Compensation Committees

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Remind me again, what’s Section 162(m)?

Image by Gerd Altmann from Pixabay

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”

Image by 政徳 吉田 from Pixabay

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

Image by succo from Pixabay

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

No, this is not a riff on Hamlet’s soliloquy.  It’s about the current kerfuffle (one of my favorite words) about stock buybacks.  In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:

  • Plowing all that cash into buying back stock means that it’s not going into plant and equipment, R&D or other things that facilitate longer-term growth and job creation.
  • Companies are using the windfall from the 2017 tax act to buy shares back rather than to make investments that will create jobs and longer-term growth.
  • Stock buybacks artificially inflate stock prices and earnings per share, which contributes to or results in additional (i.e., excessive) executive compensation.
  • By reducing the number of shares outstanding, buybacks mask the dilutive effects of equity grants to senior management.

And now there’s another concern.  Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above.  And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.Continue Reading To buy or not to buy

It may be nice to be your own boss, but setting your own compensation – and, at least arguably, giving yourself excessive pay – may get you in trouble.  A number of boards of directors have found that out, as courts have given them judicial whacks upside the head for paying themselves too much.  Not surprisingly, shareholders have gotten on the bandwagon as well.

Executive compensation – at least for public companies – has to be scrutinized and blessed by independent directors and, since the advent of Say on Pay, approved by shareholders (albeit on a non-binding basis).  In contrast, directors have long set their own pay, with little or no scrutiny and no requirement for independent review, much less approval.  (Director plans generally must get shareholder approval if they provide for equity grants, but neither the overall director compensation program nor specific awards have to be approved.)
Continue Reading Pigs and hogs — a note on director compensation

ASU 2016-09 - Share-Based Accounting
Photo by David Fulmer

Over the past couple of months, the FASB has been busy. I wanted to point out one recent change and my thoughts on its impact.

FASB has “simplified” share-based compensation accounting. I will always have a special place in my heart for old FAS123 since it was on my CPA exam a couple of decades ago.  Nevertheless, much has changed since then (APB No. 25 anyone?), including most recently:

  • No more APIC pools. Currently, tax benefits in excess of compensation cost are recorded in equity (specifically, Additional Paid In Capital or APIC). The accumulation of excess benefits has been known as an APIC pool. Tax deficiencies decrease the APIC pool. Under the new accounting rules, excess benefits and deficiencies are recognized in the period in which they occur.

My Take – Expect more income tax expense volatility from period to period. If the changes impact tax expense significantly, we could see more non-GAAP financial measures develop. Just be careful of the renewed focus on non-GAAP financial measures from the SEC.

  • No longer need to estimate forfeitures. GAAP currently requires you to estimate the number of awards that will be forfeited to calculate a more accurate amount of compensation cost each period. Under the new rules, you can continue to estimate or you can just reverse the compensation previously expensed when the forfeiture occurs. If you choose the new route, then you will have to hit retained earnings for the cumulative-effect adjustment incurred as a result of the change as of the beginning of the year the change is applied.

My Take – Again, there could be potentially more volatility if you elect to apply the new “actual” forfeiture approach.   A good example of volatility would be if a company had a significant layoff of employees. The increase in forfeitures during the layoff period would significantly
Continue Reading Impact of accounting literature: Time to get out of the pool and other changes

Director fiduciary dutiesA recent case out of the Delaware Court of Chancery could result in heightened scrutiny of equity award grants to non-employee directors. Although this decision was rendered at the procedural stage of the case and the merits of the claims have yet to be fully analyzed, this case potentially affects directors of Delaware companies and those advising them on compensation-related matters.

In this case, a stockholder of Citrix, Inc. (“Citrix”) brought a derivative lawsuit against the Citrix board of directors alleging a number of things, including breach of fiduciary duty by the board of directors in awarding significant equity compensation awards. Specifically, the plaintiff alleged that restricted stock units (“RSUs”) granted to non-employee directors (who constituted eight of the nine Citrix board members) under the Citrix equity incentive plan, were excessive.

Because the non-employee directors who received the RSU grants in question constituted eight of the nine members of the Citrix board of directors, the plaintiff was successfully able to rebut the business judgement rule presumption and the defendants bear the burden of proving to the court’s satisfaction that the RSU grants were the product of both fair dealing and fair price (i.e., the “entire fairness” standard of review).

The defendants argued that
Continue Reading Chancery Court Holds Board to Heightened Fiduciary Duty Standard in Connection with Equity Awards

I have read several reports quoting Mary Jo White, Chair of the SEC, as saying that the remaining Dodd-Frank corporate governance rulemakings will be out by year-end.  Admittedly, the reports aren’t clear as to what Chair White means.   Does she mean that the so-called pay ratio rule will be adopted in final form by year-end (in which case the disclosures wouldn’t be required until 2016)?  Or that by year-end the Commission will have proposed rules on hedging, clawbacks and pay-for-performance?  All of the above?  It’s anyone’s guess.

I have also read the daily emails I receive from the SEC entitled “Upcoming Events Update.”  (I get several of these “Updates” every day, even though they are identical and don’t seem to have been updated at all.  For those of you who don’t get these emails, they purport to announce things like every meeting of the SEC and every speech to be given by Commissioners and Staff members.)  For the last month or two, no open meetings of the SEC have been scheduled (and it’s virtually impossible for these rules to be proposed or adopted otherwise than at an open meeting).  So when I saw today that
Continue Reading My inaugural Uptick: How about never? Does never work for you?

Bob Lamm's Golden Nugget's of Corporate Governance
Photo by Eric Roy/ Golden Nugget Casino, Las Vegas, late 80’s.

On September 30, Bob Lamm moderated a panel at a “Say-on-Pay Workshop” held during the 11th Annual Executive Compensation Conference in Las Vegas, Nevada.  The Conference is an annual event sponsored by TheCorporateCounsel.net and CompensationStandards.com – and emceed by our good friend, Broc Romanek – and features many of the pre-eminent practitioners in corporate governance and securities law. 

The panel, entitled “50 Nuggets in 75 Minutes,” may just be the CLE equivalent of speed dating – each of five panelists covers 10 “nuggets” – practical and other takeaways to help them do their jobs better – in a 75-minute panel.

Here are Bob’s 10 “nuggets,” reprinted courtesy of the Conference sponsors and Broc. 

1.    Engagement is a Two-Way Street – At this stage of the game, shareholder engagement is – or should be – a given, and one of a company’s normal responsibilities.  Along with that is the mantra “engage early and often”; in other words, don’t wait until you are faced with a negative vote recommendation to start reaching out to your major holders. 

What may not be part of the mantra is that engagement is a two-way street.  Your job (and that of your colleagues and even some directors) is to
Continue Reading 10 nuggets on corporate governance hot topics