Whether planned or unplanned, retirement prior to age 65 may present an income gap until the qualifying age to receive pensions and Social Security. While stock administrators cannot offer financial planning advice, they need to know how taxation variables impact executives as they draw down company stock from a variety of accounts and compensation plans. The complexity surrounding stock-based compensation clouds the dilemma: Which funds should be drawn from to optimize the performance and minimize the tax consequences?
In mid-November, Glass Lewis released its final proxy voting policies and methodologies for the upcoming year. While most compensation policies remained largely intact from prior years (see our complete summary of compensation and governance policy changes here), this year’s release includes much-needed guidance on Glass Lewis’ approach and requirements for reviewing the use of off-cycle equity grants.
Board members bring of wealth of talent and experience to the companies they serve, but often have no practical exposure to the basic building blocks of effective compensation design. Before new compensation committee members jump into aligning incentives with company strategy, discussing “best practices” or considering accounting and tax implications, it can be very beneficial to review the concepts typically used by compensation professionals in incentive design.
On April 29, 2015, the Securities and Exchange Commission (the “Commission”) voted to propose rules requiring public companies to disclose in a clear manner the relationship between executive compensation and the financial performance of the registrant. The proposed disclosure would be required in proxy statements in which executive compensation disclosure pursuant to Item 402 of Regulation S-K is required. The proposal is meant to supplement current disclosure requirements with a factual description of how executive compensation that is actually paid in a particular year relates to financial performance.
Performance based equity awards offer companies a transparent and effective way to align executive compensation to corporate performance. Per the Dodd Frank Act and Say-on-Pay, shareholders have become increasingly more involved in commenting on executive compensation, and performance awards illustrate the direct relationship of pay to performance. Watch this video from Pamela Greene, Member of the law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., as she discusses key elements of performance awards.
The use of mandatory post-vest holding requirements on restricted stock awards and restricted stock units (“RSUs”) is increasingly prevalent as companies search for ways to strengthen the link between compensation and shareholder interests. Mandatory holding periods typically prevent employees from selling vested equity until additional requirements are met— usually “owning” shares for one, two or three years following the original vesting date. And in some cases, holding periods can stretch until retirement.
Performance awards are one of the most challenging equity types to manage. As with any complicated process, the beginning stages of planning are crucial to future success. If you plan well, chances are you will execute well. Allocate time and resources to design an effective performance award plan in order to eliminate future headaches. Here are a few key elements to set yourself up for success.