A new study reporting that some CEOs make more than their companies pay in taxes has been making a splash in the media lately. Today I offer some comments on the study.
Executive Excess 2011: The Massive CEO Rewards for Tax Dodging The study looked at the 100 highest paid CEOs in the US and found that 25 of them earned more than their companies paid in taxes. The study also found that the average pay of the 25 CEOs exceeded the average pay of CEOs at all Fortune 500 companies, but, as one criticism of the study points out: “any subset of the 100 highest-paid CEOs in the country is going to have higher average pay than S&P 500 CEOs in general,” so this isn’t exactly groundbreaking.
The study also emphasizes that most of the 25 companies received tax refunds. Maybe I’m missing something here, but I thought getting a tax refund means you paid too much in tax, the IRS earned interest on your money all year, and then gave your excess payment back without interest at the end of the year. The companies that didn’t get a tax refund were the clever ones because they earned interest on their money all year, rather than the IRS–they aren’t necessarily paying their CEOs any less.
Compensation Apples to Tax Oranges
One problem I have with this study is that CEO pay isn’t directly related to the company’s tax bill. The two amounts really have nothing to do with each other. In fact, amounts paid to the CEO are an expense to the company; expenses reduce the company’s profitability which in turn reduces the amount the company pays in taxes.
Companies that aren’t profitable don’t pay any taxes. If CEO pay shouldn’t exceed the company’s tax bill, does this mean that CEOs at companies that aren’t realizing a profit shouldn’t be paid anything? That’s really going to put a damper on the start-up market.
Don’t get me wrong, I agree with the principle that many CEOs of public companies are paid excessively–I’m just not sure that the company’s tax bill is the appropriate yardstick by which we should determine what is excessive.
Is Senator Levin Behind This?
The study includes a special side bar (on pg 7) that explains how stock options contribute to this problem by producing a tax deduction for the corporation that differs from the expense recognized for the option–something Senator Carl Levin has been trying to change for years (see my August 9 blog, “Senator Levin, Still Trying“).
The study says that “The amount of compensation the executive receives on the exercise date is often substantially more than the book expense of the options…” I take issue with this statement. I’ve never seen any data to back it up, I don’t see any data backing it up in this study, and I know that many options end up underwater or result in a spread at exercise that is less than the grant date fair value. In fact, I’d love to see an analysis comparing grant date fair value to spread at exercise for a wide range of stock options at a wide range of companies, if anyone out there wants to take the project on.
CEOs Pay Taxes Too
One reason why compensation results in a tax deduction for the company is that the individual receiving the compensation pays taxes on it. So, while the company might be getting a tax break, the CEOs are still paying tax, probably a lot of tax.
NQSO exercises are certainly subject to tax. The US corporate tax rate for large public companies is around 34% to 35% (at least according to Wikipedia–I know nothing about corporate tax rates). The highest federal marginal income tax rate in the US is 35% and I have to believe that the CEOs in the study are paying tax at this rate (plus they are paying FICA taxes and the company is paying matching FICA taxes on the income). So whether the company pays tax on the income or the CEO does, it seems like the tax revenue is about the same (maybe slightly higher when the CEO is paying the tax because of FICA).
For example, let’s say that a company earns a profit $100 million and the CEO of the company holds an NQSO with a spread of $1 million. If the CEO doesn’t exercise the option, the company pays tax on $1 billion. If the CEO does exercise the option, the company pays tax on $99 million, but the CEO pays tax on the $1 million spread–at possibly a slightly higher rate than company would have paid. Tax revenue for the US federal government is about the same either way.
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.
A Sensible Approach to Stock Ownership Guidelines By Doreen Lilienfeld of Shearman and Sterling
In recent years, there has been significant discussion concerning the terms of stock ownership guidelines and stock retention requirements for directors and executive officers. Shareholders want to know that directors and executive officers adhere to a philosophy of investing in the company for the long-term.
With the passage of mandatory say-on-pay, companies have become even more attuned to the views of shareholder activists on these issues. ISS considers three categories relating to stock options guidelines and stock retention requirements in its Governance Risk Indicators (“GRId”) score. Up to three points can be added and five points can be subtracted from a company’s GRId score in each category. These points can make the difference between a positive or negative vote on say-on-pay, director elections and other proposals.
