It feels like the holidays were just here; then year-end (for calendar year companies) and tax season moved in with a flurry. What’s next? For many: proxy season. This week I was thinking about all of the associated proxy “to-dos”. In anticipation of proxy season, I want to highlight some tips for managing one important aspect of stock plan management: plan reserves.
Plan reserves are the lifeblood of an equity plan. Without adequate shares to issue to employees, stock compensation programs will fall short. As proxy season approaches for a company, usually consideration is given to whether or not there are sufficient reserves available in the company’s stock plans to satisfy future anticipated grants and awards. If not, then shareholder approval may be necessary in order to procure additional shares. If your plan is set up such that shareholder approval is not necessary, this may create some backlash from shareholders since they will not be consulted in the matter. Nobody wants to run out of shares in their stock plans. Sadly, I’ve seen it happen several times – it’s not as unique a situation as one might envision. Here are some ideas to help ensure best practice management of your share reserves:
Forecast, Forecast, Forecast
Work with Human Resources and other interested parties to ensure proper planning includes some conservative assumptions in predicting an adequate reserve. Sometimes a couple of events can put an otherwise healthy share reserve in jeopardy of running out. For example, if the CEO resigns and vesting of his unvested stock options is accelerated (rather than being cancelled and returned to the share reserve pool for future issuance), there won’t be any shares to “return” to the share pool. Furthering the challenge: what if the company now hires a new CEO and grants that CEO a sizable award? Those two events alone could monopolize a large portion of the share reserve pool. While these events don’t happen every day, sometimes it only takes a single occurrence to create a problem. Careful attention should be given to ensuring a buffer of reserved shares that can cover unforeseen events. Proper forecasting could be the difference between asking shareholders to approve additional shares this year rather than next year.
Remember to Track Fungible Share Pools
Fungible share pools are gaining popularity, in part because shareholders are demanding more depth in managing plan reserves. The concept is that not all share issuances from a plan are created equal. For example, a single share of a full value award may be perceived as more ‘valuable’ (and costly from an accounting perspective) than a single stock option share. As a result, a ratio is established to give more weight to the shares that seemingly have more cost/value. A 2:1 ratio for a full value award means that for every full value share actually awarded, two shares are deducted from the plan reserve. When forecasting plan issuances and future balances, remember to take into account any such ratios that have been established for the plan.
Shareholder Opinions Do Matter
Many companies dread approaching shareholders for plan reserve increases. In fact, companies often take great care to ensure several years pass between such requests. Since the most common way for a public company to obtain shareholder approval for plan reserve increases is via the proxy statement/annual meeting process, it’s important to remember that such requests are only a small part of a company’s overall interaction with its shareholders. If shareholders are unhappy about other aspects of a company’s practices, such as executive compensation, then there is always the possibility that they may voice their objections by rejecting certain proposals in the proxy. Additionally, they may not like certain aspects of the plan itself, and may wish to see some changes before they will consider approving additional shares. Shareholders are becoming more vocal. If you have a large institutional investor population, you may want to communicate with them early on, prior to the distribution of the proxy, to gauge their feedback on the proposal and establish any potentially problematic concerns.
While there are never guarantees, the above steps will help minimize unexpected hurdles in managing your equity plan reserves.
Is your calendar full for January yet? As we head into the new year, now is a good time to touch base with other departments that you work with throughout the year to review procedures and plan for the coming year. In today’s blog, I discuss a few of the groups you might want to meet with. Looks like it’s going to be a busy month…
Payroll
Schedule a meeting with payroll to kick off the start of the year. A few items for the meeting agenda include reviewing W-2 reporting procedures for various stock plan transactions (see our “Form W-2 Reporting Checklist” and “W-2 and 1099 Reporting for Equity Compensation – FAQs“); reviewing tax rate and limit changes for the upcoming year; and reviewing current procedures–what’s working and what isn’t working.
Accounts Payable
Forms 1099-MISC are typically prepared by accounts payable. If you grant equity to outside directors and other non-employees, it’s a good idea to meet with this group to ensure that any of their taxable stock plan transactions for the year will be reported appropriately. Ditto for any taxable transactions that occurred after the death of an employee or subsequent to the transfer of options/awards pursuant to divorce.
