Archive October 28, 2016

Share Withholding at Maximum Tax Rate

Accounting Standards Update (ASU) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (available at: FDocumentPage&cid=1176168028584. 2) permits companies to withhold shares up to the maximum statutory tax rates (once a company is applying all the provisions of ASU 2016-09). Many existing equity compensation plans specifically limit share withholding to the minimum statutory tax rates in order to avoid potentially negative accounting consequences, i.e., liability accounting instead of fixed, grant-date accounting for equity awards. So the question has been raised whether amending an existing equity plan that limits share withholding to the minimum statutory tax rate would pose an issue under the exchanges rules.  NYSE and NASDAQ have now both issued guidance on this issue which should help companies as they consider adopting ASU 2016-09 and implementing maximum share withholding.


The NYSE indicates that a rule to add back shares that have never been issued is not a “formula.” Consequently, amending a plan to provide for withholding of shares based on a grantee’s maximum tax rate rather than the statutory minimum tax rate is not a material revision if the withheld shares are never issued, even if the withheld shares are added back to the plan.

But the NYSE also indicates that a rule to add back shares that have actually been issued generally would be considered a formula. Furthermore, the NYSE states that a rule to add back shares that are withheld from restricted stock upon vesting to cover taxes is a formula unless the forfeited shares are immediately cancelled upon vesting. Therefore, if the plan involves a formula, it must be limited to a term of 10 years from the date of the last shareholder approval. Consequently, if a plan sets the share withholding rate at the minimum statutory rate for restricted stock (and other awards where the shares are issued), then a change to increase the share withholding to the maximum statutory rate would be considered a material amendment that would require shareholder approval.

NYSE’s FAQs, including FAQ C-1, can be found at:


NASDAQ also released guidance on this issue, but failed to specifically address the issue of issued versus unissued equity awards. According to the NASDAQ guidance, an amendment to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to an equity compensation plan. But the guidance then goes on to state that allowing the holder of an award to surrender unissued shares to pay tax withholdings is similar to settling the award in cash at market price, and neither creates a material increase in benefits to participants nor increase the number of shares to be issued under the plan.

The NASDAQ guidance does not specifically address what happens if such a plan amendment is made to permit the surrendering of additional issued shares to pay tax withholding (e.g., restricted stock).  I think with the use of the term “unissued” in the NASDAQ guidance that NASDAQ is more than likely taking a similar stance as the NYSE, but some additional clarification from NASDAQ regarding issued share awards would be helpful.

NASDAQ’s FAQS can be found at:,97,109,101,103

Final Thoughts

If you are considering amending an existing equity plan to increase the share withholding rate to permit up to the maximum statutory rate (and you will be adopting the other ASU 2016-09 requirements), it is important to analyze the plan’s equity awards to determine if there are any would have issued shares, such as restricted stock. If so, then the plan amendment might be able to be crafted so that it maintains the plan’s existing tax withholding rate for issued share awards and only permits the increased tax withholding for unissued awards and therefore would not necessarily require shareholder approval.  Needless to say, companies should check with their legal and accounting advisers before undertaking such a plan amendment to ensure that it can be done without shareholder approval. Alternatively, companies could put the amendment to shareholders for approval, but should recognize that ISS likely will apply its Equity Plan Scorecard policy to the amended plan in making its vote recommendation.

For more information about ASU 2016-09, see this Exequity Client Alert:

ISS Issues Draft 2017 Policy Updates – Comment Period Open Until November 10th

On October 27, 2016, ISS released its draft 2017 policy updates.  Overall, for U.S. companies, these draft policy updates do not provide any significant changes related to ISS’s policies related to compensation.  ISS will accept comments until 6 pm Eastern on November 10th. Comments can be sent by email to

The U.S. draft policy updates are:

  • Unilateral Board Actions – Multi Class Capital Structure at IPO – This policy update would allow for adverse director recommendations to be warranted when a company completes its public offering with a multi-class capital structure in which the classes fo not have identical voting rights.
  • Restrictions on Binding Shareholder Proposals -This draft policy would cause ISS to vote against or withhold from members of the governance committee if the company’s charter or articles of incorporation impose undue restrictions (including, but not limited to, outright prohibition on the submission of binding shareholder proposals or share ownership requirements or time holding requirements in excess of SEC Rule 14a-8) on shareholders’ ability to amend the bylaws. Under this policy (if triggered) iSS would vote against/withhold the directors on an ongoing basis.
  • General Share Issuance Mandates for Cross- Market Companies (US-listed, non-US-incorporated companies) – This draft policy would recommend in favor of general share issuance authorities (i.e., those without a specified purpose) up to a maximum of 20 percent of currently issued capital, as long as the duration of the authority is clearly disclosed and reasonable.
  • Executive Pay Assessments (Cross-Market Companies) – This draft policy update is focused on companies that are incorporated in one country and listed in another, e.g., incorporated elsewhere and listed on US exchanges. Under ISS’ current policy, items that are on a proxy solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” market coverage. Therefore, ISS is proposing that U.S. domestic issuers (foreign incorporated companies that have a majority of US shareholders, meet other criteria as determined by the SEC, and are subject to the same disclosure and listing standards as US incorporated companies) with multiple compensation proposals on the proxy pertaining to the same pay program will be assessed on a case-by-case basis using the following guiding principles: (1) align voting recommendations so as to not have inconsistent recommendations on the same pay program, and (2) use the policy perspective of the country in which the company is listed (e.g., US SOP policy for proposals relating to executive pay). But if there is a compensation proposal for which there is no applicable US policy, then ISS would use the policy of the country that is requiring the proposal.

