One of the primary ways in which ASU 2016-09 changed stock plan accounting practices is to require that all tax effects be recognized in the income statement. Excess tax savings increase earnings (by reducing tax expense) and tax shortfalls reduce earnings (by increasing tax expense). For some companies, this results in a lot of volatility in earnings, earnings per share, and effective tax rates. It also makes it harder to forecast earnings.
PwC found that some companies are providing detailed commentary on the impact of ASU 2016-09 on earnings per share. Here is a sample disclosure that PwC found:
“[The Company] anticipates fiscal year 2017 diluted EPS from continuing operations to be in the range of $5.38 to $5.58, which includes an expected benefit of about 25 to 30 cents from the adoption of ASU 2016-09. Excluding the benefit of adopting the updated accounting standard, [The Company] anticipates fiscal year 2017 diluted EPS from continuing operations to be in the range of $5.13 to $5.28.”
Effective Tax Rates
PwC found similar disclosures for effective tax rates. From another company:
“We expect an effective tax rate of 26% – 27.5%, after a projected reduction of 350 – 450 basis points related to the implementation of the new accounting standard for the tax benefit of employee share-base compensation.”
Earnings Guidance
Finally, PwC found some companies that had updated previously disclosed earnings and tax rate forecasts:
“[The Company] now anticipates its effective fiscal year 2017 tax rate to be between 32 percent and 33 percent versus its previous assumption of 30 percent and 31 percent, reflecting a 2-point reduction versus year ago compared to the previously assumed 4-point reduction from adopting ASU 2016-09. The company’s updated assumptions for its fiscal year effective tax rate reflect lower than anticipated exercises of [the Company’s] stock options in the first quarter and the company’s revised outlook for full-year stock option exercises. As noted, the company had previously communicated that the benefit to be realized from the adoption of ASU 2016-09 could vary significantly.”
Here are a few items that recently showed up in my Google Alert/email that I found interesting.
Return on Executives Exequity is promoting a new way to measure alignment of pay with performance: return on executives (ROX). This measure compares the change in compensation paid to executives with the aggregate change in shareholder wealth. According to Exequity’s alert, ROX results in greater correlation between pay and performance and fewer disconnects in pay for performance alignment than other models (e.g., relative degree of alignment) typically used by ISS, Glass Lewis, and institutional investors.
The alert doesn’t go into a lot of detail on the calculation, but if you are having trouble with your Say-on-Pay story, maybe you should give Exequity a call.
Canada’s Loophole Activists in Canada are jumping on the stock options loophole bandwagon. Their objection isn’t related to corporate tax deductions, however (companies already don’t typically get a deduction for stock compensation in Canada). Stock options that meet certain requirements are taxed as capital gains in Canada, which generally results in a 50% income deduction. The requirements seem to be somewhat straightforward (you can read about them on pg 28 the NASPP’s Canada Guide) and there isn’t a limit on the number of shares that can qualify for this benefit, like there is with ISOs in the US. Canadian tax activists think option gains should be taxed as compensation. But I wonder, if the options are taxed as compensation, shouldn’t companies then be entitled to a corporate tax deduction for them?
Less Disclosure It’s not often that you hear about the SEC reducing the disclosures companies are required to make. Recently, however, the Corporation Finance staff updated the SEC’s Financial Reporting Manual to reduce the amount of disclosure companies have to make about their pre-IPO stock price valuations. The SEC doesn’t note what is new in the Manual, but a blog by Polk Davis describes what has changed with respect to the disclosures. This seems to be an outcome of the SEC’s Reg S-K study that I blogged about last week.
They grow up so fast! July 21 was the one-year anniversary of the Dodd-Frank Act (in case you are wondering, it’s been nine years since SOX was passed–time sure flies when you’re having fun). Today I take a look at Say-on-Pay results and highlight a recent announcement from the SEC about the timeline of further Dodd-Frank rulemaking projects.
To reminisce more on Dodd-Frank developments over the past year, check out the memo “Dodd-Frank One Year Later” by David Lynn of Morrison & Foerster (and editor of TheCorporateCounsel.net).
Say on Pay: The Results So Far
With proxy season winding down, here are the latest Say-on-Pay results (courtesy of Mark Borges, who has been providing weekly Say-on-Pay updates in his excellent blog on CompensationStandards.com):
2,596 companies have reported votes. Of those, only 37 reported failed votes, but there are three additional companies (Cooper Industries, Hemispherix Biopharma, and isoRay) where whether the Say-on-Pay vote passed depends on how you count. Of course, if your Say-on-Pay vote is that close, it probably doesn’t matter whether you count it as a pass or fail; either way, you are likely to be making some changes to your executive pay.
At least three companies (Lockheed Martin, General Motors, and Umpqua Holdings) modified prior grants to be subject to performance vesting in response to shareholder comments in connection with their Say-on-Pay votes.
At a majority (about 76%) of the companies reporting votes, shareholders expressed a preference for annual Say-on-Pay votes.
