Executive Compensation Archives - Page 14 of 26

Clawbacks, Compliance and Incentive Compensation: A Supplemental Approach

by Andrew Liazos and Michael W. Peregrine | Jun 26, 2014 | Executive Compensation

The following post comes to us from Michael W. Peregrine, Partner at McDermott Will & Emery, Andrew C. Liazos, head of McDermott’s executive compensation practice, and Timothy J. Cotter, Managing Director at Sullivan, Cotter, and Associates, Inc.

Governing boards should consider compliance-based incentive compensation as a supplement to statutorily mandated “clawback” provisions, and as an alternative to more aggressive proposals to recoup past compensation from “culpable” executives. The general counsel is well situated to support the board in any evaluation of compensation-based executive accountability policies.

There is much public discourse concerning the function of clawback clauses, their structure, and their limitations. Much of this discourse is prompted by recent corporate scandals and associated calls for executive accountability.[1] But there are other reasons. There is extensive discussion in anticipation of rulemaking from the Securities and Exchange Commission that is required under Dodd Frank Section 954.[2] Notable governance commentators and shareholder advocates are encouraging boards to adopt clawback policies that go beyond the statutory requirements.[3] Major public companies are adopting their own versions of clawback policies,[4] including some who are doing so at the behest of investors.[5] In addition, the boards of large, financially sophisticated nonprofit corporations are considering clawback policies as a demonstration of corporate responsibility.[6] Indeed, how best to establish a “clawback” policy continues to be a hot topic!

Read the full article.

Camp Tax Reform Proposal Could Impact Executive Compensation

by Andrew Liazos | Mar 19, 2014 | Executive Compensation

On February 26, 2014, U.S. House of Representatives Committee on Ways and Means Chairman Dave Camp (R-MI) released the proposed Tax Reform Act of 2014 (the Camp Proposal), which would simplify the Internal Revenue Code and reduce corporate and individual tax rates. However, to remain revenue neutral, the Camp Proposal would eliminate many important tax incentives and would change the landscape of executive compensation.

Changes to Nonqualified Deferred Compensation

Most significantly, the Camp Proposal would add a new Internal Revenue Code Section 409B under which nonqualified deferred compensation earned after 2014 would be taxed upon the elimination of a substantial risk of forfeiture (typically, upon vesting). Further, under the Camp Proposal, amounts earned before 2015 would generally be includible in income as of the later of: (1) 2022 or (2) the year in which the amounts are no longer subject to a substantial risk of forfeiture. If these provisions are enacted, there would no longer be any tax-advantaged reason to use non-qualified deferred compensation plans and, as a result, there would be an incentive to discontinue them unless they are funded.

Changes to Internal Revenue Code Section 162(m)

Section 162(m) currently limits to $1 million the deduction that public companies may take on the compensation paid to the chief executive officer and the next three highest paid officers. In addition:

Chief financial officers generally are not subject to Section 162(m) due to a change in SEC proxy disclosure rules in 2007.
Payments that qualify as performance-based compensation under Section 162(m) are not subject to the $1 million limit.
The limit only applies to named executive officers in the company’s proxy who are employed by the company on the last day of the company’s fiscal year.

The Camp Proposal would expand the application of Section 162(m) to:

Cover the chief financial officer
Eliminate the performance-based compensation exception (so that items like stock options and other performance-based pay would, for the first time, become subject to the $1 million cap)
Continue to apply the deduction limit to former covered officers and to beneficiaries (which would eliminate the approach of preserving deductions by deferring amounts until Section 162(m) officers terminate employment)

The Camp Proposal’s Section 162(m) provisions remove significant tax incentives to provide compensation in certain types of ways, in particular, to meet the definition of performance-based compensation. While the early consensus appears to be the proposal will not affect the movement toward pay-for-performance for other purposes (e.g., for shareholder “say on pay” votes, etc.), it likely will affect the vehicles and approaches used to implement pay-for-performance. For example, companies may no longer feel compelled to set performance metrics during the first 90 days of a performance period as many companies now do in order to qualify for the existing performance-based exception to Section 162(m).

