I have blogged before on the new proposed rules on incentive compensation for financial institutions under Dodd-Frank Act Section 956. Today I include two brief examples of how these rules would apply. These examples also use the new terminology from the Proposed Rule, including the new definitions of “Awarded,” “Vested” (or “Vesting”), “Qualifying Incentive-Based Compensation,” and “Deferral Period.”
Assume that a Level 1 covered institution grants 10,000 performance shares to a “senior executive” on January 1, 2018, with a three-year Performance Period ending December 31, 2020. Also assume that the performance targets were achieved. On December 31, 2020, the end of the three-year Performance Period, the 10,000 shares would be deemed “Awarded” to the executive.
Because the “Performance Period” is three years, this would be a “Long-Term Incentive Plan Award” under the Proposed Rule.
Under the Proposed Rule, what we currently think of as the vesting date would be the “Award Date.” The “Vesting Date” would not occur until the end of the “Deferral Period.”
On December 31, 2020, the 10,000 shares are "Awarded” and the Deferral Period begins. Under the new Proposed Rule, 4,000 shares would be distributed to the senior executive on or after December 31, 2020, and 6,000 shares (60%) of the senior executive’s Awarded shares would be subject to Deferral Period of two years. Generally, these shares will not be Vested until the end of the Deferral Period.
During the Deferral Period, shares can vest annually on a pro rata basis. Therefore, on December 31, 2021, 3,000 shares could be Vested and distributed to the senior executive and on December 31, 2022, the remaining 3,000 shares would be Vested and distributed.
And each set of shares will remain subject to a Clawback for seven years after Vesting and distribution—until December 31, 2027, for the first 4,000 shares and until December 31, 2019, for the last 3,000 shares.
For incentive compensation with a performance period of less than three years, which the proposed rule refers to as “Qualifying Incentive-Based Compensation,” the Deferral Period is longer.
Assume that a senior executive at a Level 1 covered institution is paid $800,000 base salary and is entitled to annual bonus of 100% of base salary for 2018. Assume that the performance goals are achieved and on December 31, 2018, (the end of the one-year Performance Period) the executive earns an $800,000 cash bonus.
Shortly after December 31, 2018, $320,000 would be paid out to the senior executive and the Deferral Period would begin for the $480,000 (60%) of the Awarded bonus. That $480,000 could be paid out in a single lump sum after December 31, 2022, at Vesting or could be Vested and paid out in four annual installments of $120,000 after each of December 31, 2019, 2020, 202, and 2022.
Each of the cash payouts would remain subject to a Clawback for seven years after payout—until December 31, 2029, for the last $120,000.