The Canadian draft compensation-related policy update is:

The draft policy updates for the U.K. include these compensation-related policy updates:

All of the draft 2017 ISS policies can be accessed at:

ISS is expected to issue its final 2017 policy updates in the second half of November 2016, with updates to the ISS FAQs expected sometime in December and/or January as in prior years.


SEC Issues C&DIs on CEO Pay Ratio Rule

On October 18, 2016, the SEC issued five Compliance & Disclosure Interpretations (C&DIs) covering Regulation S-K, Item 402(u), the Pay Ratio Disclosure. Generally, these C&DIs address questions related to how companies can determine the median employee for purposes of determining the pay ratio and focus on the “consistently applied compensation measure” (CACM) that is permitted to be used instead of having to calculate total compensation in accordance with the Summary Compensation Table for all employees.

Link to the SEC website with the C&DIs (also appear below):

Section 128C — Item 402(u) Pay Ratio Disclosure

Question 128C.01

Question: If a registrant does not use annual total compensation calculated using Item 402(c)(2)(x) of Regulation S-K (“annual total compensation”) to identify the median employee, how should a registrant select another consistently applied compensation measure (“CACM”) to identify the median employee?

Answer: Item 402(u) requires registrants to identify the median employee using annual total compensation or another CACM, such as information derived from the registrant’s tax and/or payroll records. Because of concerns about the expected compliance costs if registrants had been required to calculate annual total compensation for all employees, the Commission permitted registrants to use a CACM other than annual total compensation as a reasonable alternative to identifying the median employee. Any measure that reasonably reflects the annual compensation of employees could serve as a CACM. The appropriateness of any measure will depend on the registrant’s particular facts and circumstances. For example, total cash compensation could be a CACM unless the registrant also distributed annual equity awards widely among its employees. Social Security taxes withheld would likely not be a CACM unless all employees earned less than the Social Security wage base. The registrant must also briefly disclose the compensation measure used. Although the CACM must reasonably reflect annual compensation, it is not expected that the CACM would necessarily identify the same median employee as if the registrant were to use annual total compensation. [October 18, 2016]

Question 128C.02

Question: May a registrant exclusively use hourly or annual rates of pay as its CACM?

Answer: No. Although an hourly or annual pay rate may be a component used to determine an employee’s overall compensation, the use of the pay rate alone generally is not an appropriate CACM to identify the median employee. Using an hourly rate without taking into account the number of hours actually worked would be similar to making a full-time equivalent adjustment for part-time employees, which is not permitted. Similarly, using an annual rate only, without regard to whether the employees worked the entire year and were actually paid that amount during the year, would be similar to annualizing pay, which the rule only permits in limited circumstances. [October 18, 2016]

Question 128C.03

Question: When a registrant uses a CACM to identify the median employee, what time period may it use? Must the period include the date on which the employee population is determined? Must it always be for an annual period? May it use the prior fiscal year?

Answer: To calculate the required pay ratio, a registrant must first select a date, which must be within three months of the end of its fiscal year, to determine the population of its employees from which to identify the median. Once the employee population is determined, the registrant must then identify the median employee from that population using either annual total compensation or another CACM. In applying the CACM to identify the median employee, a registrant is not required to use a period that includes the date on which the employee population is determined nor is it required to use a full annual period. A CACM may also consist of annual total compensation from the registrant’s prior fiscal year so long as there has not been a change in the registrant’s employee population or employee compensation arrangements that would result in a significant change of its pay distribution to its workforce. [October 18, 2016]

Question 128C.04

Question: When someone is furloughed on the date that the registrant uses to determine the population of its employees from which it is required to identify the median, must the registrant include the furloughed person in the employee population used to identify the median employee, and, if included in the population, how should the furloughed employee’s compensation be calculated?

Answer: Item 402(u) does not define or even address furloughed employees. Because a furlough could have different meanings for different employers, registrants will need to determine whether furloughed workers should be included as employees based on the facts and circumstances. If the furloughed worker is determined to be an employee of the registrant on the date the employee population is determined, his or her compensation should be determined by the same method as for a non-furloughed employee. Item 402(u)(3) of Regulation S-K identifies four classes of employees: full-time, part-time, temporary and seasonal. The registrant must determine in which class the employee belongs on that date and determine that individual’s compensation using annual total compensation or another CACM in accordance with Instruction 5 of Item 402(u). That instruction states that a registrant may annualize the total compensation for all permanent employees (full-time or part-time) that were employed by the registrant for less than the full fiscal year or who were on an unpaid leave of absence during the period. In contrast, a registrant may not annualize the total compensation for employees in temporary or seasonal positions. A registrant may not make a full-time equivalent adjustment for any employee. [October 18, 2016]

Question 128C.05

Question: Under what circumstances is a worker employed and his or her compensation determined by an unaffiliated third party such that the worker is considered an independent contractor or leased worker under the rule? When is a registrant considered to be determining the compensation of a worker?

Answer: In the release, the Commission noted its belief that the primary benefit of the pay ratio disclosure is to provide shareholders with a company-specific metric that they can use to evaluate the compensation paid to the PEO within the context of their company. Therefore, in determining when a worker is an “employee” of the registrant under the rule, the registrant must consider the composition of its workforce and its overall employment and compensation practices. In furtherance of this, a registrant should include those workers whose compensation it or one of its consolidated subsidiaries determines regardless of whether these workers would be considered “employees” for tax or employment law purposes or under other definitions of that term. Frequently, a registrant will obtain the services of workers by contracting with an unaffiliated third party that employs the workers. When a registrant obtains services in this way, we do not believe it is determining the workers’ compensation for purposes of the rule if, for example, the registrant only specifies that those workers receive a minimum level of compensation. Further, an individual who is an independent contractor may be the “unaffiliated third party” who determines his or her own compensation. [October 18, 2016]