There is standard approach to ownership and retention guidelines. For boards that are designing or revising director and executive stock ownership programs, the myriad of possible design structures can be daunting. It is not always clear what is the most effective means to ensure that the company’s decision makers build and retain a substantial stake in the company at a level sufficient to properly align their interests with those shareholders.
With preparations for the 2012 proxy season underway at many companies, now is the time to begin thinking about your guidelines and retention requirements. In our panel, we will walk you through the decision process analyzing the important design features and let you know what other companies are doing now. Drilling down, we will explore the questions:
Should you adopt ownership guidelines, retention requirements or both? How will they interact with each other?
How deep in the ranks should these programs go?
What will be the consequences for noncompliance?
For Ownership Guidelines
What are the ownership requirements? A percentage of base salary/annual retainer? A fixed dollar amount? A fixed number of shares?
How high should you set the ownership requirements? Do they differ by position?
How much time should directors and executives be given to reach the guidelines?
Which holdings should count towards satisfying the guidelines–vested vs. unvested awards, stock options, 401(k) and deferred compensation holdings?
What happens if there is a change in the stock price leading to falling out of compliance with the guidelines?
For Retention Requirements
How many shares should be retained–50% or more of “net shares”, all equity awards?
How long should they last? Until ownership guidelines are satisfied? A specified number of years following vesting or exercise? Until retirement? Following retirement?
For answers to these questions and more, please Doreen Lilienfeld, John Cannon, and Kenneth Laverriere of Shearman & Sterling for their session, “A Sensible Approach to Stock Ownership Guidelines,” at the 19th Annual NASPP Conference.
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.
In late 2009, the IRS announced a major audit initiative for executive compensation that will ultimately involve at least 6,000 companies (see “IRS Audits: Are You Ready to Rumble?” January 26, 2010). We’re now over a year into that project, so I thought it might be a good time to revisit the subject.
No Need to Be Surprised
If you’ve been wondering what the IRS might audit relating to stock compensation, it turns out that there’s no need to be surprised. The IRS explains what they are looking for relating to stock compensation on their website. Here are a few highlights of what you can expect IRS auditors to investigate:
In the case of restricted stock and units, whether there has been a transfer of property (e.g., does the employee have voting and/or dividend rights) and whether there is a substantial risk of forfeiture for the award. According to Stephen Saxon in the March issue of PLANSPONSOR (“Saxon Angle: Audit Trials“), companies that offer accelerated vesting upon retirement should be especially wary of this issue for their retirement-eligible employees.
Whether ISOs and ESPPs meet the statutory requirements, especially the $100,000 and $25,000 limitations.
Whether income has been properly reported (on Form W-2 or Form 1099-MISC) and taxes withheld (if required) on all types of stock plan transactions.
Whether tax withholding for stock compensation has caused companies to exceed the $100,000 next-day deposit threshold that Rachel blogged about a couple of weeks ago (“Timely Tax Deposits,” May 26), and, if so, if companies complied with the deadline.
Recordkeeping practices relating to grants, exercises, and other stock plan transactions.
Compliance with Section 162(m)–but that’s a topic for another blog.
Things I Sure Hope Won’t Be a Problem
There are a few items highlighted in the IRS’s audit instructions that I sure hope won’t be a problem for any NASPP members–I know you are all too smart to fall for these traps:
Back-dated stock options. No explanation needed on this one.
Transfers of options to a related party. Under this strategy, an executive would “sell” stock options to a family member or trust in exchange for an unsecured, long-term, balloon payment obligation (essentially, the related party just “promises” to pay the executive for the stock option at some point in the future, a long ways in the future). The idea was to get around the gift tax that could apply if the option were simply transferred to the family member/trust. This type of a arrangement has been a no-go with the IRS for some time.
Not issuing stock upon same-day-sale exercises of an ISO or ESPP. Although the tax code itself is not clear, the IRS’s audit instructions specifically state that if, rather than issuing stock on a same-day sale, the underlying shares are simply cancelled in exchange for the spread–in other words, a net exercise–the arrangement is subject to withholding for both income tax and FICA purposes.
Issuing loans to executives for option exercises and then later forgiving or reducing the loans. Public companies shouldn’t be issuing loans to executives at all, much less forgiving those loans.
Last Chance to Qualify for Survey Results This week is your last chance to participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte). Issuers must complete the survey by this Friday, June 10, to qualify to receive the full survey results. Register to complete the survey today–we’ve already extended the deadline once, we can’t extend it again!
