When I posted the results of the NASPP’s quick survey on the CEO pay ratio, the data I got the most questions on were the results for how companies are handling independent contractors in the calculation. When we conducted that survey, the SEC’s guidance seemed to indicate that some individuals that are treated as contractors for other purposes might be considered employees for purposes of the CEO pay ratio. That has now changed.
The SEC’s Original Position
The SEC’s original position was that the final rules permitted the exclusion of workers who are employed by and have their compensation set by an unaffiliated third party (e.g., leased employees). A CDI issued by the SEC in October 2016 clarified that some workers who are considered nonemployees for tax purposes might be considered employees for purposes of the CEO pay ratio.
The SEC’s Reversal
In the guidance issued in September 2017 however (see the NASPP alert “SEC Issues Guidance on CEO Pay Ratio“) the SEC relaxes their original position significantly, stating:
We believe it would be consistent with Item 402(u) for a registrant to apply a widely recognized test under another area of law that the registrant otherwise uses to determine whether its workers are employees.
In addition, the CDI issued on this question in 2016 has been withdrawn and the new guidance seems to suggest that reliance on the determination of employee status for tax purposes is sufficient to establish employment status for the CEO pay ratio.
The July-August issue of The Corporate Counsel notes that in addition to the test used under the US tax code (which is fairly complex) companies might rely on the determination under the Fair Labor Standards Act (FSLA) or other laws.
A Shift in Administration = A Shift in Position?
The SEC notes in Release No. 33-10415 that the shift in their position is due to concerns expressed by commenters. I don’t doubt that this is the case, but I also wonder if it is partly attributable to the Trump administration’s pro-business agenda. Obviously, one way for companies to improve their CEO pay ratio is to contract out lower paid positions (e.g., in gig-economy type arrangements). The SEC’s original position was an obstacle to this approach; the new position is much less so.
– Barbara
P.S.—I removed the chart on how companies are handling contractors from the quick survey results (in case you are wondering why you can’t find it). Now the that SEC’s position has been changed, companies are likely changing their approach and I don’t think our data on this particular question is reliable.
Now that the NASPP Conference is over and we’ve just about concluded our Meet the Speaker series for this year, it’s time for me to get back in the habit of writing blog entries. Today I have some quick updates on the CEO pay ratio disclosure.
SEC Won’t Delay the CEO Pay Ratio Disclosure
Readers will recall that earlier this year, the SEC solicited comments on whether to delay implementation of the CEO pay ratio disclosure (see “What’s Going on With the CEO Pay Ratio” for a summary of the comments received). Based on comments made by the SEC Director of Corp Fin back in September, however, it doesn’t look like a delay is going to happen. Here’s what Broc Romanek had to say about it in his blog:
It’s big news—although not surprising if you’ve been paying attention. At the ABA Annual Meeting, Corp Fin Director Bill Hinman said that the SEC won’t be delaying the implementation of pay ratio (as always, speaking for himself & not the Commission). Bill also mentioned that Corp Fin would be issuing guidance on the pay ratio rules at some point in the near future. It’s still possible that Congress could delay—or repeal—the pay ratio rule. But I wouldn’t make that bet…
Speaking of a Repeal
In a 232-page report issued in October, the Treasury Department calls for the repeal of the CEO pay ratio, among a host of other reforms. Unfortunately, this requires Congressional action so don’t hold your breath (and don’t stop your preparations for making the disclosure).
SEC Issues Guidance on Calculating the Ratio
We posted an alert on this back in September but in case you missed it, the SEC has issued some significant and helpful guidance on calculating the CEO pay ratio. Key areas addressed by the guidance include:
Use of reasonable estimates
Reliance on internal records to determine compensation
Determining whether contractors need to be included in the ratio
Relief and examples for companies that want to use statistical sampling to determine the median employee
For today’s blog entry, I continue my reports from the 25th Annual NASPP Conference in Washington, DC. Here are a few scenes from day 2.
Nell Minow, corporate governance extraordinaire was our opening keynote speaker. Quote from Nell: “When I was a kid, a teacher asked me ‘Do you think you can make a living as a smart aleck?’ I didn’t understand that it was a rhetorical question.” Nell has a dual career as a movie critic and a critic of corporations with poor corporate governance. Her comments were both thought-provoking and entertaining.
