As I promised on Tuesday, for today’s blog entry I have highlights from a few more CEO pay ratio disclosures (for the first installment in this series, see “Early CEO Pay Ratio Disclosures – Part 1“).
I’ve linked each company’s name to its relevant proxy statement; you can find the disclosures easily by searching on the phrase “pay ratio” in the proxies.
Northwestern Corp’s CEO pay ratio is 22 to 1, which they acknowledge is up from 19 to 1 the year before. Northwestern has been voluntarily disclosing their CEO pay ratio since 2010 (i.e., since Dodd-Frank was adopted), stating that they are committed to internal pay equity. Over that time period, the CEO’s pay has ranged from 18 to 24 times the median employee pay. Although they calculated the ratio in compliance with the SEC requirements this year, at least for the first few years that they made the disclosure their methodology for calculating the ratio probably varied from the SEC’s requirements, since the SEC’s proposed rules weren’t issued until 2013.
Northwestern provides electricity and natural gas in Montana, South Dakota and Nebraska and has a little over 1,500 employees. The disclosure includes a tabular presentation comparing the CEO’s pay to the median employee’s pay by component of pay (base salary, equity awards, non-equity incentive compensation, change in pension value and NQDC earnings, and all other compensation). The CEO’s total compensation was approximately $2.8 million and the median employee’s compensation was just over $124,000.
Northwestern’s disclosure notes that they used total cash compensation to identify the median employee. They further note that they believe this is appropriate because they don’t grant equity broadly and only 7% of their employees receive annual equity awards (how disappointing). Interestingly, they did not annualize compensation paid to employees who worked only part of the year.
Range Resources has the highest ratio (77 to 1) and the shortest disclosure of the four that I’ve highlighted in this series of blog entries. Their disclosure is so short I can reproduce it for you in full:
As a result of the recently adopted rules under the Dodd-Frank Act, beginning with our 2018 proxy statement, the SEC will require disclosure of the CEO to median employee pay ratio.
Mr. Ventura had 2016 annual total compensation of $9,862,925 as reflected in the Summary Compensation Table included in this Proxy Statement. Our median employee’s annual total compensation for 2016 was $127,938. As a result, we estimate that Mr. Ventura’s 2016 annual total compensation was approximately 77 times that of our median employee.
Although I suspect that 77:1 is lower than many of the ratios we’ll see once all public companies are making this disclosure, but perhaps given its steepness, they felt that no good could come of belaboring the point. Best to be quick about it and move on.
Range Resources is a natural gas, gas liquids, and oil company and they have close to 800 employees.
Annotated Sample CEO Pay Ratio Disclosures
If you are involved with calculating your company’s CEO pay ratio, don’t miss the Pay Ratio & Proxy Disclosure Conference, which will be held on October 17 in advance of the NASPP Conference. Everyone who registers for this program can also attend three pre-event webcasts on preparing for the disclosure and will receive annotated sample disclosures in PDF and Word. Don’t wait to register—the first webcast is scheduled for July 20 and the early-bird rate is only available through July 28.
There aren’t a lot of companies rushing to disclose their CEO pay ratio before they have to, but in his blog on CompensationStandards.com, Mark Borges of Compensia highlights a few that he has found (“More CEO Pay Ratio Disclosures“).
Not surprisingly, none of the disclosed ratios are excessive; for all but one, the CEO’s pay is less than 20 times the median employee’s pay. Companies with excessive ratios probably aren’t keen on making the disclosure early. This week (today and Thursday), I have a few highlights from the disclosures, starting with the companies with the two lowest ratios. (I’ve linked each company’s name to its relevant proxy statement; you can find the disclosures easily by searching on the phrase “pay ratio” in the proxies.)
Adam Resources & Energy’s ratio is impressively low at 5.7 to 1. Their median employee pay was about $70K but their CEO made only $400K, hence the low ratio (they do not appear to issue equity to their executives). They note in the disclosure that they have 654 employees, most of whom are truck drivers (they are in the oil and gas industry and transport liquid chemicals). They also note that they annualized pay for employees who only worked part of the year and they excluded employees on leave.
