Last week, I blogged about the proposed amendments to ASC 718. This week, I have some more information about them.
Is This a Done Deal?
Pretty much. The FASB has already considered—and rejected—a number of different alternatives on most of these issues. My understanding is that there was consensus among Board members as to each of the amendments and most of the changes aren’t really controversial, so we don’t expect there to be much debate about them.
Tax accounting is an exception, of course. This change is very controversial; in fact, the FASB considered this approach back when they originally drafted FAS 123(R) and ultimately rejected it is because of the volatility it introduces to the income statement. So perhaps there will be some opposition to this change.
What’s the Next Step?
The FASB will issue an exposure draft with the text of the changes, then will solicit comments, make changes as necessary, and issue the final amendments. I have hopes that we’ll see an exposure draft by the end of the year, with possibly the final amendments issued in the first half of next year.
ASC 718(R)?
No, the new standard will not be called “ASC 718(R),” nor will the amendments be a separate document. That’s the advantage of Codification. The amendments will be incorporated into existing ASC 718, just as if they had been there all along. In a few years, you may forget that we ever did things differently.
What’s the Next Project?
This isn’t the FASB’s last word on ASC 718. They have a number of additional research projects that could result in further amendments to the standard:
Non-Employees: In my opinion, the most exciting research project relates to the treatment of non-employees. As I’m sure you know, it is a big pain to grant awards to consultants, et. al., because the awards are subject to liability treatment until vested. The FASB is considering whether consultants should be included within the scope of ASC 718, with awards to them accounted for in the same manner as employee awards. If not for all consultants, than at least for those that perform services similar to that of employees.
Private Companies: Another research project covers a number of issues that impact private companies, such as 1) practical expedients related to intrinsic value, expected term, and formula value plans and 2) the impact of certain features, such as repurchase features, on the classification of awards as a liability or equity.
Unresolved Performance Conditions: Another project relates to awards with unresolved performance conditions. I’ll admit that I’m not entirely sure what this is.
That’s All, For Now
That’s all I have on this topic for now. You can expect more updates when we hear more news on this from the FASB.
A big thank-you to Ken Stoler and Nicole Berman of PwC for helping me sort through the FASB’s announcement. If you haven’t already, be sure to check out their Equity Expert Podcast on the amendments.
For today’s blog entry, I have a couple of follow-up tidbits related to the recent EITF decision on accounting for awards with performance periods that are longer than the time-based service period. I know you are thinking: “Yeesh, it was bad enough the first time, how much more could there be to say on this topic!” but you don’t write a blog.
Background
To refresh your memory, this applies to performance awards that provide a payout to retirees at the end of the performance period contingent on achieving a non-market condition target (in other words, just about any goal other than stock price or TSR targets). Where awards like this are held by retirement-eligible employees, the awards will not be forfeited in the event of the employees’ terminations but could still be forfeited due to failure to achieve the performance targets. The service component of the vesting requirements has been fulfilled but not the performance component.
This also applies to awards granted by private companies that vest based on both a time-based schedule and upon an IPO/CIC.
The EITF came to the same conclusion you probably would have come to on your own. Expense is adjusted for the likelihood that the performance conditions will be achieved; as this estimate changes throughout the performance period, the expense is adjusted commensurately until the end of the period, when the final amount of expense is trued up for the actual vesting outcome. (See “Performance Award Accounting,” April 15, for more information.)
The IASB Does It’s Own Thing
I thought it was just a few maverick practitioners that had taken an opposing position. The alternative approach (which the EITF rejected), is to bake the likelihood of the performance condition/IPO/CIC being achieved into the initial fair value, with no adjustments to expense for changes in estimates or outcome (akin to how market conditions are accounted for).
It turns out, however, that the IASB is one of the maverick practitioners that takes this position. Apparently, the IASB thinks that option pricing models can predict the likelihood of an IPO occurring or earnings targets or similar internal metrics being achieved. Which makes this another area were US GAAP diverges from IFRS. Just something to keep in your back pocket in case conversation lags at the next dinner party you attend.
