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Trends and Issues in Executive Compensation

Trends and Issues in Executive Compensation

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    2011 final2 executive_compensation_030911 2011 final2 executive_compensation_030911 Presentation Transcript

    • Speaker Firms and Organization:
      Presented By:
      Grant Thornton, LLPJ. Henry Oehmann III CCP, CBP, CEBS, SPHRDirector-National Executive Compensation Services
      Paul, Hastings, Janofsky & Walker LLPJ. Mark PoerioPartner, Employment Department
      Skadden, Arps, Slate, Meagher & Flom LLP Regina OlshanPartner, Executive Compensation and Benefits
      Mercer LLCCarol Silverman Principal
      Thank you for logging into today’s event. Please note we are in standby mode. All Microphones will be muted until the event starts. We will be back with speaker instructions @ 2:55pm. Any Questions? Please email: Info@knowledgecongress.org
      Group Registration Policy
      Please note ALL participants must be registered or they will not be able to access the event.
      If you have more than one person from your company attending, you must fill out the group registration form.
      We reserve the right to disconnect any unauthorized users from this event and to deny violators admission to future events.
      To obtain a group registration please send a note to info@knowledgecongress.org or call 646.202.9344.
      March 9, 2011
      1
    • 2
      • If you experience any technical difficulties during today’s WebEx session, please contact our Technical Support @ 866-779-3239.
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      • Please note, this call is being recorded for playback purposes.
      • If anyone was unable to log in to the online webcast and needs to download a copy of the PowerPoint presentation for today’s
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      to download the files shortly.
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      and we will send you the dial in phone number.“
      March 9, 2011
      • About an hour or so after the event, you'll be sent a survey via email asking you for your feedback on your experience with this event
      today - it's designed to take less than two minutes to complete, and it helps us to understand how to wisely invest your time in future
      events. Your feedback is greatly appreciated. If you are applying for continuing education credit, completions of the surveys are
      mandatory as per your state boards and bars. 6 secret words (3 for each credit hour) will be give through out the presentation. We
      will ask you to fill these words into the survey as proof of your attendance. Please stay tuned for the secret word.
      • Speakers, I will be giving out the secret words at randomly selected times. I may have to break into your presentation briefly to read
      the secret word. Pardon the interruption.
      3
      March 9, 2011
    • Brief Speaker Bios:
      4
      J. Henry Oehmann III CCP, CBP, CEBS, SPHR
      Henry is Director National Executive Compensation Services practice and offices in Grant Thornton’s Raleigh office. Henry has more than thirty years of executive compensation consulting experience.Henry works extensively with compensation committees of public companies on executive compensation and corporate governance issues. Prior to joining Grant Thornton LLP, he was Vice-President of Executive Compensation Services at Clark Consulting, a Principal and compensation practice leader at Arthur Andersen and at Buck Consultants in Atlanta. In addition, he was Director of Compensation and Employee Benefits at Progress Energy. His in-depth experience in the banking and financial services industry is coupled with a wide-range of consulting engagements including both domestic and international clients across various industries.
      J. Mark Poerio
      Mark Poerio is a partner in the Employment department in the Washington D.C. office of Paul Hastings. For nearly 25 years, Mr. Poerio has been in private practice with a focus on executive compensation and employee benefit matters, especially from a business and corporate governance and securities perspective. He works regularly with every Paul Hastings office, on a national and international level, and has significant pro bono representations relating to not-for-profit business, executive compensation, and tax matters. Mr. Poerio is also an adjunct professor with the Georgetown Law School, where he designed and teaches both “Executive Pay and Loyalty” and “The Business and Securities Aspects of Executive Compensation.”
      March 9, 2011
    • Brief Speaker Bios:
      5
      Regina Olshan
      Regina Olshan’s practice focuses on advising companies, executives and boards on navigating the regulatory complexities of executive compensation and benefits. Ms. Olshan regularly advises public companies, boards, private equity clients and members of management on these issues, including those arising in the context of major corporate transactions. She is the author and editor of Section 409A Handbook published by BNA, lectures frequently on executive compensation issues, and has been quoted in various major publications on issues arising under Internal Revenue Code sections 409A and 457A, and other executive compensation matters.
      Carol Silverman
      Carol S. Silverman is a principal in the Washington Resource Group (WRG) of Mercer. The WRG is a national legal resource for Mercer consultants and clients on legislative and regulatory developments. Ms. Silverman advises employers on corporate governance and regulatory issues, and executive and director compensation strategy and design, with an emphasis on employment and change in control agreements and equity programs. She also specializes in employee benefit issues that arise in the context of corporate transactions and initial public offerings.
      ► For more information about the speakers, you can visit: http://knowledgecongress.org/event_2010_Executive.html
      March 9, 2011
    • Companies face considerable challenges when applying accounting principles related to executive compensation and bonuses in light of this new and complex regulatory environment. The Knowledge Group is assembling a panel of experts to help you understand the critical elements of executive compensation in 2010 & 2011. The speakers will share their expert opinions in a two-hour LIVE Webcast. They will address the following key issues: - Benefits, bonuses and incentives - Stock options - Compensation protection - Tax issues - Up-to-the-minute regulatory changes This live webcast will cover the fundamentals you need to understand about executive compensation.
      6
      March 9, 2011
    • Featured Speakers:
      7
      SEGMENT 1:
      SEGMENT 4:
      Carol Silverman PrincipalMercer LLC
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      SEGMENT 2:
      SEGMENT 3:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      March 9, 2011
    • Introduction
      8
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      Henry is Director National Executive Compensation Services practice and offices in Grant Thornton’s Raleigh office. Henry has more than thirty years of executive compensation consulting experience.Henry works extensively with compensation committees of public companies on executive compensation and corporate governance issues. Prior to joining Grant Thornton LLP, he was Vice-President of Executive Compensation Services at Clark Consulting, a Principal and compensation practice leader at Arthur Andersen and at Buck Consultants in Atlanta. In addition, he was Director of Compensation and Employee Benefits at Progress Energy. His in-depth experience in the banking and financial services industry is coupled with a wide-range of consulting engagements including both domestic and international clients across various industries.
      March 9, 2011
    • Understanding and Legal and Regulatory Landscape
      9
      March 9, 2011
    • Background
      10
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • Many of the recent accounting and tax changes that are impacting executive compensation should be viewed in the context of the current economic and regulatory environment:
      • A collapse of the financial markets, bank failures, and the government bailout of banks and other financial institutions;
      • The recession and related economic downturn that has resulted in a substantial decline in the stock market, significant and chronic unemployment, business failures, and a general aura of uncertainty in the business community;
      • The intrusion by the federal government into most aspects of the business and financial community to provide plans and programs to restore the capital markets and to alleviate the unemployment crisis; and
      • The infusion of taxpayer dollars through programs such as TARP and “cash for clunkers” to restart the economy and add capital to offset the economic losses caused by foreclosures, defaults, and a declining auto industry.
      March 9, 2011
    • Landscape of Legal and Regulatory Changes
      11
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • In our presentation, three recent key regulatory changes will be reviewed and serve as a platform for analysis:
      • SEC amendments to proxy disclosure rules relating to compensation and corporate governance adopted in December 2009;
      • The Dodd-Frank Wall Street Reform and Consumer Protection Act; and
      • Federal regulators of financial institutions “Guidance on Sound Incentive Compensation Policies”.
      • Our discussion will incorporate the chronology of executive compensation changes beginning with the Sarbanes-Oxley Act of 2002 and continuing with the Emergency Economic Stability Act, the American Recovery and Reinvestment Act and leading to the most recent enactment of Dodd-Frank.
      • The seeds of most of the current and likely the future executive compensation and corporate governance changes will be revealed through the lens of this historical perspective.
      March 9, 2011
    • Key Topics for Understanding the Changes
      12
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • Many of the following topics have emerged and/or been addressed repeatedly in the progression of legal and regulatory requirements imposed on public companies and financial service institutions:
      • Pay for Performance;
      • Say on Pay;
      • Clawbacks;
      • Compensation and risk management;
      • Compensation consultant independence;
      • Compensation Committee independence;
      • Hedging policy;
      • “Golden parachutes”;
      • Pay disparity; and
      • Compensation structure.
      March 9, 2011
    • 2009 SEC Disclosure Changes
      13
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • On December 16, 2009 the SEC approved amendments to the proxy disclosure rules to address certain executive compensation and corporate governance issues.
      • Many of these changes grew from the EESA and ARRA legislation and regulations that imposed restrictions on banks and financial institutions that received government assistance through programs such as TARP.