The proxy further notes that they excluded their 401(k) and medical benefits from the ratio—and with a ratio of 5.7:1, why not? Including those benefits will increase the pay disclosed for the median employee and employees comparing themselves to the median probably won’t think to include those components in their own compensation. But for companies that don’t have the luxury of such a low ratio, including those components might help bring down their ratio since the 401(k) and medical benefits are likely to be higher percentage of the median employee’s pay than the CEO’s pay.
NovaGold is in gold mining and has only 13 employees, including their CEO, which must make it pretty easy to find their median employee. Because they have an even number of employees, they note that they averaged the compensation for the sixth and seventh employees to come up with the median compensation (this also handily allows them to avoid disclosing the actual compensation of any one of their employees—potentially a concern with there being only 12 of them).
Their ratio is 13.5 to 1 and their median employee’s pay is around $400K, making them a company of fairly well-paid employees (well, at least half of the employees). Their disclosure includes a list of pay components that were included in the calculation. Besides the obvious (salary, bonuses, equity), they also included 401(k) match, ESPP match, life insurance premiums, auto allowance, and reimbursement of executive physicals.
Stay tuned: on Thursday I’ll look at two more early disclosures.
When I presented for the Western PA NASPP chapter last Wednesday, I told the group I expected the House to vote any day on the Financial CHOICE Act. And I was right—the House approved the Act the very next day. The CHOICE Act would repeal or weaken much of the Dodd-Frank Act, including repealing the CEO pay ratio disclosure.
Is It a Law Now?
No way; the Act still has miles to go before it becomes law. It has to be introduced in the Senate, pass through committee in the Senate, be voted on (and passed) by the full Senate, and then be signed into law. And the Act is very controversial; it is much broader than just the compensation-related provisions of Dodd-Frank, making significant changes to banking and financial regulation. To give you an idea of how broad it is, the Morrison & Foerster memo summarizing the Act is four pages long and doesn’t even mention repeal of the CEO pay ratio.
According to Morrison & Foerster, passing the Act as it stands now is likely to be an uphill battle:
Senate passage would require a 60 vote majority and Republicans control only 52 seats. There is no indication that any of the 46 Democrats, or 2 independents that caucus with the Democrats, will support the measure as passed by the House. As a result, it is likely that fundamental changes to the CHOICE Act would be required in order for it, or portions of it, to pass the Senate, be reconciled with the House bill and become law.
As reported by govtrack.us, Skopos Labs (a provider of predictions about legislation) is currently giving the Act a 25% chance of passing (but hey, that’s up from 1% the first time I looked at the prediction).
What Does It Do?
A lot of what the Act does is well outside the sphere of equity compensation. Here is what it does in the areas of Dodd-Frank that I am most interested in:
Repeals the CEO pay ratio disclosure
Limits Say-on-Pay votes to years in which substantial changes are made to exec pay packages (eliminating the Say-on-Pay-Frequency vote).
Repeals the hedging policy disclosure
Limits Dodd-Frank clawbacks to situations where the officer has control or authority over the financial reporting that triggered restatement
This Cooley memo provides a thorough list of all of the provisions of the Act.
Why CHOICE?
CHOICE stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.” In the words of Matt Levine, a blogger for Bloomberg View:
The sheer art of naming something “Choice,” but “Choice” is an acronym that resolves to include “Hope”! Imagine if you could create hope by adjusting bank capital requirements. It is daring, inventive, impressive stuff. It’s no USA Patriot Act—what is?—but it is an achievement in acronyming that would make the financial industry proud.
The glimmer of hope that the CEO Pay Ratio will be delayed or repealed continues to dim (although it hasn’t been completely snuffed out yet).
The SEC Delay
The comment letters submitted to the SEC about delaying the effective date were overwhelmingly opposed, although most were form letters and not nearly as many were received as on the proposed regs. More importantly, the SEC may not currently have enough commissioners to effect a delay. Although a new chair has been appointed, in his recent Equity Expert Podcast with us, Steve Seelig of Willis Towers Watson explains that three commissioners are needed for a quorum. The SEC currently has only three total commissioners (including the chair); a commissioner could prevent a matter from being voted on just by not showing up for the vote. One of the current commissioners is a Democrat (and even worked with Senator Dodd at one point) and may not be supportive of a delay.