Mid-Cycle Performance Grants
As I was reading Mercer’s “Grist Report” on the IASB’s decision, I noticed that they also had made a determination with respect to grants made in the middle of a performance cycle. These are typically grants made to new-hire employees. For example, the performance cycle starts in January and an executive is hired in February. All the other execs were granted awards in January at the start of cycle, but the newly hired exec’s award can’t be granted until February.
Under ASC 718, the grant to the newly hired exec is accounted for just like any other performance award. True, his award will have a different fair value than the awards granted in January and the expense of the award will be recorded over a shorter time period (by one month) than the other execs’ awards. But where the award is contingent on non-market conditions, the expense is adjusted based on the likelihood that the goals will be met and is trued up for the actual payout, just like any other performance-conditioned award.
The same treatment applies under IFRS 2, but only if the performance-conditioned award is granted shortly after the performance cycle has begun. Awards granted farther into the performance cycle (in my example, if the exec were hired in, say, June, rather than February) are accounted for in the manner applicable to market conditions (i.e., the vesting contingencies are baked into the initial grant date fair value, with no adjustment to expense for changes in estimates or outcome), even if the targets are internal metrics.
Hmmmm. I’m starting to wonder if discussions like this explain the dearth of dinner parties in my life.
Thanks to Susan Eichen at Mercer for bringing the IASB’s decision to my attention and for explaining the IASB’s positions with respect to mid-cycle performance grants.
The FASB recently ratified an EITF decision and approved issuance of an Accounting Standards Update on “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (their words, not mine).
What the Heck?
I was completely baffled as to when an award would have a performance condition that could be met after the end of the service period. After all, isn’t the period over which the performance goals can be met the very definition of a service period? So I spoke with Ken Stoler of PwC, who translated this into English for me.
Turns out, it’s a situation where the award is no longer subject to forfeiture due to termination of employment but is still subject to some sort of performance condition. Here are two situations where we see this occur with some regularity:
Retirement-Eligible Employees: It is not uncommon for companies to provide that, to the extent the goals are met, performance awards will be paid out to retirees at the end of the performance period. Where this is the case, a retirement-eligible employee generally doesn’t have a substantial risk of forfeiture due to termination but could still forfeit the award if the performance goals aren’t met.
IPOs: Privately held companies sometimes grant options or awards that are exercisable/pay out only in the event of an IPO or CIC. The awards are still subject to a time-based vesting schedule and, once those vesting requirements have been fulfilled, are no longer subject to forfeiture upon termination. But employees could still forfeit the grants if the company never goes public nor is acquired by a publicly held company.
The EITF’s Decision
The accounting treatment that the EITF decided on is probably what you would have guessed. You estimate the likelihood that the goal will be met and recognize expense commensurate with that estimate. For retirement-eligible employees, the expense is based on the total award (whereas, for other employees, the expense is also commensurate with the portion of the service period that has elapsed and is haircut by the company’s estimate of forfeitures due to termination of employment).
For example, say that a company has issued a performance award with a grant date fair value of $10,000, three-fourths of the service period has elapsed, and the award is expected to pay out at 80% of target. In the case of a retirement-eligible employee, the total expense recognized to date should be $8,000 (80% of $10,000). In the case of an employee that isn’t yet eligible to retire, the to-date expense would be, at most, $6,000 ($80% of $10,000, then multiplied by 75% because only three-fourths of the service period has elapsed). Moreover, the expense for the non-retirement-eligible employee would be somewhat less than $6,000 because the company would further reduce it for the likelihood of forfeiture due to termination of employment.
The same concept applies in the case of the awards that are exercisable only in the event of an IPO/CIC, except that, in this situation, the IPO/CIC is considered to have a 0% chance of occurring until pretty much just before the event occurs. So the company doesn’t recognize any expense for the awards until just before the IPO/CIC and then recognizes all the expense all at once.
Doesn’t the EITF Have Anything Better to Do?
