Two Days Left!
You have just two days left to take advantage of the early-bird pricing on the 24th Annual NASPP Conference. The Conference will be held from October 24-27 in Houston and the early-bird rate ends tomorrow, Friday, September 9. Register today!
Three Steps Towards a Fresh Start this Fall
Andrea Best of Stock & Option Solutions has posted a new NASPP Career Corner Blog on three steps to give your career a boost now that summer is over: take stock of your progress towards your goals, get organized, and take action.
NASPP To Do List
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The question of the role of compensation in encouraging risk-taking and cheating on the part of executives is an ongoing debate (for example, see “CEOs with Stock Options Are More Likely to Break Laws,” by Dylan Minor, Harvard Business Review, May 26, 2106). But a couple of recent studies that I heard about on a podcast make me wonder if it isn’t the amount or type of compensation that is the problem but more so the disclosure of it.
The Studies
I make dinner every night and doing so invariably involves endless chopping of vegetables. This gives me a LOT of time to listen to podcasts. One podcast I listen to regularly is NPR’s Hidden Brain, which discusses patterns in human behavior. A recent episode (“The Cheater’s High and Other Reasons We Cheat“) discussed social science research on cheating, specifically the social contexts in which people cheat.
The podcast discussed one study (“Cheating More for Less: Upward Social Comparisons Motivate the Poorly Compensated to Cheat” by Leslie John of Harvard Business School, George Loewenstein of Carnegie Mellon University, and Scott Rick of the University of Michigan) that found that people are more likely to cheat when they are aware that others are doing better than them. The subjects of the study were compensated at varying rates for performing a self-reported trivia task. The subjects were more likely to cheat when they knew that others in the experiment were earning more than them. The more easily they had access to the information about how others were compensated, the more likely they were to cheat. According to the authors of the study:
Our results suggest that low pay-rates are, in and of themselves, unlikely to promote dishonesty. Instead, it is the salience of upward social comparisons that encourages the poorly compensated to cheat.
A second study (“Winning a Competition Predicts Dishonest Behavior” by Amos Schurr of Ben-Gurion University of the Negev and Ilana Ritov of the Hebrew University of Jerusalem) found that people who won a competition were more likely to cheat on subsequent unrelated tasks. The propensity to cheat was tied directly to winning (i.e., performing better than their peers), not succeeding at personal goals or in games of chance.
Executive Compensation Disclosures and Cheating
When I listened to the podcast, I immediately thought of the executive compensation disclosures in the proxy statement. The disclosures provide an easy way for executives to compare their pay to their peers’. Not only is the information readily available on the SEC website, but it is fodder for any number of published studies on executive compensation. For proof, just look at the NASPP’s Surveys & Studies Portal. I count at least four or five such studies that are published annually, one of which is published in the Wall Street Journal. And that’s just among the studies that I have permission to post on the website. I’m sure there are more that I’m not aware of. If you are among the top five highest executives, I’m pretty sure you have an idea of how your compensation compares to your peers’.
On top of that, in recent years executive pay has shifted more and more towards performance-based compensation, which enables executives to increase the amount they are paid by improving company performance. We’ve also seen a significant shift toward measuring performance based on relative TSR—that is, how well a company performs as compared to its peers. Companies that rank higher against their peers “win” and those executives are paid more. Given the results of the two studies described above, this seems like a recipe for executives to cheat.
In what is possibly the least controversial decision ever made by the IRS, the agency has adopted its proposed amendment to the procedures for filing Section 83(b) elections, eliminating the requirement that taxpayers file a copy of the election with their tax return for the year that they make the election.
It’s Nice that We Can All Agree on Something
The amendment, which was proposed last year (see “IRS Proposes Amendment to 83(b) Election,” received no comments at all. Zip. Zero. No one requested a public hearing and no hearings were held. Cue the sound of crickets (ok, technically that’s the sound of frogs—I don’t have a video of cricket sounds). Hence the amendment was adopted with no changes from the original proposal.
Background
In the context of stock compensation, Section 83(b) elections are most frequently filed when employees exercise stock options prior to vesting. They are also sometimes filed upon grant of restricted stock. The election accelerates the taxable event for the award to the date of exercise (in the case of stock options) or grant (in the case of restricted stock). Employees wishing to file a Section 83(b) election must submit the election to their IRS service center within 30 days of the event triggering the election. Employees must also provide a copy of the election to their employer. Prior to this proposed amendment, a copy of the election also had to be included with employees’ tax returns for the year.