There was a full house for the keynote; only 182 empty seats (we counted).
Will Thoms, Rule 10b5-1 superhero, is here to save your executives from the perils of insider trading! He was also available in the Ask the Experts booth to answer your questions about 10b5-1 plans.
Attendees stick around to chat after a session in the Presentation Arena.
Attendees consult the Conference app to find their next session.
You’ve got to spin it to win it! Attendees spin the wheel for a prize in the CompIntelligence booth.
The 25th Annual NASPP Conference got off to a great start yesterday with the pre-conference programs and the opening reception. Here are a few pics.
First time attendees are intent are completing their bingo cards at the First-Time Attendees reception.
First time attendees have an opportunity to make friends, meet the NASPP leadership team, and meet their chapter presidents at the First-Time Attendees Reception.
Are we at the Oscars or the NASPP Conference? Morgan Stanley added a little excitement to the night by sponsoring a red carpet and a “step and repeat” for the opening reception.
The opening reception always feels like a reunion (but with people you actually like, not all those horrible people you went to high school with). In this pic attendees mingle and connect with old friends at the opening reception.
Get your photo taken in the Oval Office! A group of friends has a fun photo taken at the green screen sponsored by AST.
The NASPP’s Berni Toy and members of the Schwab team get down to the live music at the opening reception.
The 25th Annual NASPP Conference starts today with the pre-conference programs and the opening reception. I hope to see you here in DC and I have ten things for you to do while you’re here (in addition to going to the sessions, of course). Not registered yet but don’t want to miss out? Never fear! You can still register online and onsite.
Can’t be bothered to read this list? Check out this nifty “Getting to Know #NASPP25” video that Aon Equity Service created for us to showcase the many different things you can do at the Conference.
Ok, here are my ten things:
1. Conference App: Your digital guide to the NASPP Conference, the app includes the attendee list, the agenda, session materials, speaker bios, and maps. But it’s more than that—we’ll use the app to push out important announcements about happenings at the Conference. Download the app today and can get started on the PhotoPlay game, which will earn you a chance at a Bose SoundLink Mini Bluetooth Speaker.
2. Opening Night Welcome Reception: Start the Conference off on a high note by attending the opening night welcome reception. Make new friends and catch up with people you haven’t seen since last year. If you are an issuer attending for the first time, be sure to attend the First-Time Attendees’ Reception, just before the opening reception. You can meet the NASPP leadership, our chapter presidents, and get a head start on making friends.
3. Wake Up for the Keynotes: Don’t stay out too late, because you’ll want to get up early for our keynote presentations. On Wednesday morning, we’ll feature Nell Minow, who has been dubbed the “queen of good corporate governance” by Business Week Online and one of the 30 most influential investors by Smart Money magazine. Then on Thursday morning, we’ll feature a panel of representatives from the Big Four discussing “The Future of Equity Compensation.”
4. Check Out the Presentation Arena: The Presentation Arena is a stage in the exhibit hall where we will host fast-paced, 20-minute talks during the refreshment breaks and the lunches—sort of conferencing for people with short attention spans.
5. Have a Discussion: Our small group discussions, offered during the breakout sessions, are a great way to connect with other attendees on the challenges you are struggling with today. Each session is a facilitated discussion among attendees. Come prepared to share your own questions and experiences—no panelists, no presentation, and no PowerPoint. Search for “small” in the app to find a handy list of all of them.
6. Get More Out of Lunch: The luncheon roundtable discussions on Thursday are another great way to connect with your fellow attendees. Grab lunch, find a table discussing a topic you are interested in, and join the discussion.
7. Ask an Expert: The NASPP is the largest gathering of subject matter experts in the industry—if you have questions, our Conference is a great place to get answers. Consult an expert in the Ask the Experts booth or visit one of the over 30 other subject matter experts who have volunteered to be available for questions in their booths. These are not sales people; it’s an impressive list of subject matter experts who can answer technical and practical questions on stock compensation. There’s no reason to leave the Conference with unanswered questions.
8. Connect with Your Local Tribe: New this year, the Chapter Networking Social on Wednesday provides an opportunity for you meet your local chapter president and other attendees from your region.
9. Stick Around for Power Sessions: We’ve transformed the final half day of the conference into Power Sessions: quick hits (just 20-minutes each) on thought-provoking and strategic topics. Leave the Conference feeling refreshed and energized.