      • Generally, these amendments addressed the following:
      • Compensation and risk management;
      • Summary compensation table-equity compensation;
      • Enhanced director and nominee disclosure;
      • Board leadership structure;
      • Board oversight role and risk management
      • Compensation consultant disclosures
      March 9, 2011
    • Dodd-Frank Wall Street Reform and Consumer Protection Act
      14
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • In response to the collapse of the financial markets and drawing from their executive compensation and corporate governance tool kit developed in framing the EESA and ARRA legislation, the Dodd-Frank legislation will require public companies, broker/dealers, stock exchanges, and, on a enhanced basis, financial institutions.
      • The following topics are addressed in the Act and provide direction for the future of compensation planning and design:
      • Clawbacks
      • Say on Pay
      • Compensation Committee Independence
      • Compensation Consultant/Legal Advisor Independence
      • Hedging Policy
      • Pay for Performance
      • Compensation Committee Structures
      March 9, 2011
    • Dodd-Frank Wall Street Reform and Consumer Protection Act
      15
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      Planning Tips:
      • Pay for performance: build pay for performance models to support your executive compensation programs that demonstrate the link between executive pay and company performance;
      • Clawbacks present a unique challenge to most companies, whether public or private; your company’s ability to modify agreements, identify the events triggering a clawback, and tracking down and recovering pay from former employees will be difficult, if not impossible;
      • What is expected in the reporting of a compensation structure remains unclear. What is clear is that this provision is intended to address excessive compensation and/or preventing excessive risk. We think that the regulations on this will be difficult to address, but are likely to end up focusing on enterprise risk management.
      • “Say on Pay” will lead companies to rethink the adoption of new compensation plans that are difficult or awkward to communicate.
      March 9, 2011
    • Timing on Implementation of Dodd-Frank
      16
      • The table below identifies the required dates for regulatory guidance and implementation:
      March 9, 2011
    • FRB Guidance and Principles on Incentive-based
      Compensation and Risk Management
      17
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • On June 21, 2010, the FRB, OCC, OTS, and FDIC adopted final guidance on safety and soundness for incentive compensation. The guidance focused on three principles:
      • Balanced risk-taking incentives;
      • Compatibility with effective controls and risk management; and
      • Strong corporate governance.
      • Within its guidance and principles, the agencies identified the following incentive compensation strategies to ensure a balance of risk and reward:
      • Adjusted awards to reflect the following risks: credit, market, liquidity, operational, legal, compliance, and operational;
      • Positional and functional risks tied to employee incentives;
      • Use of multi-year deferrals to tie payment to the risk time horizon;
      • Risk-taking behavior linked to golden parachute and deferred compensation payments.
      March 9, 2011
    • 18
      Proposed Regulations on Incentive-Based Compensation
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • On February 7, 2011 federal banking and securities regulators published notice of proposed rulemaking for standards on incentive compensation
      • Prohibitions on excessive compensation;
      • Covered financial institutions
      • Covered persons
      • Incentive-based compensation
      • Special rules for institutions of$50.0 bill or greater
      • Prohibitions on incentive compensation that encourages inappropriate risks;
      • Establish and maintain compensation policies and procedures;
      • Reporting requirements on compensation structures;
      March 9, 2011
    • FRB Guidance and Principles on Incentive-based
      Compensation and Risk Management
      19
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • The following planning tips reflect an appropriate application of these principles:
      • Risk and size adjust awards based on the control that individuals may have to impact a broad segment of the company’s earnings or exposure to potential future losses;
      • Provide delayed payment schemes linked to the time horizon of the risk, especially if the executive has the ability to affect the near-term outcome;
      • Use of stock-based compensation, stock holding period requirements, and share ownership guidelines may improve the link between executive behavior and long term shareholder value;
      • Monitor performance to ensure that paid compensation is not later subject to revisions or restatements of financial information that would reduce the initial value of these payments;
      • Engage internal audit, the compensation committee, and management in the development, approval and tracking of incentive compensation plans.
      March 9, 2011
    • 20
      Planning Issues and Strategies
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • Annual incentive plans
      • Long-term incentives
      • Deferrals
      • Post termination pay
      • Tracking compensation arrangements
      March 9, 2011
    • 21
      Planning Issues and Strategies
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • Employment agreements, CIC/severance arrangements
      • Management’s role
      • Compensation Committee’s Role
      • Internal audit and risk management function
      • Board oversight of risk and incentives
      March 9, 2011
    • 22
      Summary
      SEGMENT 1:
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      • Legal and regulatory changes to executive and incentive compensation have evolved from the crisis events and in response to compensation abuses;
      • Look for signals and trends like those from Dodd-Frank and TARP/ARRA as a guidepost for more global compensation restrictions and requirements;
      • Risk management and compensation will need to work more closely in the future to ensure compliance and a sound approach to incentive compensation.