Now that the IRS is encouraging taxpayers to file tax returns electronically, the requirement to include the election with tax returns has proved to be problematic, since few efiling systems can attach a scanned document to the return. There was also a concern that taxpayers might be able to revoke an election after the 30-day election period by simply failing to include it with their tax return.
Effective Date
The amendment is effective for transactions occurring on or after January 1, 2016 but the IRS permitted taxpayers to rely on it for Section 83(b) elections filed in 2015. For more information, see the NASPP Alert “IRS Finalizes Amendment to Section 83(b) Election.”
More Frogs and Tax Developments
I took that frog sound video when I was visiting the Hilton Americas – Houston where the 24th Annual NASPP Conference will be held. It’s at a pond in the park across the street from the hotel. You know what else you can do in Houston besides hear the awesome sound of frogs at night? You can get an update on this and other recent tax developments directly from IRS and Treasury staffers during the session “The IRS and Treasury Speak.” Register by September 9 for the early-bird discount.
Time Is Running Out!
You have just one week left to take advantage of the early-bird pricing on the 24th Annual NASPP Conference. The Conference will be held from October 24-27 in Houston. Register today!
NYSE Clarification
The NYSE clarifies that amendments to allow maximum tax withholding do not require shareholder approval—check it out in the NASPP’s newest alert.
Understanding the IRS Rules for Tax Withholding
A new article by PwC discusses how ASU 2016-09 intersects with the IRS’s rules for withholding taxes on stock compensation.
NASPP To Do List
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Time Is Running Out!
You have just two weeks left to take advantage of the early-bird pricing on the 24th Annual NASPP Conference. The Conference will be held from October 24-27 in Houston. Register today!
New Podcast on Proposed 409A Regs
Our newest addition to the Equity Expert Podcast series features an interview with Mike Melbinger of Winston & Strawn on the newly proposed regs under Section 409A. Listen to the podcast to find out:
How the regs will make it easier to grant to newly hired employees
The one thing you should never do with restricted stock
Proposed simplifications that will ease adjustment of awards when participants die (and when their beneficiaries die as well)
NASPP To Do List
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Conference Hotel Is Filling Up
Don’t wait any longer to register for the 24th Annual NASPP Conference—the Conference hotel is quickly filling up. Register today while rooms are still available.
Attracting Top Talent
Check out Andrea Best of SOS’s new blog in the NASPP Career Center on four ways to attract top talent. Andrea notes that one of the things top performers look for is to know that they can contribute to the organization:
Expect “A” players to inquire about vision and purpose and how they, with their specific skills and experiences, can contribute to the growth and future of your company.
Read Andrea’s blog to find out the other three things top performers look for in an employer.
What Do You Think ISS’s Policies Should Be?
Did you miss the polls about ISS’s 2017 corporate governance policy in last Thursday’s blog? There’s still time to tell us what you think!
NASPP To Do List
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Every year, ISS conducts a survey in advance of updating its corporate governance policy. The survey is open not only to ISS clients and institutional investors but also to entities that are often the subject of ISS recommendations, including both companies and corporate directors, as well as other market participants, such as those that advise companies. There are a couple of questions in this year’s survey that caught my eye.
Frequency of Say-on-Pay Votes
Although most companies currently hold Say-on-Pay votes every year, the SEC’s final regulations allow these votes to be held every one, two, or three years, at the election of shareholders. The “Say-on-Pay frequency vote” must be held at least once every six years. In 2017, for the first time since Say-on-Pay went into effect, most companies will once again give shareholders an opportunity to vote on how often their Say-on-Pay vote should be held.
In anticipation of this, ISS has included a couple of questions on the frequency of Say-on-Pay votes in this year’s survey. Currently, ISS’s policy recommends an annual Say-on-Pay vote. The survey contemplates a different recommendation, possibly one that is dependent on company circumstances, such as company size, performance, problematic pay practices, and/or past Say-on-Pay vote results.
P4P Analysis
As part of its evaluation of CEO pay, ISS performs a “Pay-for-Performance Evaluation.” This consists of a quantitative analysis in which the company’s TSR performance is compared to the CEO’s pay and both metrics are ranked against the company’s peers. If the company performs poorly in the quantitative analysis, the next step is a qualitative analysis, in which ISS looks at the company’s specific pay practices.