10: Get a Little Nostalgic: Celebrate the NASPP’s 25th anniversary with us by checking out the NASPP timeline in the hotel lobby, perusing the displays of NASPP memorabilia in the exhibit hall, and add your name to our post-it wall showing the growth of the NASPP’s membership (also in the exhibit hall).
Our popular “Meet the Speaker” series, featuring interviews with speakers at the 25th Annual NASPP Conference, is a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For today’s “Meet the Speaker” interview, we feature an interview with John Hammond of Aon Equity Services. John and his team created a nifty interactive video on all the great programs you can participate in at the NASPP Conference. He will also lead the session “Pitch Perfect: Designing a Communication Strategy That Will Have Participants Singing” at the Conference.
NASPP: Why is employee education a particularly timely topic right now?
John: Effective plan communication is hot right now as companies are taking time to evaluate plan effectiveness while we have had a calming in legislation and other administrative upheaval that was so ever-present five to ten years ago. Achieving an employee perceived value that is at or close to the accounting value feels like today’s holy grail of stock plans. We know it’s out there, but how?
The abundance and variety of performance award structures has also made it very difficult to communicate value effectively, so our panel focuses much of our content around perceived value and performance awards, though there are still plenty of takeaways on broad communication strategies
NASPP: What is one action should companies be taking now?
John: Just do. Companies just need to do something. Communications is one of those activities that companies throw into a plan—”In 2019, we will buy a video”—but they tend to put it out far enough so that they know deep-down it will never be achieved, because of the 542 competing priorities that will pop up the day it hits the to-do list.
Start now. Start with something…an email, a flyer, a webinar, a pre-recorded PowerPoint. Anything is better than nothing. Then the communication task changes—it becomes ‘replace,’ which has a far-higher value on the administrative to-do list for some reason. Start small and the future takes care of itself.
NASPP: Is there a silver lining to employee education?
John: There is absolutely a silver-lining. We have two companies on the panel that will speak to successes. There is also the reality that communications are getting cheaper as technology advances. For people who have been around this industry a long-time, producing and mailing paper grant packages for a thousand participants was probably more expensive than a handful of quick, basic videos today. All of the forms of communication technology are coming down in cost—it’s a commodity. The differentiation is deployment and expertise—putting it in the right hands and doing it the right way. It’s a far easier hurdle to clear today which is great news for everyone.
NASPP: What is your favorite memory from a past NASPP Conference?
John: This is my 19th NASPP conference—the memories are countless at this point. Washington, DC was my first in 1999 and it will be nice being there for the 25th anniversary. It is the evening networking events that offer the most memories. I remember playing washboard with a zydeco band in some New Orleans dive bar in 2001. As it’s the only time I have played washboard in a zydeco band, it sticks out. There have been some wonderful pranks over the years. I will say the opening reception is consistently my favorite event. Reuniting with friends and watching others reunite is the part that makes this industry a family to me. A crazy, fantastic family.
Don’t miss John’s session, “Pitch Perfect: Designing a Communication Strategy That Will Have Participants Singing,” at the NASPP Conference!
About the NASPP Conference
The 25th Annual NASPP Conference will be held from October 17-20 in Washington, DC. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!
Our popular “Meet the Speaker” series, featuring interviews with speakers at the 25th Annual NASPP Conference, is a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For today’s “Meet the Speaker” interview, we feature an interview with Matt Vnuk of Compensation Advisory Partners, who will lead the session “So You Say I Have a Noncompete… What Are You Going to Do About It?” Here is what Matt had to say:
NASPP: Why do NASPP Conference attendees need to know about restrictive covenants?
Matt: Restrictive covenants—noncompetition and nonsolicitation obligations—are often found in equity award agreements, offer letters, employment and separation agreements, and other employment-related documents.
Despite this, restrictive covenants are often not enforceable!
Our panel will explain some common misunderstandings, provide market data and examples, provide select state-by-state comparisons, explain common mistakes, provide practical, actionable tips, and discuss “stories from the field” from different perspectives.
NASPP: What is one action should companies be taking now?
Matt: Understand your purpose for restrictive covenants—desire to enforce versus deterrence value.
NASPP: What is the silver lining to restrictive covenants?
Matt: There are practical, actionable tips that we will be sharing during our panel discussion!