I had no idea that anyone thought any other approach was acceptable and was surprised that the EITF felt the need to address this. But Ken tells me that there were some practitioners (not PwC) suggesting that these situations could be accounted for in a manner akin to market conditions (e.g., haircut the grant date fair value for the likelihood of the performance condition being met and then no further adjustments).
I have no idea how you estimate the likelihood of an IPO/CIC occurring (it seems to me that if you could do that, you’d be getting paid big bucks by some venture capitalist rather than toiling away at stock plan accounting). And in the case of performance awards held by retirement-eligible employees, my understanding is that the reason ASC 718 differentiates between market conditions and other types of performance conditions is that it’s not really possible for today’s pricing models to assess the likelihood that targets that aren’t related to stock price will be achieved. Which I guess is why the EITF ended up where they did on the accounting treatment for these awards. You might not like the FASB/EITF but at least they are consistent.
This week I attended the annual CEP Symposium hosted by the Certified Equity Professional Institute at Santa Clara University. This was no ordinary CEP Symposium – it was the Institute’s 10th annual event, and also celebrated the Institute’s 25th anniversary. With so many great sessions at this event, it was hard to choose some tidbits to share in today’s blog. Finally, I decided to share with you 5 things I learned from Mark Borges, who delivered this year’s keynote address (and, by no coincidence, delivered the keynote at the first CEP Symposium years ago).
1. Performance-based pay is the new “norm.” That’s probably not surprising to many of us who are in the trenches of administering these programs, but the part that caught my attention is that shareholders are also catching on to the mainstream prevalence of these awards. The bottom line: if you are not using performance-based pay (which includes awards), your shareholders are likely to say something – now or in the near term future.
2. The proxy statement has become a “communication” tool, rather than a “compliance” tool. Some of the bigger brands have caught on to this concept and are investing in magazine-like layouts, looks and feels in designing and delivering their proxies. For examples, check out this year’s proxies from General Electric and Coca-Cola.
3. Executive pay litigation isn’t over. We’ve been through a couple phases of litigation initiated by shareholder plaintiff attorneys. The first round mostly focused on failed say-on-pay votes. The second round turns to inadequate proxy disclosures – mostly around stock plan proposals. Where is the litigation moving next? The eye seems to be turning to the technical non-compliance with the qualified performance based exception under Section 162(m).
4. Say-on-pay disclosures may be headed towards inclusion of more supplemental or responsive insights. It’s not far fetched to envision a table in the proxy that reports detailed results of shareholder say-on-pay votes and a matrix to address concerns raised by shareholders. 5. Don’t forget about the impending CEO pay ratio disclosure requirements coming from the SEC. The Commission is still scheduled to adopt rules this year, with a likely effective date somewhere in 2014 and implementation in 2016. These disclosures are expected to be both informative and inflammatory.
All in all, this year’s Symposium was a great event. I remember the first one – attended by somewhere around 75 people. This year’s attendance appeared to be just over 400. Congratulations to the Santa Clara University and the CEPI on their 25th anniversary in supporting the equity compensation profession, and for another successful event!
The Chairman of the House Ways and Means Committee has released a discussion draft of proposed legislation that could dramatically change the tax treatment of stock compensation as we know it. Here is a summary of the proposals.
No More Deferrals of Compensation
The good news is that Section 409A would be eliminated; I still don’t fully understand that section of the tax code and maybe if I just wait things out a bit, I won’t have to. But the bad news is that it would no longer be permissible to defer taxation of stock compensation beyond vesting. Instead, all awards would be taxed when transferable or no longer subject to a substantial risk of forfeiture.
This would eliminate all elective deferral programs for RSUs and PSUs. The NASPP has data showing that those programs aren’t very common, so you probably don’t care so much about that. On the other hand, according to our data, about 50% of you are going to be very concerned about what this will do to your awards that provide for accelerated or continued vesting upon retirement. In addition to FICA, these awards would be subject to federal income tax when the award holder is eligible to retire. Say goodbye to your good friends the rule of administrative convenience and the lag method (and the FICA short-term deferral rule)–those rules are only available when the award hasn’t yet been subject to income tax. This could make acceleration/continuation of vesting for retirees something we all just fondly remember.
As drafted, this proposal would also apply to stock options, so that they too would be subject to tax upon vest (the draft doesn’t say anything about repealing Section 422, so I assume that ISOs would escape unscathed). But one practitioner who knows about these things expressed confidence that there would be some sort of exception carved out for stock options. I have to agree–I don’t have data to support this, but I strongly suspect that the US government gets a lot more tax revenue by taxing options when they are exercised, rather than at vest (and that someone is going to figure this out before the whole thing becomes law).
Section 162(m) Also Targeted
The proposal also calls for the elimination of the exception for performance-based compensation under Section 162(m). This means that both stock options and performance awards would no longer be exempt from the deduction limitation. At first you might think this is a relief because now you won’t have to understand Section 162(m) either. I hate to rain on your parade, but this is going to make the tax accounting and diluted EPS calculations significantly more complex for options and performance awards granted to the execs subject to this limitation.
And that’s a bummer, because the proposal says that once someone becomes subject to the 162(m) limitation, they will remain subject to it for the duration of their employment. Eventually, you could have significantly more than five execs that are subject to 162(m). That’s right–five execs. The proposal would make the CFO once again subject to 162(m), a change that’s probably long overdue.
And There’s More
The proposal would also change ordinary income tax rates, change how capital gains and dividends are taxed, and eliminate the dreaded AMT (making the CEP exam just a little bit easier). And those are just the changes that would impact stock compensation directly. There is a long list of other changes that will impact how you, your employees, and your employer are taxed. This memo by PwC has a great summary of the entire discussion draft. In addition, we are in the process of recording a podcast with Bill Dunn of PwC on the draft–look for it soon in the NASPP podcasts available on iTunes.
When Does This All Happen?
That’s a very good question. This proposal has a long ways to go on a road that is likely to be riddled with compromise. As far as I can tell, it hasn’t even been introduced yet as a bill in the House. It has to be passed by both the House and the Senate and then signed into law by the President. So I wouldn’t throw out those articles you’ve saved on Sections 409A and 162(m) and the AMT just yet. It’s hard to say what, if anything, will come of this.
Earlier this summer, Apple announced that CEO Tim Cook’s previously granted RSU for 1 million shares will be modified to vest contingent on relative TSR–per his own request. In today’s blog entry, I take a look at this development.
The Modification
Cook’s award was granted in 2011 and originally vested as to 500,000 shares in August 2016 and another 500,000 shares in August 2021. I’m sure you can guess what I thought of the original award, based on my prior entries covering Apple and mega grants (“Steve Jobs’ Affinity for Mega Grants,” April 28, 2009, and “And Another Thing,” May 5, 2009).
As modified, 100,000 shares still vest in August 2016 and 2021, regardless of performance. The remaining shares vests in increments of 80,000 per year, from 2012 to 2021, with the vesting in years 2014 to 2021 subject to a relative TSR goal (a small portion of the shares vesting in 2013 is also subject to a relative TSR goal). The TSR goal is applicable to 50% of each 80,000-share vesting tranche–so 40,000 shares vest every year regardless of Apple’s TSR and another 40,000 shares vest if specified TSR thresholds are achieved.
Why Do This?