The Camp Proposal, in its current form, is highly unlikely to be enacted this year. However, these executive compensation provisions (or similar provisions) are attractive revenue raisers that could be used to pay for [...]

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IRS Issues Final Regulations Clarifying Substantial Risk of Forfeiture Under Section 83 of the Internal Revenue Code

by Andrew Liazos and Jeffrey Holdvogt | Mar 7, 2014 | Executive Compensation

The Internal Revenue Service (IRS) recently released new final regulations under Section 83 of the Internal Revenue Code (the Code) that confirm several positions that it has successfully taken in litigation about what is a substantial risk of forfeiture (SRF) under Section 83 of the Code. The new regulations are substantially the same as proposed regulations issued in May 2012. While these regulations became effective as of January 1, 2013, it is reasonable to expect that the IRS will enforce Section 83 in audits for prior periods consistent with these regulations.

The final regulations clarify the following:

A SRF may be established only through a service condition, a condition related to the purpose of the transfer or potential Section 16(b) “short swing” profit liability.
A risk of forfeiture will be an SRF only if both (a) the likelihood that the forfeiture event will occur is substantial and (b) enforcement of the forfeiture condition is likely. Whether these requirements are met depends on the facts and circumstances – drafting of the equity award, by itself, does not ensure an SRF. A typical situation that requires a facts and circumstances analysis is when restricted stock is granted subject to employer-related performance conditions, such as sale of a company or meeting an operational or financial objective.
Transfer restrictions such as lock-up agreements, insider trading policies and potential liability under Rule 10b-5 do not create a SRF – in other words, they do not defer the taxable event – even if there is a potential for forfeiture or disgorgement of some or all of the property, or other penalties, if the restriction is violated. Transfer restrictions under Section 16(b) that avoid short swing profit liability are only an SRF due to an amendment to Section 83 specifically providing for that treatment.

The regulations provide new examples illustrating when transfer restrictions will – and will not – constitute a SRF. These regulations under section 83 apply to transfers of property on or after January 1, 2013.

Employee Benefits Issues in Spin-Offs

by McDermott Will & Emery | May 9, 2013 | Employment, Executive Compensation, Health and Welfare Plans, Retirement Plans

by Joseph S. Adams and Jeffrey M. Holdvogt

In a corporate spin-off, both the existing company and the new company (spinco) must consider the implications for employees, employee benefit plans and executive compensation arrangements. Benefit plans and compensation arrangements can represent significant liabilities and responsibilities, and typically are expressly allocated in an employee matters agreement (EMA). This article provides a brief summary of some of the key employee benefit plans issues to consider in a spin-off.

To read the full article, click here.

December 31 Deadline to Update Severance, Employment and Change in Control Agreements

by McDermott Will & Emery | Sep 11, 2012 | Employment, Executive Compensation

by Jonathan J. Boyles

Agreements that require a release or other signed document from an employee before payment should be reviewed to ensure compliance with Code Section 409A guidance. Transition relief ends on December 31, 2012, and the penalties for noncompliance can be harsh. Employers that conducted a fulsome Code Section 409A review in 2007 and 2008 should ensure their arrangements are in compliance with new guidance.

To read the full article, click here.

Beware this Threat to Exec-Comp Tax Deductions

by McDermott Will & Emery | Aug 30, 2012 | Executive Compensation, Health and Welfare Plans

by Andrew C. Liazos

An IRS compensation rule aimed at health insurers could actually apply to a wide range of companies.

It is well known that the Patient Protection and Affordable Care Act (PPACA, or the federal health care reform law) significantly limits the ability of health insurance companies to deduct payment of compensation beginning in 2013. What is not so well known is that the Internal Revenue Service might apply this limitation to health care services providers that are not typically considered to be insurance companies, to captive insurance companies, and even to companies outside the health insurance industry.

To read the full article, click here.

Recent Corporate Aircraft Litigation Raises SEC Perquisite Disclosure Issues

by McDermott Will & Emery | Aug 15, 2012 | Executive Compensation

by Andrew C. Liazos, Ira B. Mirsky, Anne G. Plimpton and Ruth Wimer

A recent shareholder derivative action alleges that the directors of Chesapeake Energy breached their fiduciary duties to shareholders by, among other things, misleading shareholders about the true extent and true cost of personal use of the company’s aircraft. The complaint raises questions about disclosure practices that could affect how public companies determine the aggregate cost of perquisites on proxy statements. It appears that the plaintiffs’ bar is already targeting potential plaintiffs for similar cases using the lure of whistleblower recoveries.