Steve noted, however, that even if a delay can’t be effected, the SEC staff could issue interpretive relief that would make it easier to calculate the ratio). Steve had a lot of insightful things to say about the ratio; the podcast is definitely worth a listen.
The Financial Choice Act
The Financial Choice Act has already passed through the House Financial Services Committee, only a month after it was introduced by Jeb Hensarling (R-TX). This act would dismantle or weaken many provisions of the Dodd-Frank Act, including a full repeal of the CEO Pay Ratio. But even with the quick passage through committee, this act has a ways to go and the odds of it passing are still low.
The bill is close to 600 pages long and does a whole host of other things besides repealing the CEO pay ratio; a memo from Cooley, “It’s baaaack — the Financial CHOICE Act of 2017,” provides a rundown of the scope of the bill.
Back in February, it seemed like repeal of the CEO pay ratio disclosure was only a matter of time and that when it goes, it might take a lot of the rest of Dodd-Frank with it (see “More Challenges to Dodd-Frank,” February 9). But now the GOP’s push for a repeal seems to be losing steam.
Piwowar’s Request for Comments
As I noted on February 9, SEC Chairman Piwowar has requested comments from companies that have encountered unexpected challenges in implementing the CEO pay ratio. Comments are posted to the SEC’s website as they are received: so far, the SEC has received over 60 individual comment letters and a form letter (of which there have been over 3,000 submissions). The overwhelming majority of comments, including the over 3,000 form letters, are opposed to a further delay in the implementation of the rule. Given the veritable wealth of information on executive pay that is included in the proxy, it is surprising to me that anyone feels they need to know the ratio of CEO to median employee pay to figure out that CEOs are overpaid but apparently a lot of people really do want to know this. Go figure.
If you have encountered challenges (expected or unexpected) in preparing for the disclosure, now is a good time to tell the SEC about them. Comments are due by March 23 but, in my experience, most governmental agencies will still consider comments received after the deadline. If you are interested in reading about the challenges other companies have encountered, check out the letters from Borg WarnerFlushing Financial, Stein Mart, and Finish Line.
Not a Priority?
Trump’s executive order requiring review of all “existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies” seemed to target Dodd-Frank along with other legislation (see “Dodd-Frank Under Scrutiny“). But, as reported in an article on Bloomberg (“Dismantling Dodd-Frank May Have to Wait“), repeal of Dodd-Frank was notably absent from Trump’s priority-setting speech to Congress on February 28.
Financial Choice Act a Long Shot
The Bloomberg article also noted that there is significant opposition to the Financial Choice Act. This act would repeal or weaken much of Dodd-Frank, but one analyst quoted in the article gives it only a 10-20% chance of passing.
It’s Not Over Until the Secretary of the Treasury Sings
The Executive Order calling for a review of all existing laws, regulations, etc. also requires the Secretary of Treasury and the Financial Stability Oversight Council to report their findings to the Administration by early June. Until then, there’s still a chance the rule may be delayed or repealed.
As I mentioned in my blog on Tuesday, we are starting to see some movement towards repeal or revision of at least parts of the Dodd-Frank Act. The Administration’s executive order isn’t the only action that has been taken; here are a couple of other developments:
CEO Pay Ratio—The SEC Weighs In
On Monday, February 6, Acting SEC Chair Michael Piwowar issued a statement on the CEO pay ratio disclosure. Piwowar requests comments on “unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed,” and encourages detailed comments to be submitted within 45 days. Piwowar also notes that he has directed the SEC staff to “reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.”
While that’s pretty vague, is does indicate that, in addition to the Secretary of the Treasury and the Financial Stability Oversight Council, the SEC is also looking at the CEO pay ratio rule. Even so, it’s hard to say what this means. As we all know, and as an article in the Wall Street Journal notes (“GOP-Led SEC Considers Easing Pay-Gap Disclosure Rule of Dodd-Frank“), it is difficult for the SEC to move quickly on matters like this:
Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.