NASPP Conference Program Now Available The full program for the 19th Annual NASPP Conference is now available. Check it out today and register by June 24 for the early-bird discount–this deadline will not be extended.
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). You must complete the survey by June 10 to qualify to receive the survey results.
I’m sure many of you are familiar with the limitations of the Black-Scholes model when it comes to valuing stock options for accounting purposes. Today I write about the problems of using the Black-Scholes model to determine grant sizes.
How Much Did Your CEO Make Off the Financial Crisis? A recent article in the Wall Street Journal (“Options Given During Crisis Spell Large Gains for CEOs” by Scott Thurm, April 26) discusses windfalls CEOs have seen in their stock options that were granted during the financial crisis. Many companies granted options to their CEOs when their stock price was at a low point. Because options are virtually always granted with a price equal to FMV (only 1% of respondents to the NASPP’s 2010 Stock Plan Design Survey, co-sponsored by Deloitte, granted premium-priced options), this results in a low exercise price.
Further compounding the problem is the method most companies use to determine how many shares to grant. 70% of respondents to the NASPP survey determine grant sizes based on, at least in part, the value of the grant. And for 85% of those respondents, for stock options, that value is determined using an option pricing model, such as the Black-Scholes model. What happens to the option value computed under one of these models when the stock price is low? The option value will be low as well. The end result is a larger grant, assuming companies are trying to grant a specified value. In addition to having a nice low exercise price, options granted during the financial crisis were for many more shares that would normally have been granted.
The upshot is that when the stock price recovers, the options are worth a lot of money. A lot more money than options granted during times of economic abundance, which seems counter-intuitive. Generally, options with low exercise prices are coveted by employees and executives; it hardly seems necessary to make these options larger than comparatively higher-priced grants.
What Can You Do About It
Well, at this point, there may not be much that you can do about options that have already been granted–although see my May 13 blog (“Eleven and Counting“) about GE and Lockheed Martin modifying options granted to their respective CEOs to vest based on performance. But you may be able to adjust your grant guidelines to address this sort of problem in the future. Here are some practices to consider:
Base grant guidelines on a set number of shares, rather than grant value. This number might be determined by the run rate or overhang the company desires to maintain.
Set a cap on the number of shares that can be granted to any one person, regardless of award value.
Base grant value on an average, rather than a spot value.
Cap the amount of gain that can be realized from option grants. Not only does this help address this problem but it can also reduce plan expense.
Grant premium-priced options, particularly when the FMV is unusually low.
Base grant sizes on projections of future gain for various possible growth scenarios.
Impose performance conditions on options granted to executives–this at least ensures that executives are performing, rather than merely benefiting from the general market recovery.
Be sure to tune into the NASPP’s upcoming webcast, “Equity Values of a Different Flavor,” which will discuss some of the problems with using option pricing models for compensation planning purposes and possible solutions.
Another Chance to Qualify for Survey Results Due to overwhelming demand, we have extended the deadline to participate in NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) to June 10. Issuers must complete the survey to qualify to receive the full survey results. Register to complete the survey today–there won’t be any more extensions!
New “Early-Bird” Rate for the NASPP Conference If you missed the first early-bird deadline for the 19th Annual NASPP Conference, you can still save $200 on the Conference if you register by June 24. This deadline will not be extended–register for the Conference today, so you don’t miss out.
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). You must complete the survey by June 10 to qualify to receive the survey results.
Last Tuesday, January 25, the SEC issued final regulations on Say-on-Pay votes. For the most part, the SEC adopted the proposed regulations, with only a few minor adjustments.
As expected the regulations require three non-binding votes:
Say-on-Pay: Shareholders must be permitted to vote on executive compensation every one, two, or three years. The first vote must be held at the company’s first annual meeting on or after January 21, 2011. Shareholders will be voting on the compensation paid to executives as disclosed in the proxy statement.
Say-on-Pay-Frequency: Shareholders must also be permitted to vote on how frequently the company holds a Say-on-Pay vote. This vote must occur at least every six years, with the first vote occurring at the company’s first annual meeting on or after January 21, 2011.
Say-on-Parachutes: Shareholders must be permitted to vote on golden parachute arrangements. If these arrangements have not previously been voted on, this vote must be included in the proxy statement relating to the merger (or similar transaction) for which the compensation will be paid. This requirement applies to filings on or after April 25, 2011.
McGuireWoods provides a good summary of the final regulations; we’ll be posting an alert with links to additional memos as we receive them.