To read the full article, click here.

New Rules on Overseas Companies’ Equity Incentive Plans

by McDermott Will & Emery | Jul 26, 2012 | Employment, Executive Compensation

by Lawrence Hu and May Lu

Stock option plans, stock appreciation rights plans, performance shares, phantom and restricted shares and other equity incentive plans may apply for registration under China’s State Administration of Foreign Exchange (SAFE). In February 2012, SAFE issued a Notice on Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans for Companies Listed Overseas (known as Circular 7), which replaces the previous Circular 78. Because there are tax advantages to employees if an equity incentive plan is registered through SAFE, Chinese employers considering or currently sponsoring equity programs should consider SAFE registration under this new guidance.

To read the full article, click here.

SEC Finalizes Dodd-Frank Independence Rules Under Section 952

by McDermott Will & Emery | Jul 10, 2012 | Executive Compensation

by Andrew C. Liazos

On June 20, 2012, the Securities and Exchange Commission (SEC) adopted final rules to implement the compensation committee independence requirements under Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). The final rules require the national securities exchanges (such as the New York Stock Exchange and NASDAQ) to establish certain minimum listing standards with respect to:

the independence of compensation committee members
the authority and responsibilities of the compensation committee
the process to be followed when selecting compensation consultants and other advisors

While the final rules allow the exchanges until June 27, 2013 to implement new listing standards after receiving approval from the SEC, new requirements could be very well be in place before the 2013 proxy season. Overall, the SEC made relatively few changes to the proposed rules that were issued in March 2011. A public company must meet an exchange’s listing standards in order to have its equity securities traded on that exchange. In addition, the SEC also amended its proxy rules to require additional disclosure if the work of a compensation consultant has raised a conflict of interest. This new requirement will be in effect for the 2013 proxy season—even if the exchanges have not finalized new listing standards—and complying with it will require action before next year’s election of directors. Please click here for a discussion of the final rules.

New Proposed Section 83 Regulations Clarify What Constitutes a Substantial Risk of Forfeiture

by McDermott Will & Emery | May 30, 2012 | Executive Compensation

by Joseph S. Adams and Andrew C. Liazos

Earlier today, the Internal Revenue Service (IRS) released new proposed Section 83 regulations, which clarify several points including:

A substantial risk of forfeiture (SRF) may be established only through a service condition or a condition related to the purpose of the transfer. Citing the U.S. Court of Appeals for the First Circuit’s opinion in Robinson, the preamble noted that “[s]ome confusion has arisen as to whether other conditions may also give rise to a substantial risk of forfeiture.” The proposed regulations retain the language from Section 83 final regulations that refraining from service may be a service condition.
In determining whether a SRF exists, it is necessary to consider both (a) the likelihood that the forfeiture event will occur, and (b) the likelihood that the forfeiture will be enforced. All of the facts and circumstances must be evaluated to determine whether a performance-based vesting condition for a restricted stock award will be treated as a substantial risk of forfeiture for purposes of Section 83.
Transfer restrictions such as lock-up agreements, Rule 10b-5 insider trading restrictions) do not create a SRF – in other words, they do not defer the taxable event – even if there is a potential for forfeiture or disgorgement of some or all of the property, or other penalties, if the restriction is violated. The only exception to this rule is with respect to Section 16(b) “short swing” profit liabilities. The proposed regulations provide three new examples illustrating when transfer restrictions will – and will not – constitute a SRF. The proposed regulations incorporate the IRS’ position in Revenue Ruling 2005-48.

These regulations under section 83 are proposed to apply to transfers of property on or after January 1, 2013. Taxpayers may rely on the proposed regulations for property transfers occurring after the publication of the proposed regulations until further notice. Comments are due by August 28, 2012.

Further details on the newly proposed regulations will be provided in subsequent McDermott publications.

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