NASPP: What is your favorite tourist attraction in DC?
Matt: My favorite tourist attraction in DC is the Smithsonian Museum of American History.
Don’t miss Matt’s session, “So You Say I Have a Non-Compete… What Are You Going to Do About It?” at the NASPP Conference!
About the NASPP Conference
The 25th Annual NASPP Conference will be held from October 17-20 in Washington, DC. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!
Our popular “Meet the Speaker” series, featuring interviews with speakers at the 25th Annual NASPP Conference, is a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For today’s “Meet the Speaker” interview, we feature an interview with Jule Torre of Applied Materials, who will lead the session “Global Stock Plans in Jeopardy!” Here is what Jule had to say:
NASPP: Why do you feel strongly that stock plan administration needs to be less US-centric?
Jule: With the variety of smart phones and tools available today that allow people to work from anywhere, it is so very important to have a clear understanding that US rules and processes do not work outside the United States. Each country has its own unique rules, regulations and terminology. Engaging with your internal and external business partners, stakeholders and peers is critical to ensure that the programs are meeting their goals to retain and attract employees globally. A key consideration is to continually do data analysis to assess the risk of exposure for failing to comply. This is an ongoing process.
NASPP: What is one best practice companies should implement?
Jule: Ensure that your SOX controls and flow charts will stand up to the scrutiny of audits including those outside the oversight of the stock team. In this day and age, with outsourcing and multiple third-party vendors, it’s important that controls are in place to manage the complex equity programs that are in place or being rolled out and that they not just meet the corporate objectives but also comply with the local jurisdictions (i.e., data privacy, employment laws, works councils, currency/exchange controls and foreign ownership issues, etc.). Bottom line, it is important to have compliance guidelines and/or a policy in place.
NASPP: What is the silver lining to administering global stock plans?
Jule: I would have to say that it’s the collaboration of a great group of people who bring unique skills and knowledge to the table all the while attempting to make a complex topic simple in a world where one size does not fit all. It’s the ability to continue to ask questions, find and use the available resources and understand your company culture. Every day is different and there’s no time to become bored.
NASPP: What is your favorite tourist attraction in DC?
Jule: There is so much to see and do while visiting Washington, DC, it is hard to pinpoint one site. Just walking down the mall is awe inspiring but I would have to say it is the Smithsonian. In particular, the Air and Space Museum and American Museum of History. Both have left impressions from my early visits to our capital city.
Don’t miss Jule’s session “Global Stock Plans in Jeopardy!” session at the NASPP Conference!
About the NASPP Conference
The 25th Annual NASPP Conference will be held from October 17-21 in Washington DC. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!
Our popular “Meet the Speaker” series, featuring interviews with speakers at the 25th Annual NASPP Conference, is a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For today’s “Meet the Speaker” interview, we feature an interview with Takis Makridis of Equity Methods, who will lead the session “Mind the Gap: GAAP vs Non-GAAP Metrics for Incentive Plans.” Here is what Takis had to say:
NASPP: Why are non-GAAP metrics a hot topic?
Takis: Almost all companies use non-GAAP metrics in their long-term incentive (LTI) programs. Line of sight between efforts and results has never been more important, driving executive compensation leaders to look for metrics that aren’t influenced by factors well outside an executive’s control.
GAAP metrics, although consistent and comparable across companies, can be sensitive to unpredictable factors that are not critical to the incentive goals and strategy of the company. Should interest rate spikes really cause an executive to earn (or not earn) their awards? Accounting standard changes can also trigger large payout windfalls or misses. The same with M&A activity.
But there’s a big problem. While using non-GAAP metrics makes good sense at conceptual level, the broader use of non-GAAP metrics in financial accounting is under major fire. In the spring of 2016, the SEC issued interpretive guidance, essentially blasting companies for how they use non-GAAP measures in financial reporting. This doesn’t affect how companies structure their incentive awards, but it does cover performance discussions in the proxy. Add to that the problem of proxy advisors only using GAAP metrics in their analytics and compensation committees being extra concerned with staying within the goal posts of reasonability, and we have a hot topic!
NASPP: What is a common mistake companies make with non-GAAP metrics and how can they avoid this?
Takis: The biggest mistake I see is that many companies don’t carefully vet upfront how they’ll handle a broad variety of situations that can raise question marks in their metric of choice.
