An End-of-Year Checklist for Executive Compensation Plans
It’s the time of year when Santa — and those who work with executive compensation programs — are making their end-of-year lists — and checking them twice.
To that end, the lawyers at Snell & Wilmer have prepared the following end-of-year “to do” list for executive compensation plans:
Correct Certain Section 409A Document Failures Discovered in 2015 (without taxes and penalties). Though to take advantage of this correction opportunity, the amounts in question must remain unvested for the balance of 2015 and correction must occur prior to the date the compensation vests.
Nonqualified Deferred Compensation Deferral Elections Should be Made on or Before Dec. 31, 2015. Section 409A imposes strict requirements on the timing of compensation deferral elections and that most deferrals of compensation to be earned in 2016 must be made on or before Dec. 31, 2015.
Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2011. According to Snell & Winter, the Section 162(m) regulations require that, every five years, the shareholders reapprove the performance goals that determine the amount of “performance-based compensation” to be paid. This means that companies that obtained shareholder approval of plans containing Section 162(m) performance goals in 2011 must resubmit the plans for shareholder approval in 2016.
Review Whether Your Equity-Based Compensation Plan Has Sufficient Shares Remaining for 2016 Grants.
Consider Adding Separate Annual Limits on Director Equity Awards. In response to the Delaware Chancery Court’s rulings in Seinfeld v. Slager and Calma v. Templeton, employers that are adopting or amending equity-based compensation plans in 2016 should consider adding a separate annual limit on director equity awards, according to Snell & Winter, which explains that in both Seinfeld and Calma, the Chancery Court refused to apply the “business judgment rule” to dismiss a challenge to directors who approved large equity awards for themselves under a shareholder-approved equity-based compensation plan.
Public Companies Should Familiarize Themselves with Recent Changes to the ISS Equity Plan Scorecard. While noting that the scorecard methodology remains largely unchanged for 2016, the following adjustments have been made:
- the “IPO” model was renamed the “Special Cases” model and now, in addition to IPOs, analyzes bankruptcy emergent companies;
- a separate “Special Cases” model has been introduced to apply to Russell 3000/S&P 500 companies; and
Code Section 6039 Information Statements Due by Jan. 31, 2016.
- the manner in which vesting following a change in control is scored has been adjusted.
For ISO grants and ESPP transfers occurring in 2015, the Section 6039 information statements must be provided no later than Jan. 31, 2016.
Review Grant Procedures for Upcoming Equity-Based Grants.
An employer may wish to carefully review its stock plan to determine which governing body is charged with making grants under the plan and put in place best practice procedures to ensure the proper entity takes the appropriate action as of the date the awards are considered granted.
Prepare for Final “Clawback” Rules.
Proposed rules require the SEC to direct the national securities exchanges to prohibit the listing of any security that is not in compliance with certain requirements relating to the “clawback” of executive compensation. Even though these rules have not yet been finalized, Snell & Wilmer caution that public company employers should consider familiarizing themselves with the proposed rules and may even consider adding “clawback” enabling language to their equity plans and award agreements to better facilitate compliance with these rules.
Prepare for Pay Ratio Disclosure.
New SEC rules that require public companies to disclose the:
- median of the annual total compensation of all employees (other than the CEO);
- annual total compensation of the CEO; and
- ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO are not effective until the first full fiscal year beginning on or after Jan. 1, 2017.
Nonetheless, Snell & Wilmer suggest that public company employers consider familiarizing themselves with the final rules and how they might, among other things, identify the methodology that will be used to identify the median employee.
Prepare for Pay Versus Performance Disclosure.
While the SEC’s proposed rules did not identify an effective date, the authors caution that public company employers should consider familiarizing themselves with the proposed rules and whether certain components of the disclosure will be in a narrative, graphic, or hybrid format.
Prepare for Hedging Disclosure.
Again, while the SEC’s proposed rules did not identify an effective date, Snell & Wilmer suggest that public company employers should consider familiarizing themselves with the proposed rules and whether now is an appropriate time to adopt an anti-hedging policy.
Revise Incentive Programs in Response to FASB’s Elimination of Extraordinary Items Concept.
For fiscal years beginning after Dec. 15, 2015, separate reporting on the income statement should occur when an item is unusual in nature or infrequently occurring. Incentive compensation programs that use the old accounting terminology (e.g., to describe an adjustment to a financial performance measure) should be amended to reflect this new accounting guidance.