As a follow-up to my post entitled “Thoughts When Linking Public Company Executive Pay to D&I Initiatives,” I think it is important to share, at least at a high level, the legal framework for diversity, equity and inclusion programs (i.e., it is important to successfully navigate employment laws prior to the Board taking action so that the employer can avoid legal foot faults while trying to do the right thing). One of my partners, Emily Burkhardt Vicente (co-chair of our Labor & Employment Practice), did just that when she authored an article for Banking Exchange entitled “Enhancing Diversity & Inclusion in the Financial Sector: Practical Strategies for Recruiting and Retaining Diverse Talent.” The article was written for employers in the financial sector, however, the legal framework and strategies discussed therein are applicable to all employer sectors. More coming!
This Post will begin a series of blog entries focused on the topic of linking executive pay to a publicly-traded issuer’s diversity and inclusion (“D&I“) initiatives. As background, there has been a recent push to hold executives accountable for the effectiveness of an issuer’s D&I initiatives by linking their executive pay to the success of such initiatives. Pretty straight forward (i.e., the success of the D&I initiative becomes one of the metrics in the issuer’s performance-based compensation strategy).
On Wednesday, September 30, 2020, we will be hosting a webinar entitled “The SEC’s New Human Capital Rule, Workplace Diversity and Compensation Design: Year-End Disclosures and the Board Agenda 2020”. The purpose of this webinar is to cover the SEC’s new Human Capital rule and how such disclosure will interplay and impact any diversity and inclusion (“D&I”) initiatives of the issuer. In particular, the speakers will share thoughts on how top down D&I initiatives could be structured from a compensatory perspective (i.e., top down meaning D&I initiatives are incorporated into performance metrics of compensatory awards for the issuer’s executive officers). Additionally, the speakers will discuss associated labor and employment limitations, governance issues and other SEC disclosure issues. To learn more, sign up here.
Related intellectual thought from us on the subject can be found here: “The New Era of Human Capital Resources Reporting.”
On July 22, 2020, the Securities and Exchange Commission adopted final rules and supplemented interpretative guidance that modify the proxy rules as applied to proxy advisory firms and clarify the fiduciary duties of investment advisers when voting proxies. One of our rising stars (Chelsea Lomprey) did the heavy lifting in drafting a client alert on the subject, and such can be found HERE.
We host a monthly webinar series with the intent of teaching a narrow topic deep (as opposed to covering the surface of a wide topic). Our webinar for the month of July will be held this Thursday (July 9, 2020) at 10:00 Central and is entitled “Public Companies and ESOPs: Check Yes or No” [Sign Up Here].
The purpose of this Post is to highlight some of the administrative issues that should be vetted any time the Compensation Committee of a publicly-traded company effectuates a grant of equity to key employees. The below list is not exclusive and is listed in no particular order:
Share Counting Provisions
- Verify the Equity Plan’s Share Reserve Not Exceeded. With respect to the upcoming grants, the Company will need to verify that the equity plan’s share reserve will not be exceeded. This has two parts. First, to the extent the equity plan has liberal share counting, the Company will need to track equity grants (which are a subtraction from the share reserve) AND track forfeitures of equity awards (which are an addition to the share reserve). Second, the Company should determine whether a sufficient number of shares would exist if the outstanding performance awards were settled at their maximum levels (i.e., some companies only track share counting of performance-based awards at their target levels).
- Verify Compliance with Any Holdover 162(m) Sub-Limits. Prior to the Tax Cuts and Jobs Act (“TCJA“), most equity plans of publicly-traded companies contained share grant limitations that were intended to comply with the performance-based exception to the $1mm deduction limits under Section 162(m). These were typically structured as an individual and annual limit. Though TCJA eliminated the performance-based exception, a number of equity plans have retained such limitations as “good governance.”
- Verify Compliance with any Requirement that the Equity Award Contain a Minimum 1-Year Vesting Schedule. As background, part of the “plan features” pillar of ISS’s equity plan scorecard (“EPS“) is that a certain number of points are allocated if the issuer’s equity plan has a requirement that at least 95% of the share reserve is granted with a minimum vesting schedule of 1 year. If applicable, the 5% carve-out should be tracked. For example, often grants of equity to non-employee directors are made in arrears (i.e., payment for services previously performed), and as a result, these grants are issued to directors fully vested. Such grants will work to deplete the 5% carve-out.
