ExecutiveLoyalty.org

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2014_2nd_Half

2014.Dec.29  Rescission of Stock Award to End Litigation (Annual Limit Exceeded) 
Another company has had the misfortune of being subject to a "gotcha" claim arising from inadvertently making stock awards in excess of the annual per person limit set forth in the underlying stock plan. In rescinding the excess awards, the company stood by its decision, stating in its Form 8-K that . . .

• Due to state and local law vagaries regarding what establishes adequate consideration for contractual commitments, employers should be wary of relying exclusively on continued employment and other non-cash benefits. Cash is generally king -- and better than a peppercorn -- when courts face these issues. This advice came to mind from Law360's report that Pennsylvania's Supreme Court will hear an appeal as to whether continued employment is sufficient to support a noncompete. Oh to have paid . . .  

2014.Nov.13  Another Stock Award Scandal?
About a decade ago, a stock option scandal arose from academic studies showing that the grants had to have been backdated because the exercise prices were timed to market lows (in order to maximize upside gain for the recipients).  A new academic study concludes “that CEOs strategically time corporate news releases to coincide with months in which their equity vests.”  Titled “Strategic News Releases in Equity Vesting Months,” professors from the London Business School, the London School of Economics, and the National University of Singapore’s Business School cite the following evidence . . . 

2014.Oct.31   Performance Awards - Relative Total Shareholder Return Surges 
This FW Cook report focuses on how the top 250 U.S. companies structure their performance awards.  Since 2010, the use of relative total shareholder return (TSR) has increased from 29% of awards to 49%, with 93% of performance periods being for . . ..  

2014.Oct.16   Empirical Study: Compensation Consultants Enable Higher CEO Pay 
The hiring of a special compensation consultant increases CEO pay by about 10% (per median survey results), which this Univ. of Cambridge study reports as one finding supportive of the conclusion that there is "strong empirical evidence for the hiring of compensation consultants as a justification device for higher executive pay." The study reports a different result reflecting on the independence of compensation committees, in that . . . 

2014.Sept.29   REJECTED: Settlement of Excess CEO Compensation Claim through Governance Reforms
This Reuters article reports that an Ohio Federal District Court Judge has rejected Abercrombie & Fitch's proposed settlement of shareholder derivative claims by a retirement fund investor. The proposed settlement entailed . . . 

2014.Sept.21   Code §162(m) Contagion - from Proposed Legislation, to Final Regulations for Healthcare 
There is no sign of relief from the continued expansion of Code §162(m) as a vehicle for regulating executive compensation through the denial of corporate tax deductions when certain limits are exceeded. In the past few days, we have seen the latest legislative proposal aimed at conditioning executive bonus deductions on . . . 

2014.Sept.14   Australia's CEO Pay Ratio Gap Narrows - Improved Practices Reported 
The headline in this Guardian article may involve CEO pay ratio (down from 94 times 2007 average worker pay to 63 times the 2013 average). Nevertheless, the real insights come from discussion about the reasons for fewer unfavorable say on pay votes. The article explains that . . . 

2014.Sept.10   SEC Enforcement of Section 16 Reporting Obligations 
It has been almost 20 years since the SEC simplified its Form 3, 4, and 5 requirements for executive officers and directors of public companies. During that time, the section 16 reporting process for many companies may have become increasingly routine and administrative. No longer, it would seem, in the wake of  . . .  

2014.Aug.29   Forfeiture-for-Disloyalty Sustained by Texas Supreme Court (applying NY Choice of Law) 
There is a crucial difference between non-competition provisions and forfeitures-for-competition, and the Supreme Court of Texas highlighted that in ruling against a Texas-based employee who resigned from Exxon Mobil to join a competitor. That employee forfeited about $5.7 million of restricted stock awards due to "detrimental conduct" within the meaning of to the underlying plan and award agreements. The decision highlights the importance of well-grounding the forfeiture in suitable state law. Writing that "Forfeiture provisions conditioned on loyalty . . . do not restrict or prohibit the employee's future employment opportunities," the Supreme Court of Texas declined to apply state non-compete principles and instead . . . 

2014_1st_Half

2014.June.9   Director Compensation - FaceBook Struck with Shareholder Litigation.
A Facebook shareholder has launched derivative litigation in Delaware Chancery Court, seeking to recover "unfair excessive compensation" being paid to directors (quoting from this Bloomberg article).  The lawsuit alleges corporate waste, breach of fiduciary duties, and unjust enrichment. Claims of this sort may proliferate due to a Delaware court decision, with a smart precaution being to have shareholders approve a reasonable maximum limit on director compensation in a future stock plan or LTIP. Such approval would secure judicial review under the highly-deferential business judgement rule, and avoid claims based on the more exacting "entire fairness" standard. 

2014.June.13   CEO Pay Ratio Resurrected in CA (tied to State Corporate Tax).  
Just two weeks after the California Senate defeat, a CA state senator has plans to revive -- in the current legislative session -- his bill (S.B. 1372) that would replace the current 8.84% corporate income tax rate with a rate that increases from 7% (for companies with CEO pay ratios of 25:1 or less) to 13% (for pay ratios of 400:1 or above). The maximum rate would apply to almost 20% of 250 large companies, according to a recent Bloomberg survey. See this TowersWatson Alert regarding the original bill proposal in California. 

