Institutional Shareholder Services Inc. (ISS) and Glass Lewis have released their annual updates to their proxy voting guidelines for the 2015 proxy season.
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Institutional Shareholder Services Inc. (ISS) and Glass Lewis have released their annual updates to their proxy voting guidelines for the 2015 proxy season.
When a nonqualified deferred compensation plan qualifies as a “top-hat” plan under the regulations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the benefits of that particular classification to an employer are that the plan is exempt from various reporting, disclosure and funding rules. These exemptions can significantly ease an employer’s administration and maintenance of a nonqualified deferred compensation plan. Because of this simplicity, employers are more willing to offer these types of nonqualified deferred compensation arrangements and thereby offer an additional tax deferral opportunity to the select group of employees participating in the plan. However, not appropriately qualifying for the top-hat exemption means that a non-qualified deferred compensation plan can be recharacterized as a tax-qualified plan and therefore, unintentionally being required to legally expand eligibility for the deferred compensation plan to a much larger, unanticipated group of employees. Therefore, getting the top-hat qualification right is critical for the plan sponsor’s protection.
Reprinted with the permission of ThomsonReuters, © 2014, all rights reserved.
On February 26, 2014, U.S. House of Representatives Committee on Ways and Means Chairman Dave Camp (R-Mich.) released the proposed Tax Reform Act of 2014 (the Camp Proposal). In addition to simplifying the Internal Revenue Code (IRC) and reducing corporate and individual tax rates, the Camp Proposal would fundamentally change the income tax rules that apply to nonqualified deferred compensation arrangements and would further restrict tax deductions available to publicly held corporation when paying named executive officers. It would also impose a new excise tax on employees of certain tax-exempt organizations who receive excessive compensation and certain payments that are contingent upon a change in control. Although unlikely to be enacted this year, the Camp Proposal provides a blueprint for other legislators to propose tax law changes that would significantly impact current executive compensation practices. Given the current political environment and the way tax revenue is estimated by Congress when preparing budgets, it is likely that we have not seen the last of the executive compensation changes included in the Camp Proposal, which makes it important to understand how they work and what they would mean for current executive compensation programs.
The following post comes to us from Michael W. Peregrine, Partner at McDermott Will & Emery, Andrew C. Liazos, head of McDermott’s executive compensation practice, and Timothy J. Cotter, Managing Director at Sullivan, Cotter, and Associates, Inc.
Governing boards should consider compliance-based incentive compensation as a supplement to statutorily mandated “clawback” provisions, and as an alternative to more aggressive proposals to recoup past compensation from “culpable” executives. The general counsel is well situated to support the board in any evaluation of compensation-based executive accountability policies.
There is much public discourse concerning the function of clawback clauses, their structure, and their limitations. Much of this discourse is prompted by recent corporate scandals and associated calls for executive accountability.[1] But there are other reasons. There is extensive discussion in anticipation of rulemaking from the Securities and Exchange Commission that is required under Dodd Frank Section 954.[2] Notable governance commentators and shareholder advocates are encouraging boards to adopt clawback policies that go beyond the statutory requirements.[3] Major public companies are adopting their own versions of clawback policies,[4] including some who are doing so at the behest of investors.[5] In addition, the boards of large, financially sophisticated nonprofit corporations are considering clawback policies as a demonstration of corporate responsibility.[6] Indeed, how best to establish a “clawback” policy continues to be a hot topic!
On February 26, 2014, U.S. House of Representatives Committee on Ways and Means Chairman Dave Camp (R-MI) released the proposed Tax Reform Act of 2014 (the Camp Proposal), which would simplify the Internal Revenue Code and reduce corporate and individual tax rates. However, to remain revenue neutral, the Camp Proposal would eliminate many important tax incentives and would change the landscape of executive compensation.