What’s most interesting about this story is that the award was modified at the request of Cook. Past examples of companies modifying awards to vest contingent on performance conditions have been executed under threat of a failed Say-on-Pay or stock plan proposal or in response to a failed Say-on-Pay vote (“Eleven and Counting,” May 3, 2011). So why would Cook voluntary ask for his award to be modified? The stated reason (Apples’ Form 8-K, June 21, 2013) is that Apple is going to be granting performance awards to executives in the future and Cook wants to lead by example. Which could be true, but I’m a skeptic, especially when it comes to grants of stock currently worth close to $500 million. So I wondered, was the real reason:
To demonstrate confidence in Apple’s products and performance
To make other CEOs look bad
Because Cook is worried he won’t perform well if not properly motivated
Because Cook really wants his personal wealth to be better aligned with Apple’s shareholders’ wealth
After gestating on this question for a while, my suspicion is that it was a preemptive strike. In the 8-K announcing the change, Apple says:
“In outreach discussions this year with many of our largest shareholders, we heard that they believe it is appropriate to attach performance criteria to a portion of our future executive stock awards that have been entirely time-based (i.e., vesting for continued service) in the past.”
I think that Cook saw awards held by other CEO’s modified in response to shareholder pressure and thought it might be smart to get out ahead of any demands for the same thing from Apple’s shareholders. This way, he has more control over the modifications and was able to ensure that over 50% of the award still vests based solely on the passage of time.
More on Say-on-Pay and Performance Awards
Tune in tomorrow for the NASPP’s webcast “Performance Equity Design in Light of Say-on-Pay,” which will take a look at the pressure to grant performance awards that has resulted from Say-on-Pay votes and how this is changing long-term incentive programs.
For our Meet the Speaker interview this week, we feature…me…discussing the session I’m co-facilitating with Tara Tays of Deloitte that will highlight the results of the 2013 NASPP and Deloitte Domestic Stock Plan Design Survey. Yes, that’s right–I interviewed myself!
NASPP: Last week the Wall Street Journal ran an article predicting the demise of stock options. Based on the data in the 2013 survey, is this true?
Barbara: I’m not sure I would go quite that far, but we did see a marked decline in the prevalence of stock option plans this year. Only 68% of respondents report having a stock option plan, down from 92% in 2010. But that’s still well over half of the respondents that have stock option plans, so I think that option plans still have their place and will continue to be utilized by some companies, particularly start-ups and high-growth companies.
NASPP: If stock options are declining in use, what is taking their place?
Barbara: It’s pretty clearly full value awards, both time-based and performance-based. Prevalence of time-based award plans is at 91% of respondents, up from 89% in 2010. Performance plans are where we’ve seen the most growth, with 87% of respondents reporting a performance plan, up from 71% in 2010.
These numbers are even more dramatic when we look at the results from ten years ago: at that time only 52% of respondents reported a time-based full value award plan and only 30% reported a performance plan, but 99% reported having a stock option plan. Over the last decade, the landscape for stock compensation has completely shifted.
NASPP: We been hearing for years now that the future is in TSR awards. Where do these come out in the survey?
Barbara: I think the predictions about TSR awards might be bearing out. In our 2010 survey, EPS and TSR were tied as the two most popular performance targets but with this year’s survey, TSR has really moved into the lead. 43% of respondents report that TSR is a target for their performance awards; the only other targets that were remotely close to that in terms of prevalence were EPS (27% of respondents) and revenue (21% of respondents). It’s clear that there’s been an increase in usage of TSR awards over the past three years. There are a lot of very compelling reasons to choose relative TSR as a target and I expect that we’ll see this trend continue.
NASPP: What are three things people don’t know about you:
One of my high school math teachers, Mr. Cieply, told me I was “wasting my brain” because I didn’t take calculus. In retrospect, however, I have to say that Mr. Cieply vastly overestimated my aptitude for math.
I am a big fan of Rex Stout’s Nero Wolfe novels. I’ve read the entire 46-book series multiple times. As a leading man, Archie Goodwin beats the pants off both Edward Cullen and that guy from the Shades of Gray books.
I really just don’t like pork belly. I will be very glad when the foodies move on to another trend, hopefully one that doesn’t involve animal fat. Ew.
The 2013 Domestic Stock Plan Design Survey is now open for participation. This is the industry’s most comprehensive survey on stock plan design, easily worth the cost of NASPP membership. Seriously–consulting firms charge upwards of $1,000 to participate in surveys that offer less data with fewer respondents. We let you participate for free–but issuers have to participate to receive the full survey results. Don’t put it off; you’re going to want this data and you only have until April 5 to complete the survey.