Other Dodd-Frank Rulemaking Delayed As Broc Romanek mentioned in his blog (“Four of Corp Fin’s Dodd-Frank Rulemakings Delayed,” January 27, 2011), the SEC has pushed back its estimate of when proposed rules will be issued for the following projects:
Pay-for-performance disclosure (how compensation is related to financial performance)
Pay ratios (ratio of CEO pay to median employee pay)
Clawback policies (clawback of officers’ compensation upon financial restatement)
Hedging policies (whether the company has a policy regarding the ability of directors and employees to hedge)
Based on the SEC’s revised timeline for implementing the Dodd-Frank Act–the proposed rules now aren’t expected until August, at the earliest, and possibly as late as December–Broc speculates that rules for these projects may not be finalized in time for the 2012 proxy season.
A More Social NASPP The NASPP has boarded the social networking train: you can now follow us on Twitter or like us on Facebook. We’ll be posting announcements whenever we post new content on Naspp.com–it’s a great way to keep up with all the content we have on the website.
NASPP Members Eligible for Discount on CEP Exam If you’ve been thinking about enrolling for the Certified Equity Professional exam, now is the time to do it. Because the NASPP serves on the CEP Institute Advisory Board, we are able to offer NASPP members a $200 discount on the June 4, 2011 exam.*
The CEP program is the certification standard for the equity compensation industry, comprised of a three-level, self-study program in the technical regulatory issues affecting equity compensation.
Visit the CEPI website for more information on the program. To take advantage of the NASPP member discount, contact the CEPI at (408) 554-2187. Don’t wait; registration closes on April 22.
* The Fine Print: Eligible registrations include new Level 1, Level 2 or Level 3 registrations for individuals who are involved in administering or managing their own company’s equity programs. Deferrals and re-tests are not eligible for a discount. Individuals already registered are not eligible for a retroactive discount. Candidates from service providers do not qualify. Questions regarding eligibility can be directed to the CEPI at (408) 554-2187.
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.
If you are in the San Diego area, attend the San Diego NASPP chapter meeting on Wednesday, Feb 2. Robyn Shutak, the NASPP’s Education Director will there; be sure to say hello!
For many stock plan administrators, all the press about Say-on-Pay has been just noise. Companies have been submitting their stock plans for shareholder approval for years, decades even, and stock plan administration often isn’t involved with cash-based executive pay, so what role does stock plan administration have here?
Say-on-Pay=Golden Opportunity?
But, I think that Say-on-Pay is a great opportunity for stock plan administrators to show that they deserve a seat at the table when it comes to designing compensation programs. Stock is likely to be a big part of your executives’ compensation and, likewise, a big part of the CD&A. You can help by making sure the folks drafting the CD&A are aware of which features in your stock plans are likely to draw shareholder criticism–and, therefore, may require additional explanation–and which features are likely to please shareholders–and, therefore, should be highlighted. You might even want recommend changes in your stock compensation programs that would make them more shareholder friendly.
The Critical First Year
I see this first year of Say-on-Pay as critical. Clearly, if shareholders have past grievances against your executive pay programs that they don’t feel have been attended to, this is an opportunity for them to express their ire. But, even more important than the Say-on-Pay vote, is the Say-on-Pay frequency vote–in which shareholders decide whether they want to vote on your executive compensation programs every one, two, or three years.
A well-crafted CD&A that addresses all shareholder concerns is critical this year. You want shareholders to feel absolutely confident about the decisions the company is making about executive compensation, so they don’t feel that they need to vote on the compensation every year (or even every two years).
Write a Memo
Now would be a great time to draft a memo for your manager that highlights the good, the bad, and the ugly in the stock compensation paid to your executives, with appropriate recommendations on how each issue might be addressed (or emphasized, for the good stuff) in the CD&A.
The Bad (and the Ugly)
To get you started, here are few stock-compensation related features that can irritate shareholders. If any of these apply to your stock plans, special discussion in the CD&A may be warranted:
Repricing, especially without shareholder approval
Mega grants
Grants made when your stock was at its low point that are now producing windfalls for executives
Paying dividends on unvested performance awards or units
Tax gross-ups
Performance awards where the performance criteria is too easily achieved or that are paid out even if the goals aren’t achieved
Liberal change-in-control provisions (e.g., CIC provisions that allow awards to be paid out even if the deal doesn’t close)
Of course, it goes without saying that discounted stock options are a problem, but, with the backdating scandal mostly behind us and 409A firmly in place, I doubt many, if any companies, still have any of these. Oddly enough, however, shareholders sometimes show an aversion to even at-the-money options over say, full value awards. So if you are still granting predominately stock options to execs, this may bear some discussion, depending on how enlightened your shareholders are.
