock administration, but I wanted to repeat a small piece of trivia I’ve heard several times over the past couple of days. Courtesy of USA Today, “What is one of the most bizarre government program canceled by the government shutdown? The Gateway National Recreation Area in Sandy Hook, N.J., has furloughed its poison ivy-eating goats.” Who knew!
For most of us, it’s business as usual. Let’s hope this comes to a swift close! Regardless, if anything significant changes that concerns equity plans, we’ll be sure to get the word out.
NASPP Conference Audio Did you know that we record all of the sessions presented at the NASPP Conference? Ordering the audio is a great way to experience the Conference if you couldn’t attend live or couldn’t get to all the sessions you wanted to. Purchase just the sessions you want or save with a multi-session package.
Career Advice Andrea Best of SOS, the NASPP’s official career blogger, has posted a new entry on creating your values-driven career. Check it out today in the NASPP Career Center.
NASPP To Do List Here’s your NASPP “to do” list for this week.
Order the audio from the 21st Annual NASPP Conference. Just $65 per session for NASPP members–less per session if you purchase a multi-session package.
I’m sure many of you are wondering how the government shutdown will impact stock plan administration. Here is what I could determine as of 12:08 AM Pacific this morning, when I posted this entry and implemented a shutdown of my household (just for the night, however–the Baksa household will be up and operating as normal in the morning, when the cats will demand food):
The IRS is still accepting all tax payments. I assume this refers to deposits of tax withholding, as well as individual payments. So you should plan to collect the required tax withholding on any stock plan transactions that occur during the shutdown and deposit that withholding with the IRS just as you normally would.
Hopefully you won’t need any help from the IRS in making the deposits, because the IRS support services will be closed, however.
If you happen to be in the midst of an IRS audit, you get a reprieve; IRS audit activity is suspended during the shutdown.
The SEC has indicated that it will remain open today (see the announcement on the SEC’s home page) and EDGAR will remain operational, so get those Form 4 filings submitted on time. Ditto for any other filings planned for today (Forms S-8, 8-K, etc.).
No word yet on how long the SEC will remain open after today. According to the SEC’s shutdown plan, however, EDGAR will remain operational during a shutdown. Thus, plan on submitting filings as scheduled for the duration of the shutdown. SEC review and approval of filings will be suspended during the shutdown, but this doesn’t mean that you are off the hook for submitting them on time.
The FASB is a private institution, so I don’t think it will be impacted by the shutdown. If you urgently need to look up a paragraph in ASC 718, the Codification system should be up and running.
The forces of capitalism will remain operational. The securities markets are also private sector entities, so they should open as normal at 9:00 AM Eastern. I’m guessing that today might not be the best day to sell, however.
That’s what I’ve figured out so far; we’ll provide updates as further information is available.