Accounting/Finance
For calendar year-end companies that haven’t done so since last year, now is a good time to review your valuation assumptions (volatility, dividend yield, interest rates, and expected life) for stock option grants. It’s also a good time to revisit the expected forfeiture rate applied to options and awards. Set up a meeting with accounting/finance to have a conversation about this. If you’ve had unusual transactions that occurred during the year (acceleration of vesting, changes in employee status, option exchange programs, other option/award modifications), it’s a good idea to review how these transactions are accounted for as well. You don’t want any surprises when your auditors review your financial reports.
Legal/Finance
You’ve probably already done this if your company has a calendar year-end, but if you haven’t, you’ll want to schedule a meeting with the folks responsible for preparing your company’s Form 10-K and proxy solicitation statements to ascertain what your contributions will need to be. Reviewing last year’s statements to remind yourself of the information included relating to stock compensation can be a good preparatory step for this meeting. It’s also a good idea to review the number of shares available in your stock plans, expected share usage for the next two years, and plan expiration dates, so you’ll know if a shareholder proposal relating to your stock plans is necessary.
HR
Review your current grant guidelines with HR to determine if any tweaking is necessary and to find out if HR has planned any changes to your equity programs for the next year.
Brokers
With cost-basis reporting going into effect for the first time with 2011 Forms 1099-B, you’ll want to meet with your brokers to find out what will be reported as the cost basis for stock issued under your stock plans and what information they will be providing your employees about the new reporting procedures. See my November 30, 2010 bog, “Four Questions to Ask Your Brokers.”
Section 6039 Service
If you plan to use an outside provider to prepare and/or file Section 6039 returns with the IRS and provide statements to employees, don’t wait any longer to get the conversations with your provider started. The deadline for employee statements is January 31!
International Advisors
If you offer stock compensation to non-US employees, it’s a good time to check in with your external advisors for international compliance to find out if any local requirements have changed and if there are any year-end reporting requirements you need to comply with outside of the United States. Where US employees have relocated to other countries, or foreign nationals have moved into the United States, also review the US tax reporting requirements with respect to these folks (even for foreign nationals that moved back out of the US by the end of the year).
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.
Wondering what the hottest topics in stock compensation are today? You can find out at the 19th Annual NASPP Conference, with the session “Today’s Hottest Topics in Stock Compensation.” I happen to have caught a glimpse of the panel’s slide presentation, so, in today’s blog entry, I “leak” a few of the topics that will covered.
Today’s Hottest Topics in Stock Compensation I’ve been saying all year that performance-based awards are red-hot and I’m pleased to see that our expert panel agrees (it’s always nice to be right). The panel plans to discuss a number of tricky issues relating to performance-based pay that have emerged over the past year, including:
Setting long-term performance goals in today’s volatile economy without jeopardizing 162(m) deductibility.
Best approaches for disclosing in the CD&A the use of non-GAAP financials for performance awards.
Trends and emerging practices with respect to double-trigger CIC vesting of performance-based awards.
The panel also plans to discuss whether stock options will become more performance-based in light of ISS concerns.
Next year’s proxy season is also clearly on everyone’s minds these days. Here are the proxy-related topics that the panel plans on discussing:
Under what circumstances might a company defy ISS guidance and how should they prepare for the consequences?
Drafting the CD&A disclosure of the Compensation Committee’s response to Say-on-Pay votes.
How will ISS’s new policy (currently in draft form–see the NASPP alert “ISS Issues Draft of 2012 Policy for Comment“) regarding the evaluation of executive pay affect plan design, benchmarking, and support for management’s Say-on-Pay proposals?
What best practices have evolved for developing a strategy for shareholder Say-on-Pay?
The panel will also discuss clawback provisions (particularly what to do about them if the SEC doesn’t finalize rules before the 2012 proxy season).
Don’t miss “Today’s Hottest Topics in Stock Compensation” at this year’s NASPP Conference. The panel wil be moderated by Art Meyers of Choate Hall & Stewart (and of the NASPP Executive Advisory Committee). Art’s co-panelists will be Mike Melbinger of Winston & Strawn (and author of Melbinger’s Compensation Blog on CompensationStandards.com), Mark Borges of Compensia (and author of Borges’ Proxy Disclosure Blog on CompensationStandards.com), and Paula Todd of Towers Watson (and of the NASPP Advisory Board).
See You Next Week in San Francisco! It’s hard to believe, but the 19th Annual NASPP Conference is next week! I hope to see all of my readers at the Conference, which starts next Tuesday, November 1, in San Francisco. We expect to have around 2,000 attendees–it’s going to be a very exciting event; register today to ensure you don’t miss out (and make your hotel reservations, because the hotel is close to selling 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.
