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).

But how should the “link” be designed from an SEC disclosure perspective in situations where the issuer has more than one compensatory performance metric?  For example:

  • If the D&I target made up 10% of the executive’s performance-based compensation package, would 10% open the issuer to criticism that such percentile is not enough?
  • If the D&I target made up 90% of the executive’s performance-based compensation package, would that open the issuer to criticism from its long-term shareholders that not enough incentive is focused on the issuer’s financial performance and financial return to the long-term shareholders?
  • How will the issuer explain a missed D&I target in the proxy statement (i.e., missed financial targets can be explained and softened in CD&A disclosure, but it will be awkward to explain why a D&I target was missed)?

Success of the D&I initiative should be the goal, and focusing the executives on the initiative by tying their compensation to its success is a good strategy (i.e., best way to win the heart and mind of an individual is through his or her stomach).  But avoiding awkward proxy disclosure should also be considered when designing the D&I performance targets.  To that end, consider having the D&I metric designed to act only as a downward pay modifier to a financial performance metric (similar to how absolute shareholder return can downward modify the pay outcome of an otherwise successful relative total shareholder return formula).  That way:

  • The status quo of financially incentivizing the executives towards the success of the D&I initiative is maintained.
  • Positive proxy disclosure results if both the financial target and the D&I target are satisfied.
  • Positive enforcement disclosure results if the financial target is satisfied but the D&I target is not satisfied (i.e., this outcome is not good from the perspective of the D&I initiative or from the executive’s compensation expectations, but from a proxy disclosure perspective the CD&A would disclose that failure of the D&I initiative resulted in a downward adjustment to the pay formula).
  • Semi-positive disclosure results if the financial target is not satisfied but the D&I target is satisfied (i.e., this outcome is not good for long-term shareholders, but is good from a social policy perspective), though the answer is that the performance-based pay formula resulted in a $0.00 payout.
  • But more importantly, negative proxy disclosure can be softened if both the financial target and the D&I target are not satisfied because, depending on design, only the missed financial target needs to be disclosed.  To this point, if the sole purpose of the D&I metric was to act as a negative modifier to a financial metric (i.e., the D&I metric can only downward adjust a payout and in no circumstances act to upward adjust a payout), then awkward disclosure of the missed D&I target might be avoided.

The situation in the above bullet is similar to the design of a relative total shareholder return program where absolute shareholder return acts as only a downward pay modifier (i.e., cannot be used as an upward pay modifier).  In that situation, if the relative total shareholder return formula produced a payout of $0.00, then such would be the sole disclosure and the CD&A would not have to address whether absolute shareholder return was also negative.   But . . . if absolute shareholder return could act as an upward pay modifier to a relative total shareholder return formula and the relative total shareholder return formula produced a payout of $0.00, then the CD&A would still have to address whether absolute shareholder return was negative or positive.

For the above reasons, consider whether D&I targets should only act as a downward modifier to a financial performance payout, thus avoiding awkward disclosure in situations where both the financial performance target and the D&I target are not satisfied.  More posts on this topic coming!

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 webinar is to discuss various pros and cons associated with a publicly-traded corporation (“PubCo“) sponsoring an employee stock ownership plan (an “ESOP“).  To that end, our discussion will focus on administrative and transaction design issues of PubCo sponsoring an ESOP, including:

  • Why PubCo would consider sponsoring an ESOP (i.e., the pro v. con analysis),
  • Typical fiduciary structures that can help to limit or contain fiduciary liability,
  • How to structure contributions of newly issued stock by PubCo to the ESOP trust,
  • Structuring contributions of cash by PubCo to the ESOP trust for purposes of the latter to purchase shares in the open market,
  • Incorporating ESOPs into PubCo’s “poison pill” analysis,
  • Diversification requirements,
  • Whether a Form S-8 (and related Form 11-K) is required or advisable, and related Rule 144 restrictions, and
  • Pass-through voting issues.

Hope you can make it!

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?

Rise or Resurgence of the Secular Trust?

We “might” see a small resurrection of the secular trust (where the assets are held outside of, and apart from, the company and are not generally subject to the claims of the company’s creditors).  With a secular trust, taxation to the executive is generally triggered at the time the monies are transferred to the trust, though the timing of such taxation could be deferred if certain vesting schedules or clawback provisions are implemented as part of the initial secular trust design.  And too, any asset growth within the secular trust could be captured outside of the company’s balance sheet and outside of the company’s proxy statement.

Related Posts

Blog posts that are part of this 7-part series include:

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.


Insider trading is prohibited under Rule 10b-5, which imposes a presumption in favor of liability.  Under this presumption, if a person is “aware” of material non-public information at the time a security is bought or sold, such person is then presumed to be trading based upon such material non-public information.  This presumption causes a practical problem for some executives because many executives are constantly in possession of material non-public information, and as a result, they cannot trade employer securities.

A solution to the above problem is a properly designed 10b5-1 trading plan.  A 10b5-1 trading plan can provide an affirmative defense to the above presumption and switches the focus FROM whether the executive had material, non-public information at the time of the trade, TO  whether the executive had material, non-public information at the time he or she became committed to the trade (i.e., at the time the executive entered into the 10b5-1 trading plan).  As a result, and phrased a different way to drive the point, a 10b5-1 trading plan allows an executive to sell employer securities even if he or she possesses material, non-public information, but only if the trading takes place pursuant to a plan the executive entered into at a time when he or she did not possess such material, non-public information.

Amending or Termination a 10b5-1 Trading Plan

Many executives will be considering whether it makes sense to modify or terminate their existing 10b5-1 trading plans because the minimum sale price scheduled therein is likely higher than the company’s current stock price.  Thoughts to consider include:

  • Amendments.  If the plan is to be amended, then the executive will need to verify compliance with the company’s insider trading policy and pre-clearance procedures prior to implementing any amendment.  Also, amendments should occur only during open windows and at a time when the executive does not possess material non-public information (reason is that entering into an amendment is deemed to be the adopting of a new 10b5-1 trading plan).  A waiting period (at least 30 days after the amendment) should be implemented before any trades could be reinstated.
  • Terminations/Cancellations.  Cancelling a 10b5-1 trading plan could be effectuated even if the executive is in possession of material non-public information.  And given the circumstances associated with the market and the US economy, it is unlikely that any such cancellation would create a valid assertion that the 10b5-1 plan was not originally entered into in good faith (i.e., it is likely that any prior trades would remain covered by the affirmative defense to any allegations of insider trading).

Related Posts

Blog posts that are part of this 7-part series include: