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COVID-19: Impact on Nonqualified Deferred Compensation Plans

Recent economic instability caused by the coronavirus (COVID-19) pandemic has caused many companies and their employees to suffer economic hardships that do not have a clear end in sight. As a result of ongoing fluctuations in the markets, uncertainty about job security and increased medical and other expenses, people are experiencing a real need for increased liquidity in the short term. Companies that maintain nonqualified deferred compensation plans may be approached by employees seeking to take distributions of deferred compensation from their plan accounts or to cancel or suspend currently outstanding deferral elections under the plan.

The challenge for both companies and their employees is that nonqualified deferred compensation is subject to Section 409A of the Internal Revenue Code, which was designed to prevent the early payment of deferred compensation amounts and often fails to provide needed flexibility in a crisis like we are experiencing today.
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COVID-19: Addressing Underwater Stock Options and Stock Appreciation Rights

The recent market volatility caused by the coronavirus (COVID-19) pandemic has caused precipitous drops in the stock prices of many companies, reducing the value of outstanding equity awards and potentially jeopardizing the effectiveness of these awards to reward and retain employees.  In particular, some companies may find that the exercise prices of their outstanding options and stock appreciations rights now substantially exceed the company’s current stock price. This memorandum sets forth key considerations for companies in this position and offers possible approaches that may enable companies to continue to retain and incentivize employees amid the ongoing market volatility, while taking into account the reaction from their shareholders and the proxy advisory firms.
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COVID-19: Considerations for 2020 Incentive Compensation Programs

The coronavirus (COVID-19) pandemic and the ensuing market uncertainty, as well as recently enacted legislation, have upended the compensation and benefit programs of many companies. These two memos are the first in a series of memos that will discuss considerations for companies to keep in mind in connection with their short- and long-term incentive compensation programs.

The first memo highlights key issues for companies that have yet to finalize their 2020 incentive compensation programs.  In the second memo, we identify issues for companies that have already granted their incentive compensation for 2020, including whether or not to revise performance criteria and/or goals now and other alternatives that companies may wish to consider.
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Davis Polk Client Memo: IRS Issues Proposed Regulations under Section 162(m)

On December 16, 2019, the IRS issued proposed regulations under Section 162(m) of the Internal Revenue Code, which generally have the effect of limiting the tax deductibility of a public company’s compensation arrangements.

The proposed regulations provide highly anticipated guidance clarifying the substantial changes made to Section 162(m) by the Tax Cuts and Jobs Act.

This memorandum summarizes certain key aspects of the proposed regulations and identifies the components of the proposed regulations about which the IRS is seeking comment.

Read the full memo here.

Law Clerk Alexa Póo contributed to this publication.
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ISS Releases Preliminary Updates to 2020 Compensation-Related Policies

As we previously discussed, ISS recently released its U.S. Preliminary Compensation Policies FAQ, which provides interested parties an advance view of ISS’ answers to select questions posed to ISS regarding potential changes to its U.S. compensation policies.  Updated compensation-related FAQ documents and a methodological whitepaper—which will include a detailed introduction of ISS’ new Economic Value Added (EVA) metrics—will be available in mid-December.  These changes are effective for meetings held on or after February 1, 2020.  The below summarizes the key changes outlined by the preliminary FAQ.

Changes to the Quantitative Pay-for-Performance Screens for 2020 

ISS applies an initial set of quantitative screens followed by a set of qualitative screens when evaluating say-on-pay proposals. 
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Key Findings of ISS 2019 Benchmarking Policy Survey

Yesterday, Institutional Shareholder Services Inc. (ISS) announced the results of its 2019 Global Policy Survey (a.k.a. ISS 2019 Benchmark Policy Survey) based on respondents including investors, public company executives and company advisors. ISS will use these results to inform its policies for shareholder meetings occurring on or after February 1, 2020. ISS expects to solicit comments in the latter half of October 2019 on its draft policy updates and release its final policies in mid-November 2019.

While the survey included questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fell into the following categories: (1) board composition/accountability, including gender diversity, mitigating factors for zero women on boards and overboarding; (2) board/capital structure, including sunsets on multi-class shares and the combined CEO/chair role; (3) compensation; and (4) climate change risk oversight and disclosure.
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ISS Launches Annual Benchmarking Policy Survey

Yesterday, Institutional Shareholder Services Inc. (ISS) announced its annual Benchmarking Policy survey. ISS will use survey responses to inform its policies governing 2020 shareholder meetings. Institutional investors, public companies, board directors, corporate advisors and other market participants are welcome to participate. Participants can make survey submissions until 5:00 PM ET on August 9, 2019.  ISS typically publishes the survey results a few weeks thereafter.

While the survey includes questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fall into the following categories: (1) board composition/accountability, including gender diversity and overboarding, (2) board/capital structure, including dual or multi-class shares and combined CEO/chairs, (3) compensation and (4) climate change risk oversight and disclosure.
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Where the Final Tax Reform Bill Landed on Executive Compensation

On December 15, the Conference Committee reconciling the House and Senate tax reform bills released its full bill text to be voted on by both chambers of Congress and, if approved, presented to the President. The compensation provisions in the final bill are substantially the same as those in the Senate bill. The most important of these provisions are as follows:

Deduction Limit on Executive Compensation Paid by Public Companies.

The final bill makes the following changes to Section 162(m):

  • The exceptions for performance-based compensation (including stock options) and commissions are repealed.
  • The list of covered employees is expanded to include the CFO.

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Dodd-Frank Update: Incentive Compensation for Financial Institutions

On Monday, May 2, 2016, the Federal Reserve and, on Friday, May 6, 2016, the SEC issued their versions of a reproposed rule to regulate incentive compensation at the financial institutions under their purview, as required by Section 956 of the Dodd-Frank Act. These issuances follow the releases in the prior weeks of the proposed rule by the National Credit Union Administration, the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Housing Finance Agency. We reported on the release of the proposed rule in our visual memorandum released last Monday.

As a reminder, Section 956 of Dodd-Frank generally requires that these agencies jointly issue rules that:

(1) prohibit incentive compensation that encourages inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss; and

(2) require those financial institutions to disclose information concerning incentive compensation to the appropriate federal regulator.
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Facebook Settles Lawsuit Regarding Non-Employee Director Compensation

Facebook has announced its settlement of a lawsuit filed in June 2014, alleging that its board of directors breached their fiduciary duties and unjustly enriched themselves and wasted corporate assets through the compensation paid to the non-employee directors. To date, we have discussed this case here, here and here.

As a refresher of the background facts, in 2013, Facebook’s Compensation & Governance Committee recommended that the board approve non-employee director compensation that the plaintiff alleged in the complaint was higher than that of its peers.

The board’s decision to approve the compensation of the non-employee directors was governed by the entire fairness review as a self-dealing transaction.
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