Did It Pass? Understanding Shareholder Voting Issues By Keith Bishop of Allen Matkins
Because we live in a democracy, we are likely to feel that we have a good understanding of voting. The basic principle is that whoever or whatever gets the most votes wins. Voting, however, is a far more complicated subject than many governance professionals may realize.
When determining whether a proposal has passed, the first step is to determine the applicable voting rule. This will be a function of state corporate law and the corporation’s charter documents. For Delaware corporations, Section 216 provides a general (there are some exceptions) default rule for matters other than the election of directors – the affirmative vote of the majority of the shares present and entitled to vote present in person or by proxy at the meeting. However, this default rule is not immutable. It can be changed by the certificate of incorporation or the bylaws. Some Delaware corporations, for example, have adopted a majority of the votes cast rule for shareholder action. Thus, it is important to review a company’s charter documents when determining whether a matter has been approved.
What’s the difference between these two rules? Under Delaware’s default rule, broker non-votes are not counted as votes against because they are not considered present and entitled to vote. Under a “votes cast” standard, abstentions and broker non-votes aren’t counted as votes against because neither is a vote against.
But wait, there’s more. In determining whether a proposal has passed, it is critical that companies ask the question “why are we seeking shareholder approval?” If shareholder approval is being sought to meet listing, tax or other requirements, additional, and even conflicting, voting requirements may come in to play.
For example, the New York Stock Exchange (Rule 303A.08) generally requires listed companies to obtain shareholder approval of equity compensation plans. The requisite standard for approval appears to be similar to a majority of the votes cast standard – “the minimum vote which will constitute shareholder approval for listing purposes is defined as approval by a majority of votes cast on a proposal in a proxy bearing on the particular matter, provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal.” Rule 312.07. However, the NYSE treats abstentions as votes cast regardless of their treatment under state law. Consequently, a measure may pass as a matter of state law and yet fail to meet the NYSE’s requirement.
Determination of whether a proposal has passed is not as easy as it may seem. It requires an understanding of applicable state law as well as other applicable listing and legal requirements.
Don’t Miss the 19th Annual NASPP Conference The 19th Annual NASPP Conference will be held from November 1-4 in San Francisco. With Dodd-Frank and Say-on-Pay dramatically impacting pay practices, you cannot afford to fall behind in this rapidly changing environment; it is critical that you–and your staff–have the best possible guidance. The NASPP Conference brings together top industry luminaries to provide the latest essential–and practical–implementation guidance that you need. This is the one Conference you can’t afford to miss. Don’t wait–the hotel is filling up fast; register today to make sure you’ll be able to attend.
I often hear that liberal share counting–i.e., allowing shares tendered to the company for net exercises and tax withholding–is a deal-breaker with ISS. Turns out, this isn’t always the case. For full value awards, allowing shares tendered for taxes to return to the plan is okay. Moreover, if you don’t have a flexible share reserve (or a cap on the number of shares that can be issued as full value awards), liberal share counting is also okay.
This is because the only impact of a liberal share counting provision is that ISS will treat all options and SARs as full value awards in their shareholder value transfer analysis. But full value awards are already treated as full value awards in that analysis, so there’s no reason not to use liberal share counting for these awards. And without a flexible share reserve or a cap on the number of shares that can be issued as full value awards, ISS assumes that all shares under the plan will be issued as full value awards.
Black-Out Periods and Post-Exercise Grace Periods
It is possible for stock plans to provide that, where a black-out period occurs during the post-termination exercise period for stock options, the exercise period is automatically extended. This ensures that all former employees have the same amount of time to exercise their options without having to modify the options (and perhaps take an accounting hit) at the time of termination. I imagine it also might head off lawsuits that might be filed if former employees aren’t able to exercise due to a company-imposed blackout. (Of course, in no event, should the extension allow the option to be exercised beyond the original contractual term of the option.)
Shareholder Voting Bias
One consideration in the decision to amend vs. adopt a new plan is that shareholders might have a slight bias for new plans. Just a slight bias–when considering this decision, W.W. Grainger was advised that approval rates for new plans were maybe 1% to 2% higher than for plan amendments–but still, every little advantage helps.
