Once upon a time, few if any investors seriously challenged executive pay. Executive compensation was, as always, a hot topic, but in the days before say-on-pay votes, it wasn’t easy to effectively object to excessive pay packages. Moreover, as one of the more outspoken members of the investor community once told me, as long as
Travel on corporate jets is alluring. I’ve had the pleasure, and it really is a pleasure. No TSA, nobody squishing you on both sides. No worry about checked bags not getting there, and so on. It’s no wonder that people love it so much.
However, there can be too much of a good thing. My experience
Background
On October 26, 2022, the SEC adopted final clawback rules consistent with the requirements of the Dodd-Frank Act. The new rules direct the national securities exchanges to establish listing standards requiring companies to adopt, disclose, and enforce policies to recoup, or “clawback,” incentive-based compensation erroneously awarded to executive officers. Based upon recent SEC action, listed companies will have until December 1, 2023 to adopt compliant clawback policies. The following summarizes some key provisions of the final rules and the decisions that companies will have to make as they finalize their policies by the deadline.
Adopting Compliant Policies
Companies that do not have existing clawback provisions in place must adopt policies that comply with the standards established by the exchanges. Companies that have clawback provisions in place must determine if and how those policies differ from what is required and either modify their existing policies or adopt a new compliant policy on a stand-alone basis. Questions to help integrate or create compliant policies include: Continue Reading The SEC’s New Clawback Rules: The Devil’s in the Details (and There Are Lots of Details)
Remind me again, what’s Section 162(m)?
In general, Section 162(m) of the Internal Revenue Code provides that a publicly held corporation shall not be allowed a deduction for any “applicable employee remuneration” to any “covered employee” that exceeds $1,000,000. Applicable employee remuneration generally means compensation for services performed. Though the definition has changed over time, “covered employee” originally captured a company’s CEO as of the last day of the taxable year, as well as the next three most highly compensated officers.
Insert the TCJA
The Tax Cuts and Jobs Act of 2017 (the “TCJA”) took the first stab at widening the net used to determine who is a “covered employee.” Specifically, the definition was expanded to include any person who served as CEO or CFO during the taxable year, in addition to the next three most highly compensated officers. Additionally, the definition was expanded to include any individual who was a “covered employee” for any taxable year beginning after December 31, 2016. The TCJA also made other notable changes to Section 162(m), including the elimination of an exception for qualified “performance-based compensation” approved by stockholders. The practical effect of this was to eliminate the need for stockholder votes to approve plans providing for “performance-based” compensation, because the compensation in question would be non-deductible whether or not it was performance-based.
Continue Reading Run for “Covered!” The American Rescue Plan Act casts a wider net on Section 162(m) “Covered Employees”
Environmental, Social and Governance considerations (ESG) are expected to play an increasing role in equity pay determinations for executive officers. About 50 percent of S&P 500 companies used ESG metrics in cash-based, short-term incentive compensation plans during 2020. Conversely, only about 4 percent of S&P 500 companies used ESG metrics in long-term equity incentive plans. This should change beginning with 2021 awards due to anticipated SEC-required disclosure of ESG business risks. ISS, Glass Lewis and large investors (e.g., BlackRock, Vanguard) have made calls for more ESG disclosure. Banks increasingly view ESG risks as credit risks. In addition, national media outlets have made the case for executive pay to tie with ESG goals.
In recent years equity awards made to executive officers have been tied to achieving company performance goals. But these performance evaluations are usually linked to relative total shareholder return or financial metrics such as EPS or return on invested capital. As the tide shifts to include ESG metrics, the question now asked is, “how do we set equity awards for executives to help our company attain its ESG goals?”
Continue Reading ESG Considerations for Equity Incentive Plans
As noted in a prior post, every now and then the SEC Enforcement Division likes to remind companies of the requirement to disclose personal benefits, or perquisites. I’d even hazard a guess – completely unsubstantiated by research – that enforcement actions regarding perquisite non-disclosure make up a significant percentage of enforcement actions concerning proxy statements.
