Compensation Committee

The purpose of this post is to highlight compensatory action items that publicly-traded issuers should consider this proxy season.  Such considerations include:

  • Chase the Say-on-Pay Vote.  The most common reason for a negative recommendation from ISS is a perceived pay-for-performance disconnect within the compensation structure.  Robust disclosure on this point can help, especially disclosure that clarifies why certain performance criteria were used and explains the degree of difficulty associated with achieving target performance.
  • Consider an Annual Equity Grant Policy.  Some issuers grant equity awards to executive officers based upon an initial dollar amount that is then converted into shares.  If such an issuer has a depressed stock price due to market volatility, then the conversion formula will result in the award having more shares (compared to the situation where the issuer’s stock price had not fallen).  Is the issuer ripe for an allegation that the executives are timing the market because equity was granted at a low stock price for the sole purpose of receiving a larger number of shares?  To help defend against such a question, issuers should consider having a documented annual equity grant policy.  The policy could be formal or informal (with the latter being clearly presented in the CD&A of the issuer’s proxy statement).
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Keeping with this evening’s Halloween spirit, members of Board of Directors and Compensation Committees should be aware of an allegation that is currently floating within the ominous fog – that some executives of publicly-traded issuers are trick-or-treating with “ghost revenue.”  Kidding aside, the allegation (or potential allegation) is that some executive officers are using ghost revenue (i.e., deferred revenue) in order to satisfy otherwise unattainable non-GAAP performance metrics.  A grossly-oversimplified explanation of this issue is addressed in the below portions of this post.
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Privately-held companies anticipating an IPO have a unique “one-time” opportunity to design their compensatory programs in a way that creates flexibility after the company becomes publicly-traded.  Please join us on September 13, 2018, at 10:00 CT where we will discuss various design structures, including: (i) emerging growth company considerations relevant to compensation structures, (ii) thoughts from institutional shareholders, (iii) equity incentive plan designs that can help to preserve the share reserve of the equity plan long after the effectiveness of the S-1 registration statement, (iv) design issues with respect to executive contracts, and (v) other compensatory issues (e.g., co-registration rights, rollover of profits interests, etc.).  Click here to register: Planning for an IPO: Compensation Considerations (Phase I of II).  And as always, our monthly webinar series is FREE.
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To help preserve the business judgment rule defense and make it more difficult for a plaintiff to prove that a director breached his or her fiduciary duties, Compensation Committee members should use tally sheets (a.k.a., “placemats”) when making compensatory decisions and attach such tally sheets to the Committee’s resolutions or minutes. 
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