As always, the 25th Annual NASPP Conference—14th Annual Executive Compensation Conference—was an excellent forum for exchanging information, ideas, interpretations, and updates among the nation’s top executive compensation professionals. And making new friends.
One of the panels on which I spoke was titled “50 Nuggets in 60 Minutes” (our agenda proved too ambitious and we only discussed 38 nuggets in our allotted time). However, for readers who were unable to attend, I wanted to share some of those that I discussed.
- Prepare for impact of accounting rules changes on financial performance measures. Readers will recall that I blogged on this topic in detail, see Prepare for the Impact of Four Accounting Rule Changes.
- Don’t overlook death and disability benefits in the payments upon termination of employment or change in control. Most companies’ equity incentive plans or award agreements provide for full or partially accelerated vesting upon an executive’s termination of employment due to death or disability. Some employment agreements also provide for payments or benefit on death or disability. However, from time to time we come across a proxy statement that fails to reflect these amounts in the Payments on Termination or Change in Control Table or Section. Companies usually justify this omission by arguing that Instruction 5 to Item 402(j) provides that a company need not provide information with respect to contracts, agreements, plans, or arrangements to the extent they are available generally to all salaried employees and do not discriminate in scope, terms, or operation, in favor of executive officers of the company. However, C&DI Question 126.02 states that the Instruction 5 standard that the “scope” of arrangements not discriminate in favor of executive officers would not be satisfied where the awards to executives are in amounts greater than those provided to all salaried employees. [Aug. 8, 2007]
- Ensure that the summary of key provisions of your incentive plan in your proxy statement matches the plan language exactly. Preparing the annual proxy statement takes time and money. A temptation may arise to rely on paragraphs previously used to complete the process. We make changes to incentive and other plan documents at every opportunity, to reflect changes in the law, accounting principles, and best practices. Therefore, very few descriptions in the proxy statement remain identical from year to year. Plaintiffs’ lawyers have begun to scrutinize plan descriptions and other areas of the proxy for errors and omissions in this regard. The same caution applies to the description of the duties of the Compensation Committee.
- Consider automatic exercise of in-the-money stock options. One of the most common sources of litigation is current or former employees whose in-the-money stock options expire unexercised. Companies usually win these lawsuits, but wouldn’t it be nice to avoid the time and expense, not to mention hurt feelings, entirely? Some companies have drafted their plans and/or award agreements to provide that any stock option or SAR that is in-the-money on the date it otherwise would expire will automatically be exercised.
- Verify that all plans and agreements provide for clawback and the clawback policy will work. Another topic on which I previously, see So, You Think You Don’t Need to Worry About Your Clawback Policy Because the SEC Has Not Issued Final Rules? Think again.
- Verify that your tax withholding on equity awards is updated. ASU 2016-09 revised ASC 718 effective for public companies’ fiscal years beginning after December 15, 2016, with a favorable change to the limitations on companies’ ability to withhold income taxes from equity awards. Previously, to avoid triggering liability accounting treatment, any shares withheld to cover the taxes due at settlement of an option or award must be limited to the minimum required statutory withholding of the award holder. Most companies and their counsel have hardwired the minimum required statutory tax-withholding requirement into their stock plan documents. ASU 2061-09 allows companies to withhold shares for taxes up to the maximum individual tax rate in the applicable jurisdiction, rather than the minimum statutory withholding amount. Most companies acted to avail themselves of the flexibility offered by ASU 2016-09, but not all. Nearly every equity incentive plan and award agreement previously had been drafted to specify that tax withholding would occur at the minimum statutory amount.
- Be sure your equity incentive plan has a meaningful limit on directors equity awards and total compensation. Since the Delaware courts’ Seinfeld decision in 2012, virtually every company in America has added a “meaningful limit” on the number or value of shares that may be awarded to a non-employee director under the company’s equity incentive plan in any year. Companies should also impose a limit on the total compensation payable to a non-employee director in any year. Companies may place this limit in the company’s equity incentive plan or a separate directors’ compensation plan, but they must be sure to have the limit approved by shareholders.
- Consider whether your compensation risk assessment efforts have been thorough and red flags addressed. See The Potential for Financial and Reputational Risk Lurking in Companies’ Compensation Programs – And a Possible Solution.