And Then There’s Congress
An article in Bloomberg/BNA reports that the Financial Choice Act is likely to be reintroduced into Congress this year (“Dodd-Frank Rollback Bill Expected in February, Duffy Says“). Originally introduced last year, this bill would repeal or restrict major parts of the Dodd-Frank Act, including reducing the frequency of Say-on-Pay votes, limiting application of the clawback provisions, and repealing the CEO pay ratio and hedging disclosures. Jenn Namazi blogged on the Act last year (see “Post Election: Things to Watch – Part I” and “Part 2“).
The Financial Choice Act is bigger than Dodd-Frank. The bill would also require a joint resolution of Congress before any “major” rulemaking by the SEC and a number of other agencies could go into effect. Mark Borges notes in his blog on CompensationStandards.com (“Acting SEC Chair Weighs in on CEO Pay Ratio Rule“) that the bill is expected to require the major proxy advisory firms to register with the SEC and, among other things, disclose potential conflicts of interest.
Poll: What Are You Doing?
It’s hard to know what to do in response to all this. Preparing for the CEO pay ratio disclosure requires a lot of time and resources, which most on the corporate side would view as wasted if the disclosure is eliminated. But if the disclosure isn’t eliminated, stalling preparations now could result in an implementation time crunch.
In his blog on CompensationStandards.com (“As Predicted—Hitting the Pause Button on the CEO Pay Ratio Rule“), Mike Melbinger says: “Postponement and revision of the rule seems likely. Now might be a good time to stop spending time and money on this calculation.” Take our poll to tell us what your company is doing (click here if the poll doesn’t display below).
Since last Friday, there’s been a lot of talk from regulators relating to Dodd-Frank. There’s been no definitive action yet on the law, but we’re officially on notice that things are likely to change in the future. Here’s a quick run-down of what happened.
Review of Dodd-Frank
Last Friday, February 3, the Administration issued an executive order that purportedly calls for a review of the Dodd-Frank Act, albeit without mentioning Dodd-Frank by name. The order establishes the following “Core Principles”:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
The order then gives the Secretary of the Treasury and the Financial Stability Oversight Council 120 days to report on the extent to which “existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies” adhere to these principles and to identify any of said laws, treaties, et. al., that inhibit regulation in a manner consistent with the Core Principles.
That sounds bigger than Dodd-Frank and perhaps it is. According to an article by Bloomberg (“Trump to Order Dodd-Frank Review, Halt Obama Fiduciary Rule,” the order is intended to target the Fiduciary Rule (which requires advisors on retirement accounts to act in the best interest of the clients), as well as Dodd-Frank.
It’s all very general in nature, but within the next four months (presumably sometime around the end of May) the Treasury Department will be delivering its report and (again presumably) it will address whether (and to what extent) the Dodd-Frank Act promotes or does not promote the Core Principles. I expect that this report will cover the various executive compensation-related provisions of the Act, including the CEO pay ratio disclosure requirement. While it’s still too early to know what this all means – or how it will play out, the Order clearly signals the start of the long-promised re-working of the law. This will likely include the repeal of some provisions, the modification and amendment of others, and, possibly, the survival of some provisions intact.
There’s a lot being said about the new CEO pay ratio disclosure rules, most of it far better than anything I could write myself, so today, as a fill in for Jenn Namazi who is on vacation, I continue my new tradition of “borrowing” other blog entries on this topic.
Today’s entry is a nifty “to do” list for preparing for the CEO pay ratio disclosure that Mike Melbinger of Winston & Strawn posted in his August 6 blog on CompensationStandards.com. Given that the disclosure isn’t required until 2018 proxy statements, you might have been lulled into thinking that this isn’t something you have to worry about yet. While it’s true that there’s no need to panic, there is a lot to do between now and 2018 and it is a good idea to start putting together a project plan now to get it all done. Don’t let this turn into another fire that you to put out. Here are Mike’s thoughts on how to get started:
1. Brief the Board and/or the Compensation Committee as to the final rules and the action steps. Press coverage of the rules has been extensive. They are likely to ask.