Majority for NYSE Companies
For stock plan proposals, NYSE companies need a majority not just of the votes cast but of their total votes outstanding. That’s a much higher bar to acheive and, since brokers can’t vote on stock plan proposals without receiving direction from shareholders, could be a challenge for companies with high levels of lackadaisical shareholders, e.g., retail investors and probably even employees. When stock plan proposals are in your proxy statement, make sure employees are aware of them and vote.
You’re Not Getting Away With Anything
You may have some older plans with a lot of unused shares still available for grant–maybe even an non-shareholder approved plan that you slipped in before Nasdaq and the NSYE tightened up those requirements–and you (or your execs) may think those plans are flying below the radar. Not so. Your shareholders, particularly institutional investors, and their advisors, are aware of those plans (after all, you are disclosing these plans under Item 201(d) in the proxy statement) and these plans are likely to impact how shareholders will vote on current stock plan proposals. If you aren’t using these plans, maybe it’s time to get rid of them.
The Early-Bird Gets the Vote
You might have been thinking that this webcast was timed oddly–really too late to do anything about stock plan proposals for this year’s proxy season. But, in fact, the webcast was timed just about right for getting started on next year’s proposals. If you expect to go out to shareholders with a proposal that is significant enough that it warrants consideration of amending an existing plan vs. adopting a new plan, you want to start that process about a year ahead of time. Even better would be to start two years ahead of time and get the proposal into your proxy statement a year early, so you have another chance if the proposal fails.
These were just a tiny portion of the many great practical tips presented during the webcast. If you missed it, the audio archive is now available and the transcript will be posted in a couple of weeks.
Online Financial Reporting Course–Only a Few Days Left for Early-Bird Rate There are only a few days left to receive the early-bird rate for the NASPP’s newest online program, “Financial Reporting for Equity Compensation.” This multi-webcast course will help you become literate in all aspects of stock plan accounting, including the practical considerations and technical aspects of the underlying principles. Register by this Friday, April 29, for the early-bird rate.
2011 Domestic Stock Plan Administration Survey The NASPP is excited to announce the launch of our 2011 Domestic Stock Plan Administration Survey, covering administration and communication of stock plans, ESPPs, insider trading compliance, outside director plans, and ownership guidelines. You must participate in the survey to receive the full survey results. Register to complete the survey today–you only have until May 20 to complete it.
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 early-bird rate is only available until May 13.
Register for the NASPP’s newest online course, “Financial Reporting for Equity Compensation.” Don’t wait; the early-bird rate is only available until this Friday, April 29.
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.
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.
The Restoring American Financial Stability Act of 2010, passed by U.S. Senate on May 20th, contains provisions that apply to all public companies. Fortunately, you won’t need to read the daunting almost 1500 pages of the bill to weed out the pieces that could impact stock plan managers because we’ve posted the corporate governance and executive compensation portions, courtesy of Davis Polk. Here are the main sections that I think you should be aware of.
Say on Pay and Majority Voting
This bill, like the corresponding House bill, does include a required non-binding shareholder vote to approve executive compensation. Unlike the House bill, this legislation does not require a shareholder advisory vote on golden parachute payments. This provision would take effect six months after enactment of the bill. This does mean that say on pay for all public companies is eminent. Additionally, there is a provision that requires majority voting by shareholders in uncontested board elections that would require any board member who does not receive a majority vote to submit his or her resignation.
These two provisions mean that companies will need to prepare for the voting process, but also get a game plan together on how to address the possibility that shareholders will reject either uncontested board members or executive compensation. In both scenarios, the company can still choose to do what it wants–the executive compensation vote is non-binding and the board can reject a resignation letter. On that note, the CorporateCounsel.net blog this week covers three companies that are already grappling with how to respond to a shareholder rejection of executive pay packages; Motorola, Occidental Petroleum, and KeyCorp. I’ll definitely be tracking this blog to see how say on pay pans out! If you’re looking for more help with executive compensation, don’t forget that the 7th Annual Executive Compensation Conference is included with your 18th Annual NASPP Conference Registration.
Proxy Disclosures
Although this version of the bill does not require the chairman of the board and the CEO to be separate individuals, it does require companies to disclose the reasons they have chosen to keep these positions separate or combine them. In addition, there are a host of required disclosures regarding the company’s compensation committee and executive compensation. This includes a discussion of the relationship between executive compensation and financial performance as well as how the amount of executive compensation compares to the company’s financial performance or investor-return.
