The CARES Act Would Place Limits on Compensation

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On the evening of March 25, 2020, the U.S. Senate passed H.R. 748, the CARES Act (Coronavirus Air, Relief, and Economic Security Act). Among helping folks with direct payments of cash and increase both the amount and length of time unemployment will be paid to folks out of work, the Act also provides the Secretary of the Treasury the authority to make loans and guarantee loans for certain businesses in distressed industries including air carriers and U.S. businesses that have not otherwise received adequate economic relief in the form of loans or loan guarantees under the Act.

Section 4004 places limitations on the compensation of certain employees of businesses that receive loans or loan guarantees under the Act. Specifically, the Act makes two separate limits for employees:

  1. General limit applies to officers and employees whose total compensation exceeded $450,000 in calendar year 2019 (except for pay pursuant to certain collective bargaining agreements in place prior to March 1, 2020).
    • Cannot receive total compensation which exceeds, during any 12 consecutive month period, the total compensation received in 2019.
    • Cannot receive severance pay or other benefits upon termination that exceeds twice the maximum total compensation received in 2019.
  2. Special limit applies to officers and employees whose total compensation exceeded $3 million in calendar year 2019.
    • Cannot receive total compensation during any 12 consecutive month period that exceeds the sum of:
      1. $3 million, and
      2. 50% of the excess over $3 million of the total compensation received in 2019

Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by a business.

UPDATE: These limits on compensation continue until 12 months after a company pays back any loan. During the time that a company has a loan with the federal government, it must also agree not to repurchase any of its equity securities listed on a national securities exchange (no share buybacks), except in accordance with a contractual obligation in place when the Act becomes effective, through 12 months after the company pays back the loan. Additionally, companies taking loans cannot pay dividends or make other capital distributions (no dividends) until 12 months after the loan is repaid. See Section 4003, Emergency Relief and Taxpayer Protections.

The House is expected to take up this Act today, March 26, 2020.

I was able to find the text of this Act on the website of the Tax Foundation. The text of the Act is not yet available on Congress’ website, Here is the link to the text of the Act on which this post was based:

ISS 2011 DRAFT Policy Updates – Comments Accepted Thru 11/14

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Well, it is that time of year when ISS becomes a bit of a flirt and shows us a little bit of what its policy updates for the next proxy season might look like (but not all of them).  ISS just posted some of the draft policies its thinking of issuing as final policies to apply to the 2011 proxy season. ISS is asking for comments on these specific draft policies (which I expect won’t be the only policy updates that get issued in November) before November 11, 2010.

The draft 2011 policies out for public comment and ISS’  request for comments can be found HERE.

So what are the US draft Compensation Policies that ISS has out for comment?

  • Management Say on Pay Frequency Vote Proposals
  • Vote on Golden Parachute Proposals

Management Say on Pay Frequency Vote Proposals

  • Basically, ISS is supporting an annual vote frequency for MSOP.
  • But, ISS is asking whether an anuual vote provides the most effective format and what circumstances might warrant a different format.
  • ISS is also asking about what the consequence of failing to follow a shareholder vote in favor of annual MSOP vote frequency and if that should be considered when evaluating the MSOP itself?

Vote on Golden Parachute Proposals

  • ISS will evaluate votes of golden parachutes in accordance with Dodd Frank Act requirements on a CASE-BY-CASE basis.
  • However, consistent with ISS’ problematic pay practices policy the following items could cause ISS to recommend AGAINST the golden parachute proposal:
    • Recently adopted or amended agreements that include excise tax gross-up provisions (since prior annual meeting);
    • Recently adopted or amended agreements that include modified single trigger agreements (since prior annual meeting);
    • Single trigger payments that will happen immediately upon a change in control, including cash payments and such items as the acceleration of performance-based equity despite failure to achieve performance measures;
    • Single-trigger vesting of equity based on a definition of change in control that requires only shareholder approval of the transaction (rather than consummation);
    • Potentially excessive severance payments;
    • Recent amendments or other changes that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders;
    • In the case of substantial gross-up from pre-existing/grandfathered contract: what triggered the gross-up—option mega-grants at low point in stock price, unusual or outsized payments in cash or equity made or negotiated prior to the merger;
    • The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.
  • ISS is asking the following questions about this proposed policy:
    • Whether the potential for having disparate recommendations (e.g., FOR a transaction, but AGAINST on the non-binding vote on parachute payments) raises any concerns?
    • Whether the factors listed above are appropriate?
    • Whether the total cost of severance payments serve as a primary or secondary consideration in the evaluation of say-on-golden parachute proposals?