2. Each company may select a methodology to identify its median employee based on the company’s facts and circumstances, including total employee population, a statistical sampling of that population, or other reasonable methods. We expect that the executive compensation professionals in the accounting and consulting firms very soon will be rolling out available methodologies (they began this process when the rules were proposed, two years ago). The company will be required to describe the methodology it used to identify the median employee, and any material assumptions, adjustments (including cost-of-living adjustments), or estimates used to identify the median employee or to determine annual total compensation.
3. As I noted yesterday, the rules confirm that companies may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure). Assess your ability to calculate precisely all items of compensation or whether reasonable estimates may be appropriate for some elements. The company will be required to identify clearly any estimates it uses.
4. Begin to evaluate possible testing dates. The final rules allow a company to select a date within the last three months of its last completed fiscal year on which to determine the employee population for purposes of identifying the median employee. The company would not need to count individuals not employed on that date.
5. Consider tweaking the structure of your work-force (in connection with the selection of a testing date). The rules allow a company to omit from its calculation any employees (i) individuals employed by unaffiliated third parties, (ii) independent contractors, (iii) employees obtained in a business combination or acquisition for the fiscal year in which the transaction becomes effective. Finally, the rule allows companies to annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire. The rules prohibit companies from full-time equivalent adjustments for part-time workers or annualizing adjustments for temporary and seasonal workers when calculating the required pay ratio.
As I noted yesterday, the rules permit the company to identify its median employee once every three years, unless there has been a change in its employee population or employee compensation arrangements that would result in a significant change in the pay ratio disclosure.
6. Determine whether any of your non-U.S. employees are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules only allow a company to exclude employees in these countries. (The rules require a company to obtain a legal opinion on this issue.)
7. The rules only allow a company to exclude up to 5% of the company’s non-U.S. employees (including any non-U.S. employees excluded using the data privacy exemption). Consider which non-U.S. employees to exclude.
8. The rules allow companies to supplement the required disclosure with a narrative discussion or additional ratios. Any additional discussion and/or ratios would need to be clearly identified, not misleading, and not presented with greater prominence than the required pay ratio.
The rules explicitly allow companies to apply a cost-of-living adjustment to the compensation measure used to identify the median employee. The SEC acknowledged that differences in the underlying economic conditions of the countries in which companies operate will have an effect on the compensation paid to employees in those jurisdictions, and requiring companies to determine their median employee and calculate the pay ratio without permitting them to adjust for these different underlying economic conditions could result in a statistic that does not appropriately reflect the value of the compensation paid to individuals in those countries. The rules, therefore, allow companies the option to make cost-of-living adjustments to the compensation of their employees in jurisdictions other than the jurisdiction in which the CEO resides when identifying the median employee (whether using annual total compensation or any other consistently applied compensation measure), provided that the adjustment is applied to all such employees included in the calculation.
If the company chooses this option, it must describe the cost-of-living adjustments as part of its description of the methodology the company used to identify the median employee, and any material assumptions, adjustments, or estimates used to identify the median employee or to determine annual total compensation.
Companies with a substantial number of non-US employees should seriously consider the ability of apply a cost-of-living adjustment to the compensation measure used to identify the median employee.
Last week, the SEC adopted the final CEO pay ratio disclosure rules. I’ve been on vacation, so I don’t have a lot to say about them, but Broc Romanek’s blog on ten things to know about the rules is better than anything I could have written anyway, so I’m just going to repeat that here:
1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new “Top 10″ Lists in a couple years. Highest and lowest pay ratios. Although the rules aren’t effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules do not require companies to report pay ratio disclosures until fiscal years beginning after January 1, 2017.
2. You Don’t Need to Identify a New Median Employee Every Year! This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there’s a change in employee population or employee compensation arrangements). Your still need to disclose a pay ratio every year—but you don’t have to go through the hassle of conducting a median employee cost analysis every year. During those two years when you rely on a prior-calculated median employee, your CEO pay is the variable.
