It’s been months since I last discussed anything related to the Dodd-Frank Act so in today’s blog, I provide an update on SEC rulemaking related to the Act.
More Delays
The SEC recently updated its calendar for rulemaking activities pertaining to Dodd-Frank to delay a number of projects, including:
Requirements for companies to adopt clawback policies for compensation paid to executives.
Disclosure of the ratio of CEO pay to the median pay of all employees.
Disclosure of the relationship of executive compensation to corporate financial performance.
Disclosure of hedging policies for employees and directors.
Final rules on these projects are now scheduled to be issued no earlier than July and possibly as late as December 2012. This means we won’t have final rules in time for this year’s proxy season (but you had probably already figured that out for yourself). The SEC expects to issue proposed rules during the first half of 2012.
Accredited Investors
The SEC has amended the definition of an “accredited investor” to exclude the value of primary residences from net worth. This is an important definition under Regulation D, which provides a number of exemptions from registration for offerings of stock, some of which limit the number of nonaccredited investors that can participate in the offering.
Next up, the SEC is set to finalize rules prohibiting “bad actors” from participating in Rule 506 offerings. At first I thought this meant that Pauly Shore and David Caruso wouldn’t be able to participate in unregistered offerings, but it actually relates to felons and others that have been convicted of or sanctioned for securities fraud and similar activities.
These changes probably don’t impact the operation of most companies’ stock plans. Public companies generally register all the shares issued under their stock plans and private companies are generally relying on Rule 701 for an exemption from registration. Either way, neither has to worry about accredited investors or complying any with of the Regulation D exemptions (including Rule 506). But where a private company has exceeded the limitations in Rule 701 (10 points if you know what they are off the top of your head–no Googling) or where either public or private companies are making private sales of stock to investors outside of their stock plans, the Regulation D exemptions can come into play.
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.
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!
As those of you that have been keeping up with my blog entries know, for the past few weeks, I’ve been covering the executive compensation-related provisions of the Dodd-Frank Act, highlighting tidbits I learned at a presentation by Mike Andresino of Posternak Blankstein & Lund and David Wise and Sara Wells of Hay Group at the July Silicon Valley NASPP chapter meeting. This week I discuss some of the changes David thinks we can expect to see for stock compensation as a result of the Act. (If you’re keeping score, that’s three blog entries from one chapter meeting–now that’s what I call a productive meeting!)
Stock Compensation Under Dodd-Frank Here are a few changes we might see to stock compensation under the Dodd-Frank Act.
More Double-Triggers
In the NASPP’s 2010 Stock Plan Design Survey (co-sponsored by Deloitte), I was surprised by the number of companies with plans that provide for immediate acceleration of vesting on a change-in-control. With shareholders now given the opportunity to vote on executive pay packages and a separate vote for change-in-control provisions that haven’t previously been voted on, expect to see more companies move to a double-trigger (i.e., vesting accelerates only if the executive is terminated within a specified period after the CIC).
Greater Use of Performance Awards
With companies now required to disclose how executive pay relates to performance, it seems fairly clear that this will propel the use of performance-based awards. At the same time, the requirement to disclose the ratio of CEO pay to median employee pay may cause boards to look for ways to reduce the value of CEO pay. Since this disclosure is based on amounts in the SCT–rather than actual payouts–one way to accomplish this is to grant options and awards that are subject to performance conditions.
For LTI programs in general, David expects to see more interest in relative goals (because absolute goals have become so challenging to set), more use of multiple goals (e.g., an absolute goal with a relative goal), more companies using three measures instead of just two measures, lowering of plan maximums, and longer vesting schedules.
Premium-Priced Options
Options granted with a price above the grant date FMV have never really caught on, but do result in a lower grant-date valuation. Since this is the value reported in the SCT, premium priced options could help improve the CEO to median employee pay ratio, perhaps increasing their popularity.
Broad-Based Plans?
Another way to make the CEO to median employee pay ratio look better is to increase employee pay. Could this cause companies to consider expanding eligibility for stock compensation programs? Maybe–if you are looking at raising pay, seems like it would be easier to do this with a non-cash expense than with cash compensation.
Deferrals
More companies may also start requiring deferred payout for awards. David points out that deferrals serve two goals: (i) they can be of assistance in enforcing clawback provisions–now required under Dodd-Frank and (ii) they help facilitate enforcement of stock ownership/holding requirements–a primary means of risk mitigation in stock plans.
The 18th Annual NASPP Conference is Just Five Weeks Out! Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay and the other requirements of the Dodd-Frank Act. We’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win! Don’t delay–this program ends on August 31.
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.
It’s a big week for NASPP Chapter meetings: don’t miss the meetings in Atlanta, Denver, NY/NJ, Orange County, Phoenix, and San Diego. Robyn Shutak, the NASPP’s Education Director, will be attending the San Diego meeting; be sure to say hello!
Last Tuesday, I blogged about the Say-on-Pay provisions of the Dodd-Frank Act, but the Act includes a number of other corporate governance provisions that are of interest to stock plan professionals. Luckily, the presentation I attended by Mike Andresino of Posternak Blankstein & Lund and David Wise and Sara Wells of Hay Group at the Silicon Valley NASPP chapter meeting covered these aspects of the Act as well.
The Dodd-Frank Act: More Than Say-on-Pay The Dodd-Frank Act is very broad in scope, with banking legislation and consumer protections as well as regulating private placements and private investment funds–that’s nice to know, but we don’t really care about any of it for purposes of this blog. I want to focus on the areas of the Act that are likely to intersect with my readers’ job responsibilities.
Internal Pay Equity
As I noted in my June 29 blog, the Act requires companies to disclose the ratio of CEO pay to the median pay of all other employees. I understand that the jury is still out on how this ratio will actually be computed–preparing a Summary Compensation Table for all employees just to calculate their median pay may not be feasible–but, regardless, this disclosure is likely to cause a lot of consternation (David Wise pointed out that it was a top focus of the business lobby). The definition of all employees could include employees in overseas operations, including, say, manufacturing plants in countries where wages are considerably lower than in the United States. We are only beginning to contemplate the implications of this disclosure.
Relationship of Pay to Performance
Companies will be required to disclose the relationship of executive compensation to corporate financial performance. Like Say-on-Pay, this is another provision that I naively thought we already had–i.e., the performance graph in the executive compensation disclosures. Silly me. As Mike Andresino pointed out, the Act doesn’t limit the disclosure to just the top five NEOs, so this “pay for performance” disclosure could be quite a bit more work to put together than the performance graph.
According to a Pearl Meyer & Partners memo on the Act that we’ve posted in the NASPP’s Say-on-Pay Portal, there are lots of issues to resolve for this requirement, including which “executives,” what “compensation,” what “financial performance,” the time period the disclosure covers, and whether the disclosure is on an aggregate or individual basis (or by component of compensation–imagine what fun that would be to put together).
Clawbacks
The Act expands the requirements for companies to adopt clawback policies for compensation paid to executives beyond what was required under Sarbanes-Oxley. According to the NASPP’s 2010 Domestic Stock Plan Design Survey (co-sponsored by Deloitte), only 32% of respondents have clawback policies for stock compensation and of those that don’t, only 20% are considering adding one. That’s going to have to change.
Broker Non-Votes
The Act requires the SEC to direct the stock exchanges to prohibit brokers from voting uninstructed shares for director elections, executive compensation matters (e.g., Say-on-Pay), and any other significant matter (brokers are already prohibited from voting uninstructed shares on matters relating to stock plans).
This doesn’t leave a whole lot that brokers can vote uninstructed shares on. Mike Andresino pointed out that if there’s nothing in the proxy that brokers can vote on without instruction, companies may have problems achieving a quorum at shareholder meetings.
Compensation Committees
The Act requires the stock exchanges to establish new independence standards for compensation committee members. In addition, the committee must have the ability to retain its own independent (per standards to be determined by the SEC) comp consultants, legal counsel, and other advisors.
18th Annual NASPP Conference Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay and all of the other executive pay reforms required under the Dodd-Frank Act. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
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.
Tune in next Tuesday, August 10, for the NASPP webcast highlighting the results of the 2010 Domestic Stock Plan Design Survey (co-sponsored by Deloitte, survey support provided by the CEP Institute). There’s sure to be some surprises!
Refer new members to the NASPP so you qualify for the August raffle and Conference discount available through our New Member Referral Program.
Don’t miss your local upcoming NASPP chapter meetings in Boston, Chicago and Michigan. In addition, the San Francisco chapter is hosting its annual all-day program at the bucolic Wente Vineyards on August 11–I’m looking forward to it and hope to see you there.
Every week brings us a little closer to mandatory “Say-on-Pay.” Last week (very early Friday morning), Senate and House conferees reached agreement on the finance reform bill. All that remains now is for the House and Senate to vote on the bill and for President Obama to sign it into law–all this is expected to be wrapped up in time for the July 4 holiday. (Is it just me or does it seem like all major regulatory changes happen right before a holiday? It’s a good thing we have holidays or nothing would ever get done in this country.)
The full bill is 2,000 pages long–a little light reading for down-time during your 4th of July picnic. For those of you that want the cliff-notes version, we’ve posted a 23-page excerpt of the sections relating to executive compensation.
A Triennial Requirement (or How Much Control Will Your Shareholders Want)?
The final bill would allow companies to seek shareholder approval to hold a Say-on-Pay vote only once every two or three years, rather than requiring the vote every year. Shareholders would have to be allowed to vote on the frequency of Say-on-Pay votes at least once every six years. This must be a separate resolution from the Say-on-Pay vote.
SCT for Rank-and-File Employees
The final bill requires companies to disclose the median pay of all employees other than the CEO and the ratio of this pay to the CEO’s pay. “Pay” for this purpose is computed based on the requirements for reporting total compensation in column (j) of the Summary Compensation Table. The amount for employees other than the CEO will be disclosed on a aggregate basis (you won’t disclose pay for non-NEOs on an individual basis)–but to get to the aggregate amount, you’ll have to apply the SCT principles to each individual employee. Now would be a good time to check with your administrative service providers to determine if their solution offers a report to assist with this calculation.
A Bill by Any Other Name
The last motion on the bill was to change the name to the “Dodd-Frank Wall Street Reform and Consumer Protection Act.” That’s quite a mouthful, so Broc Romanek, in his June 28 blog on the bill, has a poll on what the shorthand name should be. True to my 80’s roots, my favorite is the “Doddy-Frank Goes to Hollywood Act (Relax, don’t do it…)”
18th Annual NASPP Conference Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!
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.