Squishing a Balloon—Executive Compensation Changes

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We are all aware of the many changes in executive compensation that have occurred over the past few years–changes in the proxy disclosure rules, as well as changing shareholder attitudes about what best practices are for executive compensation. As a result, companies have been changing and refining their executive compensation programs. Based on the latest proposed rules from the SEC regarding the Dodd-Frank Act requirements, I believe companies will continue to make changes to their compensation programs.

Shareholder and proxy advisor pressure has had an impact on executive compensation as well.  Just look at the decline in excise tax gross-up provisions for executives at FORTUNE 100 companies over the past two years and you can see something is afoot.

Yes, the only constant in life is change. But, sometimes, change for its own sake should be avoided.  Folks urging changes to executive compensation should stop and consider the implications (read that as “unintended consequences”) of the changes being proposed to see if those are things they truly would want to have happen.

Case in point? Perquisites.  I understand how aggravating and annoying these can appear to shareholders (hey, I’m a shareholder too!). I also understand that there have been some excesses and that the 2006 proxy disclosure rule changes basically would have caused some companies embarrassment if they had to disclose all of their perks. As a result the then emerging best practice of limiting executive perquisites began to gain a greater following and many boards and management teams did away with many of their executive perks. A turn of events that every shareholder should have applauded, right? Yes, until you consider that often times the elimination of the perquisites was coupled with an increase in base salary or bonus opportunity as a way of “making up” for the perks that were cut.

Some shareholders have continued to push against executive perks.  Their latest target? Executive relocation benefits. There was even a recent (10/25/2010; click HERE (subscription required)) Wall Street Journal article on this very topic, which looked at what some companies had done and the way some companies are changing their relocation benefits (Click HERE to read Microsoft Corporation’s recent blog explaining why and how its executive relocation policy is changing).

On the surface, that all appears well and good.  However, I am concerned about what this might do to the ability of companies that make these changes to recruit the best executive management talent to help execute on their strategic goals and objectives. Say an executive is highly sought after by several suitor companies.  One happens to have reached an understanding with shareholders that it will tie relocation benefits to a pay-back obligation while the others have not. The suitor company with that obligation is therefore at a disadvantage viz-a-viz the other suitors on this point.

Now, you could rightfully say that the company might still be attractive for other reasons, which seems reasonable. But suppose the executive ends up seriously considering the offer of two suitor companies one with the pay-back obligation on the relocation benefits and one without. Further, let’s assume that the executive was hard hit by the recent real estate melt down, but is good at negotiating (we did say he was a sought after talent). So the executive tells the suitor company with the pay-back obligation on the relocation benefits that while he’s interested in the position, the offer is worth less because of the pay-back obligation.  Don’t you think that the suitor company would then look for ways to “sweeten” its offer? Perhaps it would offer a cash signing bonus, an additional equity grant or something else that has value. Let’s suppose that the executive accepts that sweetened offer. Now, when it comes time for proxy disclosure, the shareholders see that the company followed its relocation policy and gave the new executive relocation benefits that have a repayment obligation.  The shareholders also notice that the executive gets something as a signing bonus and some equity awarded for joining.  However, nothing is ever said that the amount of the signing bonus or equity grant is slightly higher as a result. So much for transparency for executive compensation!

So, everyone is happy, right?  You’d think so.  Unfortunately, that happiness could be short-lived (depending on your point of view). Why? “Unintended consequences.”  The shareholders of the company that hired the executive never learned that the company had to pay the executive more because of the repayment obligation on the relocation benefits. Furthermore, the sign-on bonus or equity grant would get picked up when other companies look to fill similar positions. They likely won’t know that anything “extra” had been included in the signing bonus or equity award or why those amounts might be larger than they otherwise would have been. And so, hire-on compensation overall increases as the hire-on of this one executive gets factored in when other executives get hired later. So pay will float up, transparency of pay to shareholders has gone down. And everyone should be happy? Maybe I’m nuts but I see this as ultimately against both shareholders’ and companies’ interests in the long run.

The thing I try to keep in mind when thinking about making changes to executive compensation is that it is like when you squish a balloon.  If you squeeze it in one area, it is likely to bulge up in another.  Now, you might say that compensation would just “pop” if you stick a pin in it.  That’s true, but what would happen to a company that had its compensation “popped?” Would it still be able to recruit the talent it wants or would it have to “settle” for those executive that are now willing to work for the level of pay it now offers? Does that limit the future upside of the company or its ability to execute on its strategic goals and objectives, which in turn could lead to lower returns for shareholders? I don’t have all the answers to these questions, but these are at least some of the questions everyone who advocates change to executive compensation should consider.

Copyright © 2020 Edward A. Hauder. All right reserved