This week, we feature another installment in our series of guest blog entries by NASPP Conference speakers.  Today’s entry is written by Brian Frost of Towers Watson, who will lead the session “The Better Part of Valor: Discretion in Performance Share Plans”

Discretion and Long-Term Performance Plans
By Brian Frost of Towers Watson

Long-term performance plans are becoming more prevalent every year as companies strive to align executive pay with shareholder returns. However, some compensation committees have become uncomfortable with establishing fixed goals for a three-year period due to the uncertain economic environment or changes happening at the company. To address these challenges, one approach might be for the committee to establish some initial performance goals while reserving the discretion to adjust the payout after taking into account likely outside perceptions and company-specific issues. Maintaining this flexibility comes with some downsides, however, and a particular concern is the potential for significant changes in the timing and amount of compensation reported in the company’s Summary Compensation Table (SCT). This, in turn, can influence the views of shareholders, proxy advisors and the press, which makes the decision to retain and exercise discretion one that requires a full understanding of the implications.

These are among the issues we’ll address in our October 10 session (6.3) at the 20th Annual NASPP Conference entitled “The Better Part of Valor: The Complicated World of Discretion in Performance Plans.” While the accounting rules are fairly straightforward when dealing with mainstream plan designs, more complicated plans, including those involving discretion, often reside in a gray area where accounting guidance is vague and the company and its accountants must use judgment to determine the appropriate accounting treatment. While the accounting interpretation may not have a material impact on the company’s financial statement, it can have a profound impact on the amount and timing of reported pay for NEOs.
Participants in our session will gain insights about the plan design considerations that lead companies to use more discretion in determining performance plan payouts, the technical accounting rules that drive proxy reporting and other implications of discretion. Since how equity awards are reported in the SCT is determined under Accounting Standards Codification Topic 718 (ASC 718), we’ll explore the basics of those rules as well as the nuances of when and how discretion can influence the mysterious complexities of “grant date” and “service inception date.”

We also will explore the recent SEC decision in the Verizon case, which received significant publicity and involved his complicated mix of rules. Finally, we’ll review a list of items compensation professionals should know to better understand the decisions that influence the accounting and disclosure of discretionary plan awards so they can anticipate areas of potential concern before they arise.

Don’t miss the session, “The Better Part of Valor: Discretion in Performance Share Plans,” presented by Brian Frost and Paula Todd of Towers Watson and Arthur Kohn of Cleary Gottlieb Steen & Hamilton at the 20th Annual NASPP Conference.

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 we keep an ongoing “to do” list for you here in our blog. 

– Barbara