Compensation Governance

Compensation governance is a front-and-center topic with a continued focus on stock ownership and clawback policies (in part due to the voting guidelines of institutional investors, proxy advisory firms and the Dodd-Frank Act).  At 10:00 am Central on Thursday, October 10, 2019, in a webinar entitled “Stock Ownership Policies & Clawback Policies: Design Pointers,” our

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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Employment agreements between publicly-traded issuers and their executive officers often contain severance pay provisions that are heavily negotiated at the time of entering into the agreements.  The purpose of this post is to consider whether the amount of contractually-provided severance pay could, over the employment term, be reduced proportionate to the increase in the executive’s wealth accumulation over the same time period (i.e., an inversely proportional relationship between the amount of severance pay and the amount of wealth accumulation by the executive over the employment term).
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As we head into a new proxy season, we would like to invite you to attend our annual FREE webinar entitled “Upcoming Proxy Season: Compensatory Thoughts from ISS,” which will be held on Thursday, January 17, 2019 from 10:00 am to 11:00 am Central.  As always, continuation education credits are available.

For your convenience, our remaining 2019 monthly webinar program is as follows:
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The recent settlement by James Dolan, CEO of Madison Square Garden Co. (MSG) serves as a reminder that the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”) can apply to compensatory equity awards.  To avoid violations, a publicly-traded issuer should monitor (at least annually) equity grants and outstanding equity awards for ongoing HSR

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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It is difficult for publicly-traded issuers to solve the problems associated with outstanding stock options that are “underwater” (i.e., underwater because the exercise price of the stock option is greater than the fair market value of the underlying shares).  None of the typical solutions are attractive to publicly-traded issuers.  As a result, the underwater stock options continue to exist for 10 years from the date they were granted, and continue to decrease the life expectancy of the equity plan’s share reserve.  But what if a compensatory design existed that, if implemented on the front end, could negate the possible future existence of outstanding stock options that are substantially underwater?  Would such a design be attractive to an issuer so long as the design did not destroy the retention value otherwise inherent in the stock option?  Could a stock-price forfeiture provision be a solution to the foregoing problem?  Discussing a stock-price forfeiture provision as a possible solution to negate substantially underwater stock options is this “Tip of the Week.”
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All publicly-traded issuers have (or should have) a blackout policy that prohibits a designated individual from engaging in open-market transactions whenever such individual possesses material non-public information.  But what if the issuer is always (or near always) in a blackout period?  How does the issuer satisfy its income tax withholding obligation if the individual cannot finance the obligation through other means (e.g., family money, borrowings, etc.) and the individual is prohibited from financing the obligation by selling shares in the open market?  Answers to these questions are discussed in this Tip of the Week (presented in NO particular order, and not intended as an exhaustive list).
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