For today’s blog, I highlight just a few of the many data points in the survey that I am eagerly anticipating an update on. These are hot topics today and I’m looking forward to finding out where current practices stand with respect to them:
Performance Award Usage: In the 2010 survey, usage of full value awards largely caught up to usage of stock options. Usage of performance awards had increased significantly, but still lagged a bit. I am very curious to see if performance award usage has plateaued or if usage of these awards will rival that of traditional service-based awards. The 2010 survey also revealed that companies were granting performance awards down further into the organization. I’m not sure that performance awards work well below management; I’m very interested to see if this trend continues or if companies have pulled back on their performance award programs.
Clawbacks: Only 32% of respondents indicated that awards are subject to a clawback provision. This seemed surprisingly low, given the shareholder optics on this issue, as well as pressure from regulators (a la SOX and Dodd-Frank). When we conducted the survey in 2010, Say-on-Pay had not yet gone into effect. Now that we’ve completed two rounds of Say-on-Pay votes and are in the middle of a third, I’m curious to see where clawbacks come out.
Double-Triggers: Almost 60% of respondents indicated that vesting is automatically accelerated on a change-in-control and only 38% of respondents reported that awards were subject to a double-trigger. I was very surprised to see such low usage of double-triggers and I’m very interested to see if this data reverses itself in the new survey.
Flexible Share Reserves: Only 17% of respondents in 2010 reported that their stock plan had a flexible share reserve. I’ve heard a lot of consultants promoting flexible share reserves and I agree that they make a lot of sense, so I was surprised that usage was low and even more surprised that it really hadn’t changed since we last conducted the survey in 2007. I’m intrigued to see if usage remains flat again in 2013 or if this plan feature has started to take hold.
Deferrals: Only 22% of respondents in 2010 reported that they allowed (or required) deferral of payout of RSUs. I think deferral programs offer some key advantages, including tax planning opportunities for award holders and easier enforcement of clawbacks and stock ownership guidelines for companies. I’m curious to see if usage of deferral programs has increased in 2013.
– Barbara
P.S. (can I do a PS in a blog?) – If you missed my cat, Kaylee’s appearance in the blog last week, you should check it out for your daily quota of cute.
This week I have a couple of additional treats from the smorgasbord of topics related to stock compensation. Enjoy!
FAQs on ISS Peer Groups I guess I wasn’t the only one confused by ISS’s new peer group methodology; ISS has issued an FAQ to explain the new process.
There’s still a bunch of stuff about 8-digit, 6-digit, 4-digit, and 2-digit GICS codes that I don’t understand, but the gist that I came away with is that peers are selected first from within the company’s 8-digit code. ISS constrains which companies can be considered peers based on size (by revenue and market capitalization), so if there aren’t any 8-digit peers that fit within those constraints, then ISS moves to the 6-digit peers, and then to the four-digit peers. ISS will not select peers that match only based on the 2-digit code.
I finally googled “GICS Codes” to figure out what all these digits mean. Standard & Poor’s assigns companies to ten 2-digit industry groups (your 2-digit GICS code). Then within that 2-digit code, you are assigned to a more specific 4-digit code, and within that 4-digit code…all the way down to the 8-digit code. So the companies that share your 8-digit code should be those that most closely resemble you in terms of industry classification.
When selecting among those peers that meet your size constraints, ISS will give priority to companies that are in your self-selected peer group or that have been selected you as a peer, as well as companies that have been selected as peers by your peers or that have selected by your peers as their peers. This sort of feels like that game “Six Degrees of Kevin Bacon.” Note that if you’ve changed the companies in your self-selected peer group since last year, ISS has provided a special form that you can use to notify them of the change; you have until Dec 21 to do so.