SEC Delays Further Rulemaking
In his also excellent blog on CompensationStandards.com, Mike Melbinger reported yesterday that the SEC has modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation. Here is the new schedule:
August – December 2011
§951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
§§953 and 955: Adopt rules regarding disclosure of pay-for-performance, CEO to median employee pay ratio, and hedging policies
§954: Adopt rules regarding recovery of executive compensation (i.e., clawbacks)
§956: Adopt rules (jointly with others) regarding executive compensation at covered financial institutions
July – December 2012
§952: Report to Congress on study and review of the use of compensation consultants and the effects of such use
Given the new schedule, Mike thinks it unlikely that most of these rules will be effective for next year’s proxy season, but there is a chance that one or two provisions will be effective for proxies filed after January (as with the Say-on-Pay rules, published in January 2011). Mike notes that the SEC will propose rules first (and already has for a couple of the provisions), so we should know well in advance which provisions will be final for the 2012 proxy season.
It’s Not Too Late to Enroll in the NASPP’s Financial Reporting Course The NASPP’s newest online program, “Financial Reporting for Equity Compensation” started on Thursday, July 14, but it’s not too late to get into the course. All webcasts have been archived for you to listen to at your convenience.
Designed for non-accounting professionals, this course will help you become literate in all aspects of stock plan accounting, from expense measurement and recognition, to EPS and tax accounting. Register today so you don’t miss any more webcasts.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Don’t miss your local NASPP chapter meetings in Kansas/Missouri, Philadelphia, and Phoenix. And, next week, on August 10, the San Francisco chapter will host their annual all-day event at Wente Vineyard in Livermore, CA. You really should come out for this exceptional event.
Recipients of Troubled Assets Relief Program (TARP) funds may be finding it hard to keep up with the restrictions associated with their participation. The TARP was introduced as a part of the Emergency Economic Stabilization Act of 2008 (EESA), which I blogged about in November. The EESA offers several ways for financial institutions, large and small, to gain access to funds. Access to funds comes with initial restrictions attached, many of which impact the stock plan administration of those companies. These restrictions include limits on senior executive severance benefits & 162(m) tax deductions as well as the requirements for certain claw-back provisions and to have a board Compensation Committee to oversee compensation strategies that should include measures to curb inappropriate risk-taking.
Companies that participate in the TARP are also now subject to additional restrictions through new Treasury statements in 2009 and the American Recovery and Reinvestment Act of 2009 (ARRA), which I blogged about in April of this year. This legislation focuses on executive compensation, moving to provide greater transparency and control to shareholders through certification requirements, executive compensation disclosure, say on pay, and limited bans on parachute payments and luxury expenditures. The ARRA also makes an important distinction between regular participants in the TARP, and those who receive exceptional assistance. It also provides a way for participating companies to release themselves from these restrictions by repaying TARP funds, which some companies have already done – see Ten Major Banks Repay $68 Billion in TARP Funds (CNBC June 17, 2009).
Interim Final Rule
The various regulations governing TARP recipients were consolidated by the Treasury on June 10, 2009 when it issued the Interim Final Rule (IFR). TARP recipients are subject to different levels of restrictions based on which program they are participating in and the size of the assistance they receive. Fortunately, the Interim Final Rule appoints a Special Master to help companies determine the applicable regulations and review executive compensation for participating companies. As it stands now, participating companies may be subject to the certain restrictions for senior executive officers (SEOs) or the next most highly compensated employees (HCEs). The IFR:
Prohibits
“golden parachute” payments to SEOs and the next five HCEs
bonus payments to SEOs and certain other HCEs, with the exception of certain restricted stock awards that meet the qualifications for the exception or other qualifying bonus payments that were legally binding through a contract on or before February 11, 2009
compensation plans that encourage “unnecessary and excessive risk” by SEOs
tax gross-ups to SEOs and the next 20 HCEs, except for payments under tax equalization agreements
Requires:
clawback provisions for bonuses paid to SEOs and the next 20 HCEs that are found to have been based on materially inaccurate performance criteria
“say on pay” non-binding shareholder vote applicable to proxy statements filed with the SEC after February 17, 2009
implementation of a corporate policy on excessive or luxury expenses;
disclosure of the use of any compensation consultant including the specific services provided and methods employed by the compensation consultant
disclosure of any perquisite with a total value exceeding $25,000;
certification by the CEO and CFO that the company is in compliance with all compensation and corporate governance requirements
Additional Ramifications
In addition to the IFR, the Treasury also expressed support for the SEC in its pursuit to impose similar executive compensation and corporate governance reforms for all companies, not just for TARP recipients.
On July 1, 2009, the SEC voted to move forward (see the SEC Press Release) with plans to improve corporate executive compensation disclosures (as outlined in the June 10th Press Release), in addition to modifying proxy disclosure to be in line with the IFR requirements for TARP recipients.
I think that all companies should be paying attention to the requirements made on TARP recipients. Congress and the current Administration appear to be moving towards implementing reforms for all companies to guide corporate governance and align executive compensation with company performance. Now is the time to review your company’s compensation philosophy and equity compensation programs and begin implementing changes that keep personal performance goals in line with company performance. Additionally, it is time to take a look at “say on pay” to determine if it’s right for your company now.