3. Pick Your Employee Base Within Three Months of FYE: The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don’t count folks not yet employed by that date—but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).
4. Independent Contractors Aren’t Employees: Duh.
5. Part-Time Employees Can’t Be Equivalized: The rules prohibit companies from full-time equivalent adjustments for part-time workers—or annualizing adjustments for temporary and seasonal workers—when calculating pay ratios.
6. Non-US Employees & the Whole 5% Thing: For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:
– Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules require a company to obtain a legal opinion on this issue—can you say “cottage industry”!
– Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.
7. Don’t Count New Employees From Deals (This Year): The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)
8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay: The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).
9. Alternative Ratios & Supplemental Disclosure Permitted: Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they’re clearly identified, not misleading nor presented with greater prominence than the required ratio).
10. Register NOW for the Proxy Disclosure Preconference and August 25 Pay Ratio Workshop:Register now before the discount ends next Friday, August 21. The Proxy Disclosure Preconference will be held on October 27, in advance of the NASPP Conference in San Diego. Registration for the Proxy Disclosure Preconference also includes access to a special online Pay Ratio Workshop that will be offered on August 25. The Course Materials will include model disclosures and more. Act by Friday, August 21 to save!
Last Wednesday, the SEC proposed the last set of compensation-related rules required under Dodd-Frank: clawback policies. This is one of those things where the SEC can’t directly require companies to implement clawback provisions, so instead, they are proposing rules that would require the NYSE and NASDAQ to add the requirement to their listing standards for exchange-traded companies.
Clawback Policies
The requirements for clawback policies under Dodd-Frank are much broader than under SOX (which required misconduct and applied only to the CEO and CFO). Here’s the gist of the SEC’s Dodd-Frank proposal:
Applies to all officers (generally the same group subject to Section 16) and former officers
Clawback is triggered by any material noncompliance with financial reporting standards, regardless of whether intent, fraud, or misconduct is involved
Applies only to incentive compensation contingent on the financial results that are subject to the restatement (interestingly, this includes awards in which vesting is contingent on TSR or stock price targets)
Recoverable Amount
The amount of compensation that would be recovered is the excess of the amount paid over what the officer is entitled to based on the restated financials.
In the case of awards in which vesting is contingent on TSR or stock price targets, the company would have to estimate the impact of the error on the stock price. Which seems a little crazy to me. But I didn’t take a single math, science, economic, or business course in college so my understanding of what drives stock price performance is most charitably described as “rudimentary.” Perhaps this is more straightforward than I think.
In the case of equity awards, if the shares haven’t been sold, the company would simply recover the shares. If the shares have been sold, the company would have to recover the sale proceeds (good luck with that). If you weren’t in favor of ownership guidelines and post-vesting holding periods for executives before, this might change your mind, possession being nine-tenths of the law and all. Check out our recent webcasts on these topics (“Stock Ownership Guidelines” and “Post-Vest Holding Periods“)
Disclosures
In addition to requiring a clawback policy, the SEC has also proposed a number of disclosures related to that policy:
The policy itself would be filed with the SEC as an exhibit to Form 10-K.
Companies would be required to disclose whether a restatement that triggered recovery of compensation has occurred in the past year.
If a restatement has occurred, the company must disclose the amount of compensation recoverable as a result of the restatement and the amount of this compensation that remains unrecovered as of the end of the year. For officers for whom recoverable compensation remains outstanding for more the 180 days, the company must disclose their names and the amounts recoverable from them.
For each person for whom the company decides not to pursue recovery of compensation, the company must disclose the name of the person, the amount recoverable, and a brief description of the reason the company decided not to pursue recovery.
More Info
For more information, check out the NASPP alert on this topic. The memos from Ropes & Gray, Jenner & Block, and Covington, as well as Mike Melbinger’s blogs on CompensationStandards.com, were particularly helpful to me in writing this blog (in case you don’t want to read all 198 pages of the SEC’s proposal).