Changes to Nonqualified Deferred Compensation
Most significantly, the Camp Proposal would add a new Internal Revenue Code Section 409B under which nonqualified deferred compensation earned after 2014 would be taxed upon the elimination of a substantial risk of forfeiture (typically, upon vesting). Further, under the Camp Proposal, amounts earned before 2015 would generally be includible in income as of the later of: (1) 2022 or (2) the year in which the amounts are no longer subject to a substantial risk of forfeiture. If these provisions are enacted, there would no longer be any tax-advantaged reason to use non-qualified deferred compensation plans and, as a result, there would be an incentive to discontinue them unless they are funded.
Changes to Internal Revenue Code Section 162(m)
Section 162(m) currently limits to $1 million the deduction that public companies may take on the compensation paid to the chief executive officer and the next three highest paid officers. In addition:
The Camp Proposal would expand the application of Section 162(m) to:
The Camp Proposal’s Section 162(m) provisions remove significant tax incentives to provide compensation in certain types of ways, in particular, to meet the definition of performance-based compensation. While the early consensus appears to be the proposal will not affect the movement toward pay-for-performance for other purposes (e.g., for shareholder “say on pay” votes, etc.), it likely will affect the vehicles and approaches used to implement pay-for-performance. For example, companies may no longer feel compelled to set performance metrics during the first 90 days of a performance period as many companies now do in order to qualify for the existing performance-based exception to Section 162(m).
The Camp Proposal, in its current form, is highly unlikely to be enacted this year. However, these executive compensation provisions (or similar provisions) are attractive revenue raisers that could be used to pay for [...]
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The Internal Revenue Service (IRS) recently released new final regulations under Section 83 of the Internal Revenue Code (the Code) that confirm several positions that it has successfully taken in litigation about what is a substantial risk of forfeiture (SRF) under Section 83 of the Code. The new regulations are substantially the same as proposed regulations issued in May 2012. While these regulations became effective as of January 1, 2013, it is reasonable to expect that the IRS will enforce Section 83 in audits for prior periods consistent with these regulations.
The final regulations clarify the following:
The regulations provide new examples illustrating when transfer restrictions will – and will not – constitute a SRF. These regulations under section 83 apply to transfers of property on or after January 1, 2013.
by Joseph S. Adams and Jeffrey M. Holdvogt
In a corporate spin-off, both the existing company and the new company (spinco) must consider the implications for employees, employee benefit plans and executive compensation arrangements. Benefit plans and compensation arrangements can represent significant liabilities and responsibilities, and typically are expressly allocated in an employee matters agreement (EMA). This article provides a brief summary of some of the key employee benefit plans issues to consider in a spin-off.
To read the full article, click here.
Agreements that require a release or other signed document from an employee before payment should be reviewed to ensure compliance with Code Section 409A guidance. Transition relief ends on December 31, 2012, and the penalties for noncompliance can be harsh. Employers that conducted a fulsome Code Section 409A review in 2007 and 2008 should ensure their arrangements are in compliance with new guidance.
To read the full article, click here.
An IRS compensation rule aimed at health insurers could actually apply to a wide range of companies.
It is well known that the Patient Protection and Affordable Care Act (PPACA, or the federal health care reform law) significantly limits the ability of health insurance companies to deduct payment of compensation beginning in 2013. What is not so well known is that the Internal Revenue Service might apply this limitation to health care services providers that are not typically considered to be insurance companies, to captive insurance companies, and even to companies outside the health insurance industry.
To read the full article, click here.
by Andrew C. Liazos, Ira B. Mirsky, Anne G. Plimpton and Ruth Wimer
A recent shareholder derivative action alleges that the directors of Chesapeake Energy breached their fiduciary duties to shareholders by, among other things, misleading shareholders about the true extent and true cost of personal use of the company’s aircraft. The complaint raises questions about disclosure practices that could affect how public companies determine the aggregate cost of perquisites on proxy statements. It appears that the plaintiffs’ bar is already targeting potential plaintiffs for similar cases using the lure of whistleblower recoveries.
To read the full article, click here.