The Good
And, here’s the flip side–stock compensation-related features that you want to emphasize to your shareholders:
Performance awards with appropriately challenging targets and where the board retains (negative) discretion over payouts
Hold-through-retirement policies and share retention requirements
Clawback and non-complete (and similar) provisions
Award deferral programs (a risk-mitigation strategy, similar to stock retention requirements)
Double-triggers and other responsible CIC provisions
Anti-hedging policies
And More…
Of course, neither of the above is a complete list–this is a blog that is already too long, not an unabridged compendium of executive compensation. If you missed the 18th Annual NASPP Conference, there were a number of sessions presented on Say-on-Pay and executive compensation that provide further information on shareholder hot buttons–purchase the audio for any and all of the these sessions. And the NASPP’s Plan Design Portal has some great articles that might also help with your memo.
Time is Running Out! All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free! Don’t wait any longer–you have less than two weeks left to take advantage of this offer!
This offer is also available to anyone the joins the NASPP before December 31–tell all your friends!
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.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify to receive the audio of one NASPP Conference session for free.
As I’m sure my readers know, the Dodd-Frank Act requires public companies to allow shareholders to vote on their executive compensation programs beginning next year. On October 18, the SEC proposed regulations governing how these votes will work, bringing us one step close to the inevitable.
Say-on-Pay Regs Proposed The regulations require three non-binding votes:
Say-on-Pay: Shareholders must be permitted to vote on executive compensation every one, two, or three years. The first vote must be held at the company’s first annual meeting on or after January 21, 2011. Shareholders will be voting on the compensation paid to executives as disclosed in the proxy statement.
Say-When-on-Pay: Shareholders must also be permitted to vote on how frequently the company holds a Say-on-Pay vote. This vote must occur at least every six years, with the first vote at the company’s first annual meeting on or after January 21, 2011.
Say-on-Parachutes: Shareholders must be permitted to vote on golden parachute arrangements. If these arrangements have not previously been voted on, this vote must be included in the proxy statement relating to the merger (or any similar transaction, such as a sale of the company’s assets) for which the compensation will be paid. In connection with this, the SEC is requiring enhanced tabular disclosure of parachute payments in proxy statements for mergers and similar transactions.
Effective Date
The Say-on-Pay and Say-When-on-Pay votes must be included in the proxy for the first annual meeting on or after January 21, 2011, even if the SEC has not finalized these regulations by then. The Say-on-Parachutes vote is not required until the regulations are finalized.
Non-Binding with a Kick
All of the votes are non-binding, which means the company doesn’t have to abide by them. For the Say-on-Pay vote, however, the proposed regulations require companies to discuss in the CD&A how the vote has been considered in setting executive pay. Likewise, for the Say-When-on-Pay vote, companies must disclose in the 10-Q following the vote whether they intend to comply with it. Woe to those companies that don’t choose to comply; shareholders can then introduce a proposal regarding the frequency of Say-on-Pay votes in the next year’s proxy statement.
More Information
We’ve posted an alert on the proposed regs that includes the memos we are receiving from law firms and compensation consultants; look for even more memos to be posted in the next few days. Check out the excellent summaries by Maslon Edelman Borman & Brand and Morrison & Foerster (co-authored by CompensationStandards.com’s David Lynn).
Conference Audio Available Are you ready for Say-on-Pay? Make sure with the many sessions on Say-on-Pay offered at this year’s NASPP Conference. All of the sessions have been recorded and can be downloaded in MP3 format. Purchase just the session(s) you want or save by purchasing a package of sessions.
Free Conference Session Audio If You Renew by Dec 31 All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!
Join Now and Get Three Months Free and Free Conference Session Audio! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. If that’s not enough, you’ll also get the audio for one NASPP Conference session for free. Tell all your friends!
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.
According to the NASPP’s 2010 Domestic Stock Plan Design Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute), 68% of respondents report that their stock compensation programs are not subject to a clawback provision. I’m hearing predictions that this will change, with more companies implementing clawbacks for executive level employees in the future.