The survey focuses on the quantitative analysis, asking if this analysis should be based on other metrics, in addition to TSR, and, if yes, what other metrics should be included.
In the past decade, we’ve seen a significant increase in the use of TSR targets in performance awards. In the NASPP/Deloitte Consulting 2013 Domestic Stock Plan Design Survey, use of TSR had increased to 43% of respondents, up 48% from the 2010 survey. I expect usage will be even higher in this year’s survey—possibly nearing or exceeding 50% of respondents. No other metric comes close, in terms of prevalence.
But, TSR is not without its critics. For example, see the article we just posted by Brett Herand of Pearl Meyer, “Re-Evaluating Total Shareholder Return as an Incentive.” It is interesting to see that the TSR backlash has reached enough of crescendo that ISS is considering changing its policy.
Survey Closes August 30
If you want to participate in ISS’s survey, you don’t have much time. The survey closes on August 30.
Conference Hotel Is Filling Up
Don’t wait any longer to register for the 24th Annual NASPP Conference—the Conference hotel is quickly filling up. Register today while rooms are still available.
Equity Expert Podcast: Balancing Expense with Perceived Value
Check out our latest Equity Expert Podcast featuring Dan Kapinos of Aon Hewitt and Mike Palermo of Fidelity on making your equity awards as efficient as possible when it comes to plan cost and incenting employees. A few of their suggestions:
Using a more nuanced version of the Black-Scholes model
Not paying dividends on unvested awards
Post-vesting holding periods
Payout caps on performance awards
Listen to the podcast to learn more about these suggestions and hear Dan and Mike’s other ideas.
Re-Evaluating TSR
The article “Re-Evaluating Total Shareholder Return as an Incentive,” by Brett Herand of Pearl Meyer (originally published in workspan) takes another look at the use of relative TSR as a performance metric for equity awards. Herand discusses recent research demonstrating weaknesses in the effectiveness of TSR as an incentive. He notes:
By shifting from an rTSR plan to a plan based on financial and/or operational performance, telling employees that they will be given additional control over their own compensation destiny, as opposed to being overly exposed to market vagaries, can be powerful.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Quick Survey on Global ESPPs
Take our quick survey on global ESPPs, co-sponsored by Solium. The survey is less than 25 questions; you can complete it in under 15 minutes! Do it today before you forget!
Brush up on the basics of full value awards with our newest online program, Restricted Stock Essentials. The full course has been archived for you to complete at your convenience.
Our popular “Meet the Speaker” series, featuring interviews with speakers at the 24th Annual NASPP Conference is great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
NASPP: Why is Section 16 compliance particularly timely right now?
Alan: Section 16 compliance is a particularly timely topic right now for two reasons. First, the SEC has stepped up its Section 16(a) enforcement program, targeting more late filers of Forms 4 and increasing it monitoring of noncompliance through electronic surveillance techniques. Second, the Section 16(b) plaintiffs bar is growing in size and becoming increasingly aggressive in pursuit of potential recoveries of short-swing profits. These developments make it even more important than before that every public company have a qualified, knowledgeable person responsible for Section 16 compliance.
NASPP:What is one action should companies be taking now with respect to Section 16?
Alan: Companies should review their existing compliance program, including how they determine each insider’s beneficial ownership, how and from whom they receive information about insiders’ holdings and transactions, and how they keep insiders’ informed of the importance of restricting and monitoring the actions of their financial advisors, to be sure that the compliance program is designed and implemented to maximize filing compliance and minimize exposure to liability under Section 16(b) as well as the SEC’s antifraud rules.
NASPP:What is the worst Section 16 horror story you know?
Alan: A Section 16 insider paid more than $30 million in short-swing profits, as calculated under the punitive “Smolowe rule” of matching the highest priced sale with the lowest priced purchase within six months, because the compliance staff didn’t fully understand the application of Section 16 to transactions in derivative securities.
NASPP:What is your favorite memory from a past NASPP Conference?
Alan: My favorite memory is of the first few NASPP Conferences, which seemed to be held in San Francisco in those days, and finding time to explore the city and even Napa Valley with other speakers. Running into Conference speakers and attendees around town made the city and the Conference very personal.
The 24th Annual NASPP Conference will be held from October 24-27 in Houston. 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!