Late last week, the House Ways and Means Committee released the Tax Cuts and Jobs Act, which is its first attempt at legislation to implement major US tax reform. At over 400 pages, the bill makes substantive changes to many areas of tax law, including marginal individual income tax rates, standard and itemized deductions for individuals, and the corporate tax rate. The bill also proposes changes that would have a material impact on stock and executive compensation.
Stock Options Taxed at Vest?
In a surprise development, the bill includes language which would make all forms of nonqualified deferred compensation subject to tax when no longer subject to a substantial risk of forfeiture. There would simply no longer be any way to defer taxation of compensation past the point at which it is vested.
The bill specifically defines NQDC to include stock options, SARs, and unit awards. If enacted, taxation of stock compensation would be modified as follows:
Stock options and SARs would be taxable at vest.
Deferring payout of RSUs would no longer delay taxation of the award; all RSUs would be taxable at vest for both FICA and FIT purposes.
Options and awards that provide for accelerated or continued vesting upon retirement would be taxable for FIT purposes, as well as FICA, when the award holder is eligible to retire.
Substantial Risk of Forfeiture
The proposed legislation treats compensation as subject to a substantial risk of forfeiture only if vesting is conditioned on the performance of services. I suspect that this language is intended to clarify that clawback arrangements don’t delay taxation. A memo by McDermott Will & Emory notes, however, that the language could be construed to mean that awards in which vesting is conditioned only upon an IPO or CIC would not be considered to be subject to a substantial risk of forfeiture. If so, this would make it very challenging for private companies to offer stock compensation in any form to their employees.
What About ISOs and ESPPs?
That is a very good question that I don’t know the answer to. The bill does not appear to include a specific exemption for compensation awarded under Section 422 and 423 but it also doesn’t specifically repeal these sections of the tax code. If ISOs and ESPPs are exempt, these vehicles would be the only way to deliver compensation in the form of stock that wouldn’t require taxation at vest. If so, this could be the one change that might bring ISOs back from the brink of extinction. You can color me speechless.
Effective Date
The new rules would apply to compensation attributable to services performed after December 31, 2017 (yes, less than two months away—nothing like giving companies a little time to rethink their entire equity compensation strategy). Moreover, a memo by Baker McKenzie notes that this language means that all currently outstanding but unvested options and awards would be taxable at vest starting next year.
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 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!
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 Raenelle James of Equity Methods, who will lead the session “A Disrupter’s Guide to Equity Accounting Transformation: Insights from Winning Teams.” Here is what Raenelle had to say:
NASPP: Why do you feel strongly about your topic?
Raenelle: We were seeking the answer to the question—”What does a center of excellence look like? What exactly is best in class as it relates to equity compensation accounting?”
In our quest, we found that finance executives really care about impact! They want stock compensation accounting (and all other areas in their domain) to deliver relevant and useful decision-making information to stakeholders. They want controls and automation, AND flexibility and agility.
At the end of the day, stock-based compensation is just one component of the overall finance function, but it can and should be a very strategic component.
NASPP: What is one action should companies be taking now?
Raenelle: At the end of the day, there’s no prescriptive “you must do these things” sort of a list. However, to make an impact, having good controls is essential! Therefore taking a step back and taking a critical look at the current process to confirm that good controls are in place is a good first step for most companies.
If this is already a foregone conclusion for you, then ask yourself—what information are you delivering? Is the stock-based compensation accounting function viewed as a key business partner for strategic initiatives? And if not, what information can you help provide that would force organizational leaders to start taking that viewpoint?
NASPP: What is the silver lining to your topic?
Raenelle: Regardless of your size or industry, epitomizing best in class is very feasible.
I like to reference Kaizen as it is the Japanese word for “continual improvement.” Ultimately, that’s what we should be striving for.
NASPP: What is your favorite restaurant in DC?
Raenelle: I may cop out here and give two answers for this question—primarily because one is a bakery, but I had to mention it as I love desserts 🙂
PAUL—I discovered this on a trip to DC recently. It’s a French bakery that has amazing pastries. Key note—it is a chain that started in Paris and has a very long history, but I have found it to be a place where I can get very good pastries.
Rasika—this is a true restaurant (as opposed to just a bakery). It has amazing Indian food and in the times that I have been there, I have always found something new to try (and have never had a bad meal there).
All of this of course is just my humble opinion :). DC has an amazing selection of restaurants. If you love to eat, this is a great city to be in.
Don’t miss Raenelle’s session, “A Disrupter’s Guide to Equity Accounting Transformation: Insights from Winning Teams,” 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 John Schultz of Compensation & Benefit Solutions, who will lead the session “Think of the Administrators! Simplicity vs. Complexity in Incentive Plan Design.” Here is what John had to say:
NASPP: Why do NASPP Conference attendees need to know about your topic?
John: Well you know what they say about the best laid plans of mice …. Often, in our experience, we see companies come up with great plan design concepts that ultimately result in chaos once it comes down to the nuts and bolts of administering the program. Some of this can be attributed from not having all stakeholders involved in the plan design, but more often it is simply a matter of unique circumstances in how the mechanics of the various administration inputs operate. Our goal for this session is to walk through some of the more common plan design features that can create the biggest headaches (and costs!) for the administration team.
NASPP: What is a common mistake companies make and how can they avoid this?
John: Not having all the stakeholders involved when designing the incentive plan. That doesn’t mean that all parties need to be involved at every step of the way, but we highly recommend to our clients running key design features by the people that will actually be involved in administering them. For example, payroll often gets the short shrift in plan design (if involved at all), yet that group of stakeholders can flag timing issues that make a design feature much costlier than ever anticipated (think withholding calculations and remittance timing).
NASPP: What is the worst horror story you can tell on your topic?
John: Penalties … lots and lots of penalties ….
NASPP: What is your superpower?
John: Wow, that is a good question. Difficult, though; what does one gauge his response on? Physical prowess? Keen deductive skills? The ability to banter well with super villains? (Brodie Bruce, Mallrats)
Don’t miss John’s session, “Think of the Administrators! Simplicity vs. Complexity in Incentive Plan Design: Session,” 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!