Clawbacks
The bill requires the SEC to direct exchanges to prohibit the listing of any company that does not adopt certain clawback policies. This provision is not included in the House bill. Stock plan managers should pay particular attention to this part of the bill. If it is enacted, you will need to work with your legal team to determine if your grant agreements need to be updated and nail down a policy on how to respond to financial restatements that trigger compensation recovery.
Get Smart
As you know, we’ve rolled out our NASPP Question of the Week. I’m really excited about this new challenge for NASPP members! What you may not know is that if you missed out on our first announcement, you still have the unique and never-to-come-again opportunity to catch up. The first four quiz questions will remain available at the full point value until the second month of our contest. So, don’t feel like you’re starting at a disadvantage–you can still work toward that number one position. Create your screen name and get started now!
Recipients of Troubled Assets Relief Program (TARP) funds may be finding it hard to keep up with the restrictions associated with their participation. The TARP was introduced as a part of the Emergency Economic Stabilization Act of 2008 (EESA), which I blogged about in November. The EESA offers several ways for financial institutions, large and small, to gain access to funds. Access to funds comes with initial restrictions attached, many of which impact the stock plan administration of those companies. These restrictions include limits on senior executive severance benefits & 162(m) tax deductions as well as the requirements for certain claw-back provisions and to have a board Compensation Committee to oversee compensation strategies that should include measures to curb inappropriate risk-taking.
Companies that participate in the TARP are also now subject to additional restrictions through new Treasury statements in 2009 and the American Recovery and Reinvestment Act of 2009 (ARRA), which I blogged about in April of this year. This legislation focuses on executive compensation, moving to provide greater transparency and control to shareholders through certification requirements, executive compensation disclosure, say on pay, and limited bans on parachute payments and luxury expenditures. The ARRA also makes an important distinction between regular participants in the TARP, and those who receive exceptional assistance. It also provides a way for participating companies to release themselves from these restrictions by repaying TARP funds, which some companies have already done – see Ten Major Banks Repay $68 Billion in TARP Funds (CNBC June 17, 2009).
Interim Final Rule
The various regulations governing TARP recipients were consolidated by the Treasury on June 10, 2009 when it issued the Interim Final Rule (IFR). TARP recipients are subject to different levels of restrictions based on which program they are participating in and the size of the assistance they receive. Fortunately, the Interim Final Rule appoints a Special Master to help companies determine the applicable regulations and review executive compensation for participating companies. As it stands now, participating companies may be subject to the certain restrictions for senior executive officers (SEOs) or the next most highly compensated employees (HCEs). The IFR:
Prohibits
“golden parachute” payments to SEOs and the next five HCEs
bonus payments to SEOs and certain other HCEs, with the exception of certain restricted stock awards that meet the qualifications for the exception or other qualifying bonus payments that were legally binding through a contract on or before February 11, 2009
compensation plans that encourage “unnecessary and excessive risk” by SEOs
tax gross-ups to SEOs and the next 20 HCEs, except for payments under tax equalization agreements
Requires:
clawback provisions for bonuses paid to SEOs and the next 20 HCEs that are found to have been based on materially inaccurate performance criteria
“say on pay” non-binding shareholder vote applicable to proxy statements filed with the SEC after February 17, 2009
implementation of a corporate policy on excessive or luxury expenses;
disclosure of the use of any compensation consultant including the specific services provided and methods employed by the compensation consultant
disclosure of any perquisite with a total value exceeding $25,000;
certification by the CEO and CFO that the company is in compliance with all compensation and corporate governance requirements
Additional Ramifications
In addition to the IFR, the Treasury also expressed support for the SEC in its pursuit to impose similar executive compensation and corporate governance reforms for all companies, not just for TARP recipients.
On July 1, 2009, the SEC voted to move forward (see the SEC Press Release) with plans to improve corporate executive compensation disclosures (as outlined in the June 10th Press Release), in addition to modifying proxy disclosure to be in line with the IFR requirements for TARP recipients.
I think that all companies should be paying attention to the requirements made on TARP recipients. Congress and the current Administration appear to be moving towards implementing reforms for all companies to guide corporate governance and align executive compensation with company performance. Now is the time to review your company’s compensation philosophy and equity compensation programs and begin implementing changes that keep personal performance goals in line with company performance. Additionally, it is time to take a look at “say on pay” to determine if it’s right for your company now.