Executive Compensation (US)

Existing rules in Europe require, and proposed rules in the U.S. would require, companies and financial institutions to have in place effective clawback policies.  Under such policies, employers have the ability to recover compensation paid to employees when certain events occur or information comes to light that could have an adverse effect on the employer.  The aim, of course, is to create a direct link between reward and conduct so as to promote good corporate behavior and ensure effective risk management.

Clawback provisions have been around for a number of years and they are now a fairly well-known feature in a variety of different bonus and equity incentive programs. They often complement other measures that employers can deploy to address adverse events and circumstances, the most common of which is the ability to forfeit or downward adjust unvested compensation. With executive scrutiny and accountability on the rise, the significance of these policies and their effectiveness will undoubtedly be put to the test.  This article looks briefly at the legal and practical challenges companies face at each stage of a clawback policy – from design and implementation to operation and enforcement.Continue Reading Learning to Live with Clawbacks: The New, Long String on Executive Compensation

On August 5, 2015, the Securities and Exchange Commission adopted, by a three-to-two vote, a rule that will require most public companies to disclose, annually, the ratio of the median of the annual total compensation of the company’s employees to the annual total compensation of the company’s principal executive officer.
Continue Reading SEC’s New Pay Ratio Disclosure Rule Explained

Although executive compensation has been under significant scrutiny for many years, directors’ compensation has flown somewhat under the radar. That may be about to change: in Calma v. Templeton, a Delaware court recently held that the level of compensation granted to non-employee directors should be reviewed under the “entire fairness” standard rather than under the more lenient “business judgment” standard. The court concluded that the stricter standard was appropriate because:

  • the directors had a conflict of interest when they were deciding whether to award themselves any equity compensation; and
  • the company’s shareholders did not “ratify” the directors’ equity awards when they approved the plan under which the awards were granted, since the plan did not include “meaningful limits” on the potential awards.

Continue Reading Time to Focus on Directors’ Pay?

The Securities and Exchange Commission has proposed a rule that will require companies with listed securities to recover incentive compensation based on erroneous financial statements. The proposed rule will also require new disclosures concerning listed companies’ clawback policies and their efforts to recover incentive compensation pursuant to the policies. The proposed rule and a fact sheet are available on the SEC’s website.
Continue Reading SEC Proposes Clawback Rule

As business becomes increasingly globalized, multinational corporations are sending more executives on international assignments and hiring more expatriates to fill local positions overseas.  Compensation connected to these employment patterns can create a series of legal and regulatory challenges.  For example, unless an exception applies, U.S. citizens and U.S. residents are subject to U.S. federal income tax on their worldwide income, regardless of where they perform services or earn their compensation.  Significantly, this extraterritorial reach of U.S. federal income tax extends to the complex and confounding deferred compensation rules of section 409A of the Internal Revenue Code.
Continue Reading Foreign Compensation and the Long Reach of Code Section 409A

Finding a 409A violation generally prompts a sometimes frantic search for a means of correction under various IRS pronouncements.  One previously helpful — but now slightly limited — such item was included in the proposed income inclusion regulations, which were issued in December 2008.  Those regulations, which have not been finalized but which may be relied upon, state that a 409A violation results in income inclusion under section 409A (including the additional 20% tax) if the violation occurs in a year in which the deferred compensation is vested.  The result:  If a violation is corrected before the deferred compensation vests, no adverse tax consequences occur under section 409A.  A recently released chief counsel advice memorandum clarifies this mechanism for correction.  The memorandum indicates that this means of correction is effective only if completed before the taxable year in which the compensation vests, and not merely before the date on which the compensation vests.
Continue Reading 409A Correction for Unvested Amounts Clarified

By David Engvall, Reid Hooper, Keir Gumbs, and David Martin

On April 29, 2015, the Securities and Exchange Commission (the “SEC”) proposed a new rule that would require public companies to provide new disclosures annually regarding the relationship, over a five-year period, between executive compensation actually paid and a measure…
Continue Reading SEC Proposes “Pay for Performance” Disclosure Rule

On February 9, 2015 the SEC proposed rules, as required by Section 955 of Dodd-Frank, that would require disclosure regarding whether directors, officers and other employees are permitted to hedge or offset any decrease in the market value of equity securities granted by the company as compensation or held, directly or indirectly, by employees or directors.  The purpose of the rules, according to the SEC, is to elicit disclosure regarding whether employees or directors are permitted to engage in transactions that mitigate or avoid the incentive alignment associated with equity ownership.  Companies may wish to review their trading policies in light of the proposed rules.
Continue Reading SEC Hedging Disclosure Proposal Could Cause Companies To Review Trading Policies

Employers should consider reviewing their procedures for withholding and paying FICA tax in light of the recent district court decision in Davidson v. Henkel Corp.  The court concluded that the employer was liable to participants in a nonqualified deferred compensation plan for failing to withhold FICA tax in a manner that would have decreased their overall tax liability.  The additional FICA tax reduced the participants’ benefits under the plan, and the court concluded that this result was inconsistent with the plan’s design and purpose. 
Continue Reading Employers Might Be Liable to Nonqualified Plan Participants for Failing to Follow FICA’s Special Timing Rule

Withholding and paying FICA tax on nonqualified deferred compensation can be a tricky business.  Because special timing rules apply to FICA tax, employers can’t simply withhold and pay FICA tax when they pay deferred compensation to the employee.  Instead, FICA tax is due when the deferred compensation vests (or, in some cases, when the amount of the deferred compensation can be determined).

It is not always easy to tell when these triggering events occur.  In fact, it is sometimes hard to tell whether compensation is “deferred compensation” that is subject to the special timing rules.  Employers faced with these complications often discover long after the fact that they have failed to withhold and pay FICA tax on deferred compensation when the tax was due.  The additional 0.9% Medicare tax introduced in 2013 makes these errors much more difficult to correct.
Continue Reading New Medicare Tax Makes FICA Errors Harder to Correct