- Verify Share Reserve on Form S-8. Equity plans with liberal share counting provisions count share depletion on a “net basis,” however and irrespective of the foregoing, share depletion under Form S-8 rules are counted on a “gross basis”. Over time a disparity can exist such that, in the extreme example, shares remain for issuance under the equity plan whereas the shares protected under the Form S-8 have been fully exhausted. See our prior post entitled “Tip of the Week: Number of Shares to Register under a Form S-8” for more details.
- Verify Compliance with Director Sub-Limits. As background, a number of equity plans contain non-employee director sub-limits for purposes of bolstering any shareholder ratification defenses. See our prior post entitled “Discuss Director Compensation During the Fall 2018 Board Meetings” for more details.
If Applicable, Verify Compliance with any Prior Delegations of Authority
- Background. Absent a valid delegation of authority, only the Board of Directors has the authority to grant equity. Typically, the Board delegates such authority to the Compensation Committee pursuant to the Compensation Committee Charter. And sometimes the Compensation Committee provides for a further downward delegation to a sub-committee or to the CEO in order for the latter to act quickly in new hire situations (as opposed to waiting until the next regularly scheduled Compensation Committee meeting).
- Verify the Grant Complies with the Parameters of the Delegation. Such downward delegations are often drafted to comply with Section 157(c) of the Delaware General Corporation Law. As a result, grants of equity by delegates should be tracked for compliance with the delegated authority (e.g., reporting mechanisms, using pre-approved award agreements, complying with share cap restraints, etc.)
Share Award Recipients Cannot Be Entities
- Service Provider Must Be a “Natural Person.” Under Form S-8 rules, the recipient of an equity award must be a natural person. As a result, equity awards cannot be made to entities and also be covered under the Form S-8 (though there are rules that would allow in individual of the intended entity to receive the equity award in name only and on behalf of the entity).
Designing effective compensation strategies within a partnership structure (or an LLC taxed as a partnership) can be a complex endeavor, and finding education on the topic is virtually non-existent. To that end, we are providing a FREE webinar entitled “Compensation Design Issues within a Partnership/LLC Structure” (day and time set forth below). The purpose of this program is to share practical ideas for incentivizing and retaining executives within a partnership or LLC structure, including discussing design points on the topic of:
- grants of capital interests, profits interests and/or phantom interests to key employees;
- how to structure employer-provided loans to key employees for the latter to purchase capital interests;
- structuring vesting schedules, economic forfeiture provisions and certain employment conditions that can trigger employer-favorable repurchase rights (i.e., terminated for Cause or quit without Good Reason);
- change-in-control pay considerations that are unique to partnerships and LLCs;
- pre-IPO considerations; and
- annual or transaction-related cash bonuses.
The webinar will be held on Thursday, June 11, 2020 from 10:00 am to 11:00 am Central, and you can sign up HERE.
The purpose of this Post is to highlight the question of whether, in today’s economic environment, deferred compensation monies should be secured with a secular trust. This Post is Part 7 of a 7-Part series addressing compensation adjustments that Compensation Committees could consider in order to continue to incent and retain their executive officers in today’s economy.
It is well-settled that the assets of non-qualified deferred compensation programs are subject to the claims of the company’s general creditors. Securing the assets with a Rabbi Trust does nothing to change that answer.
With today’s market volatility and many companies struggling to survive, some executives may not value deferred dollars because of the fear that these deferred dollars will be swept by the company’s creditors. And if the executives do not value the program, then the program is not providing the necessary incentive and retention benefits. So does it make sense to consider a different vehicle or approach?
Just a quick note that our upcoming monthly webinar is entitled “Administrative Perspectives on Granting Compensatory Equity Awards: A Checklist of Action Items,” and will be held this Thursday, May 14, 2020, from 10:00 am to 11:00 am Central. The purpose of this webinar is to provide a checklist of design and administrative considerations associated with grants of compensatory equity awards, and will be discussed at an intermediate level. You can register at the above link.
An executive of a publicly-traded company would not have anticipated today’s market volatility and depressed stock price when he or she entered into a 10b5-1 trading plan in 2019. As a result, this executive will probably want to amend or terminate such trading plan. The purpose of this Post is to provide a quick reminder of the applicable issues that should be considered. This Post is Part 6 of a 7-Part series addressing compensation adjustments that Compensation Committees could consider in order to continue to incent and retain their executive officers in today’s economy.