What does all of this have to do with stock compensation you ask? Well, not much, because these peers have nothing to do with the burn rate tables published by ISS (those are based solely on 4-digit GICS codes). ISS uses these peer groups only for purposes of determining whether compensation paid to your CEO aligns with company performance. But it’s good to be aware of your ISS peer group because it probably differs from the peers you’ve identified for purposes of your performance awards and other LTI programs. Thus, even though your CEO has awards that vest based on performance, ISS could still find that his/her pay doesn’t align with company performance.
Top Ten Myths on Say-on-Pay A group of academics from Stanford and the University of Navarra have written a paper to debunk myths related to Say-on-Pay. Beside being an interesting topic, the paper has the advantages of being short (only 14 pages, including exhibits) and is written in fairly straightforward English (the word “sunspot” doesn’t appear in it anywhere).
My favorite myth is #6: “Plain-vanilla equity awards are not performance-based.”
Both ISS and Glass-Lewis have published updated corporate governance guidelines for the 2013 proxy season. The good news for my readers is that, in both cases, there aren’t a lot of changes in the policies specific to stock compensation; I think that Say-on-Pay is a much hotter issue for the proxy advisors right now than your stock compensation plan. Here is a quick summary of what’s changed with respect to stock compensation.
I don’t think ISS made any changes that directly apply to stock compensation, but there were some changes in their general policies on executive and CEO pay that may have an impact on your stock program:
Peer Groups: ISS assigns each company to a peer group for purposes of identifying pay-for-performance misalignments in CEO pay. The determination of company peer groups has been an ongoing source of much consternation; many companies disagree with the peers ISS assigns. In the past, peers have been determined based on GICS codes, market capitalization, and revenue. The new policy involves a lot of technical mumbo jumbo about 8-digit and 2-digit CICS groups that I don’t understand, but the gist that I came away with is that companies’ self-selected peers will somehow be considered in constructing peer groups. I’m not convinced this will be the panacea companies are looking for, but hopefully it will be an improvement.
Realizable Pay: Where ISS identifies a quantitative misalignment in pay-for-performance, a number of qualitative measures are taken into consideration before ISS finalizes a recommendation with respect to the company’s Say-on-Pay proposal. Under the 2013 policy, for large cap companies, these measures will include a comparison of realizable pay to grant date pay. For stock awards, realizable pay includes the value of awards earned during a specified performance period, plus the value as of the end of the period for unearned awards. Values of options and SARs will be based on the Black-Scholes value computed as of the performance period. If you work for a large-cap company, you should probably get ready to start figuring out this number.
Pledging and Hedging: Significant pledging and any amount of hedging of stock/awards by officers is considered a problematic pay practice that may result in a recommendation against directors. My guess, based on data the NASPP and others have collected, is that most of you don’t allow executives to pledge or hedge company stock. But if this is something your company allows, you may want to get an handle on the amounts of stock executives have pledged and consider reining in hedging altogether.
Say-on-Parachute Payments: When making recommendations on Say-for-Parachute Payment proposals, ISS will now focus on existing CIC arrangements with officers in addition to new or extended arrangements and will place further scrutiny on multiple legacy features that are considered problematic in CIC agreements. If you still have options or awards with single-trigger vesting acceleration upon a CIC (and, based on the NASPP and Deloitte 2010 Stock Plan Design Survey, many of you do), those may be a problem if you ever need to conduct a Say-on-Parachute Payments vote.
Glass Lewis Updates
Glass Lewis, in their tradition of providing as little information as possible, published their 2013 policy without noting what changed. I don’t have a copy of their 2012 policy, so I couldn’t compare the two but I’ve read reports from third-parties that highlight the changes.
As far as I can tell, the only change in their stock plan policy is that Glass Lewis will now be on the lookout for plans with a fungible share reserve where options and SARs count as less than one share (the idea is that full value awards count as one share, so options/SARs count as less than a share). It’s a clever idea for making your share reserve last as long as possible, but, to my knowledge, these plans are very rare (I’ve never seen one even in captivity, much less in the wild), so I suspect this isn’t a concern for most of you.