2014.May.25  Clawback Update: From Surveys to Financial Expense to Tax Deductions
Survey of Top-100 Companies - Highlights from PwC's April 2014 Survey include 92% of companies impose clawbacks in the case of material financial restatements, with nearly three-fourths of those clawbacks being triggered by executive fraud or misconduct, and the others being strict liability. Interestingly, fraud alone triggered clawback rights in 44% of the policies surveyed, while only 22% involved violation of post-employment non-competition agreements. See Clawback Surveys.
Too Much Discretion - over the terms for a clawback could trigger liability-based (variable) accounting due to uncertainty about when a grant has occurred, according to two of the big four accounting firms. See this Towers Watson Alert, which quotes from KPMG and PwC memos. 
"Uncertainty of Apparent Right Critical In Clawback Deduction, IRS Counsel Says" - This BloombergBNA article reports the IRS view as follows, quoting here from the article . . . continued at Clawback Tax and Accounting Rules.2014.May.20  Carried Interest Tax Regulation -- Likely to Stay on Hold
A Bloomberg BNA article quotes that Clifford M. Warren, special counsel to the IRS associate chief counsel (passthroughs and special industries), as saying “no one is eager to revisit” the 2005 proposed rules (REG-105346-03) which would govern the issuance and vesting of capital and profits partnership interests issued in connection with the performance of services.  After speaking to a PLI session, Warren told Bloomberg BNA that “it doesn't make sense to open that door” (re the issuance of tax regulations addressing carried interests) while Congress has legislation under consideration. See Carried Interests.

2014.Mar.27  Nasdaq Deadline Looms for Compensation Committees . . . 30 Days after 2014 Annual Meeting
Nasdaq's independence and charter requirements that took effect in 2013 for compensation committees require one more step for listed companies: their filing of a certification of compliance with Nasdaq. The deadline is generally 30 days after a company's 2014 annual meeting; provided that . . .  

2014.Mar.26  German CEO Pay Mirrors Corporate Performance; Trails Global Averages
TowersWatson reports that companies listed on the German DAX had essentially flat corporate earnings from 2012 to 2013, with CEO compensation also being flat. This pay-for-performance alignment contrasts with wide differentiation in the global markets. As reported by TowersWatson, the CEOs of Germany's largest companies made about 15% less than the E.U. average - and less than 50% of the U.S. companies comprising the Dow Jones Industrial Average. See Germany.

2014.Mar.14  Executive Severance Challenged as Corporate Waste by Yahoo!'s Board
This Law360 article describes the filing of shareholder derivative litigation in Delaware Chancery Court. The complaint alleges that $127 million of severance paid to Yahoo!'s former COO was "egregious and wasteful."  The case is The David R. & Lynn B. Hughes Trust of June 25, 1987 v. de Castro et al. For similar litigation, see Excessive Severance Cases.

2014.Mar.13  DE Magistrate: Dismiss Code §162(m) and Related 14A Litigation vs ConocoPhillips - and vs Allergan
In a DE federal district court action dating back to 2011, the magistrate judge has recommended dismissal of causes of action "based entirely on executive compensation under the 2011 Plan and the alleged non-tax-deductibility of those executive compensation awards" by ConocoPhillips. A recommendation was issued the next day for dismissal of similar 162(m) litigation against Allergan due to . . .  see "ConocoPhillips" and "Allergan"

2014.Feb.26  Duration of CEO Employment Agreements: Study of Impact 
Do longer employment agreements provide CEOs with greater security, thereby making them more inclined to take business risks? The answer is yes, based on empirical support in this academic study. 

2014.Feb.20  CEO Pay Windfall from Tax Law that Tries to Discourage Companies from Moving Their HQ Overseas 
Bloomberg recently reported a wayward outcome - in the form of accelerated payouts of executive compensation - which has resulted from U.S. tax legislation aimed at discouraging companies from moving their corporate headquarters overseas. The problem arises under . . . continued at International Exec Comp.

2014.Jan.12  409A and Employment Agreements: Early Detection Checklist

It has been nearly 10 years since Congress enacted Code §409A, and compliance has become generally routine for traditional deferred compensation and other non-qualified plans. Most mistakes tend to arise when no one thinks to involve 409A experts for employment agreements, releases, and severance payouts. Management of this risk requires . . . continued at 409A Checklist for Employment Agreements and Releases.

2014.Jan.09  Pay Ratio Odds . . . and Some Possible Global Relief
Multinational employers cannot be happy with, or surprised by, the 7-to-1 odds that TowersWatson has given against having the SEC allow pay ratio calculations based solely on domestic U.S. employees. A little-noticed but valuable proposal has come from the American Benefits Council in its comment letter . . .

2014.Jan.04  Say on Pay 2014 . . . and 2013 Voting Results
Because executive compensation continues to attract public and shareholder scrutiny, directors and officers should carefully track issues from best practice trends to litigation triggers to ISS policy statements. See 2014 Say on Pay Guide for a comprehensive list of issues to consider. Likewise, the Charters for Compensation Committees merit testing against this Checklist, both to track best practices and to avoid litigation over disconnects between a charter and committee decisions. 

2013 Say on Pay Results: this Stephen Hall & Partners Alert reports 3,363 shareholder votes in 2013, with 73 failures (2%), and with 71% of companies receiving at least a 90% favorable vote.