On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA), which generally went into effect for tax years beginning on or after January 1, 2018.  The TCJA provisions affecting executive compensation (for example, the elimination of the performance-based compensation exception to Section 162(m) of the Internal Revenue Code) have received signification attention, but the TCJA also has meaningful implications for broad-based employee benefit plans and programs.

A memorandum that provides an overview of the key TCJA provisions impacting employee benefits is available here.
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Over the past week, Republican lawmakers in the House of Representatives have proposed sweeping tax reform legislation, including a series of amendments to the initially proposed bill. As companies enter their year-end compensation planning to develop compensation programs for 2018, they may wish to keep in mind certain aspects of the proposed legislation that may dramatically change how companies choose to compensate employees, executives and directors. A memorandum outlining these issues is available here.

Additionally, a blog post summarizing changes proposed by Representative Brady’s amendment to the bill relating to the taxation of stock options and restricted stock units granted by private companies is available here.
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As companies are coming to grips with the reality that the pay ratio rules will not be delayed, the SEC yesterday issued interpretative guidance that went a long way toward reassuring companies that they have sufficient flexibility and can exercise their best judgment in determining the median employee and the resulting pay ratio, thereby reducing compliance costs.

This came in the form of a brief Commission guidance and separate Staff interpretations.  In addition, although no mention was made in the press release touting these SEC actions, the Staff also updated and in one case withdrew its prior pay ratio guidance in the Division of Corporation Finance compliance and disclosure interpretations (CDIs) from last year (see Section 128C).
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New EEOC regulations seeking pay data will not go into effect in March 2018 as planned.  According to the EEOC, the Office of Management and Budget (OMB) informed the Commission that it is initiating a review and instituting an immediate stay of the effectiveness of the pay data collection aspects of the revised form that was adopted in September 2016, in accordance with its authority under the Paperwork Reduction Act (PRA).

While the acting chair of the EEOC had opposed the revised form at the time it was approved, the EEOC reportedly lacked sufficient votes to reverse course.  Some groups had asked congressional lawmakers to pass laws to prohibit the EEOC from enforcing the rule. 
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A recent Semler Brossy report that examined supplementary proxy materials on say-on-pay proposals since 2011 found no material impact on the vote outcome for companies that made those filings in response to a negative ISS recommendation.  The average results for companies that received an “against” recommendation and made a supplemental filing are equal to or below the results at companies that received negative recommendations and did not file additional materials.

While the number of these filings have decreased from a high of 113 in 2012 to just 38 three years later, companies continue to file them.  So far this year there has even been an increase. 
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The litigation against Facebook for their director compensation raised a question of first impression:  whether a disinterested controlling stockholder can ratify a transaction approved by an interested board of directors by expressing assent informally, instead of using one of the prescribed methods under Delaware corporate law, and be able to shift the standard of review from entire fairness to the business judgment presumption.

The board’s decision to approve the compensation of outside directors in 2013 was governed by the entire fairness review as a self-dealing transaction. After the filing of the lawsuit, which we previously discussed here and here, Mark Zuckerberg, who controlled over 61% of the voting power, approved the compensation in a deposition and with an affidavit.
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On April 30, 2015, the Delaware Court of Chancery held for the second time in three years that a decision by a board of directors or a board’s compensation committee to award equity to non-employee directors as part of their annual compensation constituted a self-interested transaction and, when challenged in a stockholder derivative action, that (a) stockholder demand was excused and (b) the decision would be reviewed under the heightened “entire fairness” standard. This holding comes despite the fact that the equity compensation plan in question, which included a per-person limit on grants, was previously approved by the company’s stockholders.

Read the full memo »
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Davis Polk partner Ed FitzGerald and I spoke in December with Tapestry’s Compensation Committee Leadership Network (CCLN) on forthcoming SEC executive compensation rules, as summarized in this Tapestry Viewpoints. The CCLN brings together a select group of compensation committee chairs from prominent companies to discuss ways to improve the performance of their companies and communicate effectively with shareholders through their compensation committee work.

The discussion included the Dodd-Frank clawback provisions, which as enacted do not consider fault to be a trigger, unlike the most common clawback policies that have already been adopted by companies. The vast majority of those require some form of misconduct.
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A derivative action has been brought in Delaware Chancery Court alleging that Facebook’s board of directors breached their fiduciary duties and unjustly enriched themselves and wasted corporate assets through the compensation paid to the non-executive directors, with “a yearly take beyond what could be considered reasonable.” 

Plaintiff alleges that the individual director compensation of $461,000 is 43% higher than peer companies, including Amazon and Walt Disney, which generate more revenue and profit. In making this peer group calculation, plaintiff removed from Facebook’s disclosed list of peers certain companies, such as Apple, Google and Microsoft. It claims those entities are not comparable to Facebook because their market cap and other financial metrics make them much larger.
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While only 142 Russell 3000 companies have failed say-on-pay in the last three years from over 7,000 companies with those votes, 893 companies had to counter negative recommendations from ISS. By now it is well-known that ISS uses both a quantitative test and then examines qualitative factors. The qualitative review is triggered when a company receives “high” concern on the quantitative metric that examines, among other things, the CEO pay and total shareholder return to other companies, but the review may also occur even when a company receives less than “high” concern. 

The qualitative review becomes critically important because only half of those companies that fail the initial numerical test ever receive “against” recommendations from ISS.
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