And yet, companies seem to keep forgetting about perks disclosure. In some cases, the companies’ disclosure controls may not capture perquisites, but my hunch – again, unsupported by research, but this time supported by experience – is that companies and, in particular, their executives, manage to persuade themselves that the benefits in question have a legitimate business purpose and thus are not personal benefits at all. Over the course of my career, I’ve heard hundreds if not thousands of reasons why a seemingly personal benefit should be treated as a business expense. Here are just a few:
Continue Reading When it comes to perquisites, caveat discloser
About two years ago, I wrote a post about director compensation, quoting the old saw that pigs get fat but hogs get slaughtered. Given what I’ve been reading of late, I think it’s time for a refresher, but this time I’m discussing executive, rather than director, compensation.
With the onset of the COVID-19 pandemic, a number of companies or their executives took action to reduce pay. In some cases, salaries were reduced to $1 a year or eliminated entirely. So far, so good. However, there were also cases in which the executives were given so-called mega-grants of equity to make up for their sacrifices. That may have raised a few eyebrows, but the eyebrow-raising may have been mitigated or overlooked because the grants were made when the stock markets had dropped precipitously and many companies’ shares were trading at 52-week lows.
Of course, what goes down must come up, so when the stock markets rallied (and, in general, have continued to rise to levels that seem absurd in the face of what’s going on these days), the noble executives who sacrificed pay made out like bandits. Or hogs. No sane person would argue that the stock markets have any rational connection to corporate performance generally, much less to that of a particular company. However, the rising tide has floated a number of boats, including the holders of those mega-grants.
Continue Reading Of shields and swords, pigs and hogs
SEC Rule 701 exempts non-reporting companies from registering securities offered or sold to employees, officers, directors, partners, trustees, consultants, and advisors under compensatory benefit plans or other compensation agreements. As discussed in an earlier post, under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, the threshold for the aggregate sales price of securities sold during any consecutive 12-month period that triggers additional disclosure requirements under Rule 701 was increased from $5 million to $10 million. What may have gone unnoticed was that the SEC has adopted final rules to implement EGRRCPA and has published a concept release “soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.”
Continue Reading The SEC modernizes exempt compensatory offerings (with more changes in the works)
As we approach the end of 2018, it’s only natural to look back on some of the year’s events – and some non-events. For my money, one of the most significant non-events was the inauguration of CEO pay ratio disclosure, one of the evil spawn of Dodd-Frank.
In the interest of brevity, I’ll skip the background of the disclosure requirement, except to say that it seemed intended to shame CEOs – or, more accurately, their boards – into at least slowing the rate of growth in CEO pay. Some idealists may have actually thought that it would lead to reductions in CEO pay. Poor things; they failed to realize not only that all legislative and regulatory attempts to reduce CEO pay have failed, but also that such attempts have in every single instance been followed by increases in CEO pay.
So the 2018 proxy season, and with it pay ratio disclosures, came and went. Sure, there were media outcries about some of the ratios, but they failed to generate any traction. Companies may have incurred significant monetary and other costs to develop the data needed to prepare the disclosures, but their concerns about peasants storming the corporate gates with torches and pitchforks proved needless. Few, if any, investors – and certainly no mainstream investors – seemed to care about the pay ratios. Employees making less than the “median” employee didn’t rise up in anger. Even the proxy advisory firms seemed to yawn in unison.
So that’s that. Or so you’d think.Continue Reading To pay ratio advocates, nothing succeeds like excess
Since the beginning of this month (July 2018), the SEC has brought two enforcement cases involving perquisites disclosure – one involving Dow Chemical, and one involving Energy XXI. As my estimable friend Broc Romanek noted in a recent posting, over the past dozen years, the SEC has brought an average of one such case per year. It’s not clear why the SEC is doubling down on these actions, but regardless of the reasons, it makes sense to pay attention.
The SEC’s complaint in the Dow Chemical case is an important read, as it summarizes the requirements for perquisites disclosure. Among other things, it’s worth noting the following:
“Among the factors to be considered in determining whether an item is a perquisite or other personal benefit are the following:
The SEC has also noted on several occasions that if an item is not integrally and directly related to the performance of the executive’s duties, it’s still a “perk”, even if it may be provided for some business reason or for the convenience of the company.Continue Reading Doubling down (literally) on perquisites disclosure