Here’s the thing: suppose you’re using a non-GAAP metric like EBITDA—it’s not enough to simply state that and assume you’re in the clear. It might be straightforward to find earnings and then back out interest, taxes, depreciation, and amortization, but numerous other considerations need to be thought through. Two big ones that can wreak havoc are accounting standard changes and corporate actions.
Most companies will be adopting the new revenue recognition and lease accounting standards. They’re setting metrics before the standards go into effect, but paying out after. How will results three years in the future be adjusted for the effect of the accounting standard changes? Or, what if a business unit is sold next year that generates $400 million in pre-tax earnings? Will you adjust your target down by that amount? These are examples of the level of nuance that needs to be thought through upfront.
The solution? Socialize with your key stakeholders (the compensation committee, general counsel, executive compensation, and finance) how you will treat future events that can insert ambiguity into your payout determination and certification.
I’m especially excited to hear my co-panelist, Dave Thomas of Wilson Sonsini, share some war stories during our session—he’s the master of bringing plain-English clarity to dense legalese. One specific best practice we’ll discuss is building and socializing a checklist that explains how, at a principle level, each future event will be handled so that the compensation committee is not backed into a corner to choose a treatment that’s favorable simply to avoid conflict.
NASPP: What is the silver lining to non-GAAP metrics?
Takis: When all is said and done, if non-GAAP metrics are used in a company’s LTI plan, having a clear framework for how it will perform adjustments to GAAP results will eliminate unnecessary surprises and friction with participants. But getting there takes a lot of work, and I think there’s an extra silver lining to all that work…
When you take the time to sort through how different business events will be handled in your LTI payout, this vetting drives mindshare. It drives mindshare with key executives who may be part of the planning process, and also with your compensation committee. How often do we hear that committees don’t really understand how the LTI award works or how participants view their awards as lottery tickets? I’ve seen a vetting process around non-GAAP adjustments drive engagement from both committee members and executive stakeholders, resulting in greater line of sight with what the award is really intending to incent.
NASPP: What is your favorite memory from a past NASPP Conference?
Takis: It was probably almost fifteen years ago, and I was running late to make it to the opening day reception. It might have been in San Francisco, but I remember it was raining and I was stressed that everything was taking a little longer than planned. I eventually arrived and within five minutes ran into a client, who embraced me with a big “thank you” for some work we had recently finished up.
That was a pivotal moment in my career. At that moment, it hit me that as technical as our field gets, we are all in the business of solving problems for other people. I think that’s true regardless of whether we’re in consulting, law, or work at an issuer—what we do matters, and it matters to other people.
I’m stoked for this year’s NASPP. So much has changed in the technical topics of what we all do, but we’re still a collection of people trying to make a difference—and I’m really excited that this hasn’t changed and that we can celebrate this together in DC.
Don’t miss Takis’s session, “Mind the Gap: GAAP vs Non-GAAP Metrics for Incentive Plans,” at the NASPP Conference!
About the NASPP Conference
The 25th Annual NASPP Conference will be held from October 17-20 in Washington DC. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!
Our popular “Meet the Speaker” series, featuring interviews with speakers at the 25th Annual NASPP Conference, is a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For today’s “Meet the Speaker” interview, we feature an interview with Jon Doyle of International Law Solutions, who will lead the session “Step-by-Step: Keys to a Successful Global ESPP.” Here is what Jon had to say:
NASPP: Why is a session on global ESPPs particularly timely right now?
Jon: There is an increased interest in offering ESPPs globally. Whether a company is considering offering its ESPP globally for the first time or has been offering it for years worldwide, there are more challenges to offering an ESPP globally than other types of equity awards.
NASPP: What is one best practice companies should implement?
Jon: Companies should engage in a cost-benefit analysis to determine whether there is sufficient interest in country before deciding to move forward.
NASPP: What is the silver lining to implementing a global ESPP?
Jon: With some careful planning and by following a step-by-step approach, companies can have a successful global ESPP.
NASPP: What is your favorite tourist attraction in DC?
Jon: The National Mall.
Don’t miss Jon’s session, “Step-by-Step: Keys to a Successful Global ESPP” at the NASPP Conference!
About the NASPP Conference
The 25th Annual NASPP Conference will be held from October 17-20 in Washington DC. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!