Clawback Provisions A clawback provision enables the company to recover, or “clawback” previously paid or realized compensation upon the occurrence of specified events or behavior. Historically used to enforce noncompete provisions, we are now seeing clawbacks for financial restatements due to misconduct or compliance failures, inaccurate financial reports, and fraud or ethical misconduct (whether or not it results in financial restatement). I’ve even heard of a company including a clawback on performance awards if the board later determined that the way the performance goal was achieved wasn’t quite the behavior they were looking for. Clawbacks can apply to bonuses and various types of stock awards, including stock options, restricted stock/units, and performance awards.
Why Clawbacks Now?
Clawbacks are hot now in part because several recent pieces of legislation have required them, including SOX, the Emergency Economic Stabilization Act, and, most recently, Dodd-Frank. Although the requirements are fairly limited in each case (for example, EESA only applies to TARP companies), regulator interest in clawbacks is likely indicative of the public and media support for them. And now clawbacks are viewed as an effective tool for mitigating risk in compensation programs.
In addition to the obvious questions that must be addressed when implementing clawbacks–who should the clawback cover, what compensation should it cover, what events should trigger it, and how long it should be in effect–there are a number of more sophisticated matters to address:
Should the clawback be a provision in the plan or award agreement or should it be a more general policy?
Will the clawback be enforceable? State laws can be a particular hindrance to enforcement, so this question is not always as easy to answer as you might think, given that federal laws require clawbacks in some circumstances.
How will the clawback be communicated to executives and what level of consent will be required from them (for example, executives have to indicate consent by signature)? If the clawback policy covers previously granted awards, what will the consequences be if executives don’t consent?
What level of discretion to enforce (or not enforce) the policy will be provided to the board?
If a company has a clawback policy or provision in place, one tip from the “Risk Mitigation for Stock Compensation” panel is to discuss the policy prominently in the Executive Summary of the CD&A in your proxy statement. Clawbacks are exactly the type of risk mitigation strategy that ISS and shareholders (and other shareholder advisory groups) are looking for; having a clawback policy could offset other problematic compensation practices.
The panel also included a detailed discussion of the tax treatment that applies when a clawback is triggered–information that is likely to be very useful in the future as we see more enforcement of these provisions.
Conference Audio Available If you missed these panels and want to know more about clawbacks, don’t despair–you can purchase the recorded audio for any and all Conference sessions in downloadable MP3 format. Purchase just the session(s) you want or save by purchasing a package of sessions.
Free Conference Session Audio If You Renew by Dec 31 All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!
Join Now and Get Three Months Free! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. Tell all your friends!
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.
I’m blogging live from the “18th Annual NASPP Conference” in Chicago, which is a phenomenal success, with a full line-up of the best and the brightest speakers in the industry and close to 2,000 attendees. Today is the first day of the Conference, so I thought I would share some scenes from the pre-Conference programs and last night’s opening reception with my readers.
The Conference started off this morning with a keynote presentation featuring a lively panel on executive compensation. The panelists included well-respected directors Brad Anderson, Vice Chair and Former CEO of Best Buy and Bob Denham, Former CEO of Salomon, Director of Chevron Corp. and Partner of Munger, Tolles & Olson LLP, along with John Olson of Gibson, Dunn & Crutcher and Jesse Brill, Chair of the NASPP and CompensationStandards.com. One theme that emerged from the panel is the idea of CEOs forgoing compensation that is excessive or inappropriate or so that additional compensation, such as stock, can be delivered to employees.
Scenes from the 18th Annual NASPP Conference With over 40 sessions, the Conference will be chock full of practical guidance, best practices, and critical updates. Here are a few pictures so you can see all the excitement. (Click each thumbnail to see a full-size version of the picture.)
There are a lot of people here this year–as you can see by the packed exhibit hall during the opening reception.
Feats of acrobatic prowess were performed in Computershare’s booth in the exhibit hall–I’m referring to actual acrobatics, in addition, of course, to their flexible and innovative solutions for stock plan management that were also on display.
The Morgan Stanley Smith Barney booth is in the center of all the excitement and a popular stop for reception attendees.
Baker & McKenzie featured an unique giveaway in their Conference booth–sure to be of assistance in managing global stock compensation.
Don’t Miss Out–Audio Available If you aren’t able to attend the Conference or are here in Chicago but can’t get to all the sessions you’d like (with over 40, who could?), you can download the audio from any and all sessions in MP3 format. Purchase just the sessions you want or save by purchasing a package of sessions.
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.
