Readers probably thought I was exaggerating in my post last Friday when I said, “If you are a lawyer, compensation committee member, or other executive compensation professional, you may need to learn a new language, as the proposed rules create a series of new definitions – many of which do not match with professionals’ common understanding of the meaning of those terms.” Not so. The new proposed rule give a separate definition for each of the following terms:
- Long-term incentive plan
- Incentive-based compensation plan
- Incentive-based compensation program
- Incentive-based compensation arrangement
- Qualifying incentive-based compensation
As people like to say, “You can’t make this stuff up.”
- “Incentive-based compensation arrangement” is an agreement between a covered institution and a covered person under which the covered institution provides incentive-based compensation to the covered person, including incentive-based compensation delivered through one or more incentive-based compensation plans. An individual employment agreement would be an incentive-based compensation arrangement.
- “Incentive-based compensation plan” is a document setting forth terms and conditions governing the opportunity for and the delivery of incentive-based compensation payments to one or more covered persons. An incentive-based compensation plan may cover, among other things, specific roles or job functions, categories of individuals, or forms of payment. A covered person may be compensated under more than one incentive-based compensation plan.
- “Incentive-based compensation program” is a covered institution’s framework for incentive-based compensation that governs incentive-based compensation practices and establishes related controls. A covered institution’s incentive-based compensation program would include all of the covered institution’s incentive-based compensation arrangements and incentive-based compensation plans.
- “Long-term incentive plan” is a plan to provide incentive-based compensation that is based on a performance period of at least three years.
- “Qualifying incentive-based compensation” is an incentive-based compensation awarded to a covered person for a performance period of less than three years. With the exception of long-term incentive plans, all forms of compensation, fees, and benefits that qualify as “incentive-based compensation,” including annual bonuses, would be included in the amount of qualifying incentive-based compensation.
Again, I want to remind readers who do not work for a financial institution not to ignore these rules (and my posts). Rather, view them as a preview of SEC requirements and/or “best practices” coming soon to a company or board meeting near you.