Dodd-Frank Executive Compensation Update Rounding the Final Turn? August 13, 2015 Presented by: Scott Landau and Erik Lundgren
Today s elunch Presenters Scott Landau Executive Compensation and Employee Benefits Practice New York slandau@winston.com Erik Lundgren Executive Compensation and Employee Benefits Practice Chicago elundgren@winston.com 2
Dodd-Frank Executive Compensation Update Overview Overall Implementation Timeline Overview and Action Items for Final CEO Pay Ratio Rules Proposed Clawback Rules and Open Questions Impact of Proposed Pay for Performance Rules Proposed Anti-Hedging Rules, Policies and Practices 3
Implementation Overview Provision Proposed Final Effective Applicable To Clawback July 1, 2015 TBD SEC TBD; exchanges have 1 year to adopt rules following effectiveness of SEC rule; companies then have 60 days to adopt policy CEO Pay Ratio Pay for Performance Disclosure Hedging Disclosure September 18, 2013 April 29, 2015 February 9, 2015 August 5, 2015 TBD W/r/t compensation in fiscal years beginning on or after January 1, 2017 (reported in 2018 proxy statement). Transition for newly public companies TBD; phase-in for number of covered years in the new table All issuers listed on a national exchange. Covers compensation based on financial info for periods ending on and after SEC effectiveness Reporting companies other than emerging growth companies, smaller reporting companies and foreign private issuers Reporting companies other than emerging growth companies and foreign private issuers. TBD TBD Reporting companies other than foreign private issuers 4
Final CEO Pay Ratio Rules On August 5, 2015, the SEC adopted final rules requiring companies to disclose: A. the median of the annual total compensation of all employees of the company, excluding the CEO B. the annual total compensation of the CEO of the company C. the ratio of (A) to (B) How to calculate the ratio: Include all full-time, part-time, temporary, seasonal and non-u.s. employees who are employed by the company or any of its consolidated subsidiaries as of a date (chosen by the company) within the last 3 months of the company s last completed fiscal year The final rule includes limited exemptions for (1) non-u.s. employees in foreign jurisdictions where it is not possible to obtain or process the information necessary for compliance without violating local data privacy laws and (2) up to 5% of the company s non-u.s. employees (including any non-u.s. employees excluded under (1)), provided that, if a company excludes any non-u.s. employee in a particular jurisdiction, it must exclude all non-u.s. employees in such jurisdiction 5
Final CEO Pay Ratio Rules (cont.) May (but are not required to) annualize compensation for full-time employees who served part of the year Companies identify the median employee whose compensation will be used for the annual total compensation once every three years unless there has been a significant change in the company s employee population or employee compensation arrangements May choose a method of identifying the median employee that best fits the company s particular circumstances May use any consistently applied compensation measure (such as payroll or tax records) to determine the median employee May use self-determined statistical sampling or other reasonable method to reduce the number of employees for whom annual compensation must be calculated Companies will be required to provide pay ratio disclosures for their fiscal year beginning on or after January 1, 2017 (companies with a 12/31 fiscal year end would be required to include pay ratio disclosure in the 2018 proxy statement) 6
Proposed Clawback Rules On July 1, 2015, the SEC proposed executive compensation Clawback Rules pursuant to the Dodd-Frank Act The Clawback Rules would require all executive officers (e.g., Section 16 Officers) to disgorge any excess incentive-based compensation received that was based upon the attainment of financial reporting measures that subsequently were required to be restated to correct a material error in an issuer s financial statements. The Clawback Rules apply to all executive officers who served in such capacity during the applicable period (both current and former officers) The amount subject to being recovered from the executive officers would be the amount, calculated on a pre-tax basis, of the incentive-based compensation received that exceeded the amount that would have been due based upon the corrected financial reporting measures reflected in the accounting restatement The look-back period under the Clawback Rules would be the three completed fiscal years immediately preceding the date that an accounting restatement is required There is strict liability for all executive officers; fault or knowledge of the basis for the accounting restatement is irrelevant 8
Proposed Clawback Rules (cont.) The proposed Clawback Rules are subject to a 60-day comment period, following which the SEC will issue final rules. Exchanges will be required to adopt and put into effect a rule requiring clawback recovery policies within one year from the adoption of final Clawback Rules by the SEC. Each listed issuer will then be required to adopt a compliant clawback policy no later than 60 days after the exchanges rules are effective. In the event of an accounting restatement, companies would be required to recover excess incentive-based compensation based on financial information for any fiscal period ending on or after the effective date of the SEC s final rules While some companies existing clawback policies include an automatic update feature, a revision to the policy is recommended once there is greater certainty about the terms of the final Clawback Rules to be adopted by the SEC 9
Proposed Pay for Performance Disclosure On April 29, 2015, the SEC proposed pay vs. performance rules Proposed rules would require companies include in their proxy statements a table that sets forth, for each of the past 5 years, the below information: Year Summary Compensation Table Total for Principal Executive Officer ( PEO ) Compensation Actually Paid to PEO PAY VERSUS PERFORMANCE Average Summary Compensation Table Total for Non-PEO Named Executive Officers Average Compensation Actually Paid to Non- PEO Named Executive Officers Total Shareholder Return Peer Group Total Shareholder Return The table would be required to include certain average compensation actually paid Total compensation actually paid would be total compensation required to be included in a company s Summary Compensation Table, modified to adjust the amounts included for pension benefits and equity awards Proposed rule also requires a clear description (in a narrative or graphic presentation) of (i) the relationship between the CEO s compensation and the average compensation paid to other NEOs and the company s cumulative shareholder returns for each of the last 5 years and (ii) the company s versus peers shareholder returns over these periods The peer group used for TSR disclosure may be the peer group used in 10-K or in the CD&A section of the proxy The 60-day comment period ended in July 2015 10
Proposed Hedging Disclosure Rules On February 9, 2015, the SEC proposed rules regarding disclosure of hedging policies Proposed rules require disclosure about 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 such persons The proposed rules expand the type of transactions covered to include transactions that are designed to or have the effect of hedging or offsetting any decrease in market value of equity securities The proposed rules do not require companies adopt anti-hedging and anti-pledging policies (or require companies adopt policies meeting certain requirements) Disclosure is required regarding the types of hedging transactions that the company permits and prohibits and the categories of persons who are and are not covered by any company prohibition on hedging Given that the rules are in the proposal stage, many companies are waiting to revise existing anti-hedging policies at this time The 60-day comment period regarding this rule ended in April 2015 11
Questions?
Thank You. Scott Landau Executive Compensation and Employee Benefits Practice New York slandau@winston.com Erik Lundgren Executive Compensation and Employee Benefits Practice Chicago elundgren@winston.com 14