      March 9, 2011
    • 23
      Introduction
      Mark Poerio is a partner in the Employment department in the Washington D.C. office of Paul Hastings. For nearly 25 years, Mr. Poerio has been in private practice with a focus on executive compensation and employee benefit matters, especially from a business and corporate governance and securities perspective. He works regularly with every Paul Hastings office, on a national and international level, and has significant pro bono representations relating to not-for-profit business, executive compensation, and tax matters. Mr. Poerio is also an adjunct professor with the Georgetown Law School, where he designed and teaches both “Executive Pay and Loyalty” and “The Business and Securities Aspects of Executive Compensation.”
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • Clawbacks
      24
      Historical Perspective
      Three different kinds of Clawbacks
      Restatement
      Ill-gotten Gains
      • TARP - AARA
      • “Malus”
      Disloyalty
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • Key Design Issues
      25
      (1) Who is subject to clawback?
      (2) What is subject?
      • Nature of Compensation
      • Timing of Compensation
      (3) What triggers for financial restate or ill-gotten gains?
      • SEC v Jenkins (D. AZ)
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • SOX 304(a)
      26
      Additional Compensation Prior to Noncompliance With Commission Financial Reporting
      Requirements. If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for--
      1. any bonus or other incentive-based or equity-based compensation received by that person
      from the issuer during the 12-month period following the first public issuance or filing with the
      Commission (whichever first occurs) of the financial document embodying such financial
      reporting requirement; and
      2. any profits realized from the sale of securities of the issuer during that 12-month period.
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • Dodd-Frank 2010
      27
      Clawback in Section 954 of Dodd-Frank Conf. Report (7/12/2010):
      [New to ‘34 Act:]
      §10D. RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION. POLICY
      (1) LISTING STANDARDS.—The Commission shall, by rule, direct the national securities
      exchanges and national securities associations to prohibit the listing of any security of an issuer
      that does not comply with the requirements of this section.
      (2) RECOVERY OF FUNDS.—The rules of the Commission under paragraph (1) shall require each
      issuer to develop and implement a policy providing—
      (A) for disclosure of the policy of the issuer on incentive-based compensation that is based on
      financial information required to be reported under the securities laws; and
      (B) that, in the event that the issuer is required to prepare an accounting restatement due to the
      material noncompliance of the issuer with any financial reporting requirement under the
      securities laws, the issuer will recover from any current or former executive officer of the
      issuer who received incentive-based compensation (including stock options awarded as
      compensation) during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement, based on the erroneous data, in excess of what would
      have been paid to the executive officer under the accounting restatement.
      March 9, 2011
    • Dodd-Frank 2010
      28
      • Comparison to SOX 304
      • What’s next?
      • SEC uncertainty
      • Company response
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • Executive Pay and Loyalty
      29
      • Traditional Corp. Enforcement Strategies
      • Litigation in Extreme Cases
      • Golden Handcuffs and Forfeitures
      • Stock Plans
      • ERISA NQ Plans
      • Your Current Practices/Issues
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • Business Protection
      30
      • Why now is the time to better protect business interests through changes to executive compensation
      • WW trend toward deferred compensation
      • Suitable time for “Loyalty Covenants”
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • 280G Example
      31
      Assumptions:
      Base Amount = $200K
      280G Limit = $600K
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • 280G Example
      32
      Assumptions:
      Base Amount = $200K
      280G Trigger = $600K
      Penalty if $601K?
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • 280G Example
      33
      Assumptions:
      Base Amount = $200K
      280G Trigger = $600K
      Penalty if $601K:
      = $401K lost deduct.
      = $120K excise tax
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • Golden Parachute Components
      34
      Severance
      Employer-paid Coverage
      Accelerated Vesting
      Early Payout
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • Basic 280G Remedies
      35
      • Post-closing Comp.
      • Non-Competes
      • Shareholder Approval
      • Hold Harmless
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • Conclusion
      36
      Questions?
      Mark Poerio
      202.551.1780
      markpoerio@paulhastings.com
      SEGMENT 2:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      March 9, 2011
    • 37
      18 offices across Asia, Europe, and the U.S.
      One legal team to integrate withthe strategic goals of your business
      March 9, 2011
    • 38
      Deductibility of Bonuses
      by Accrual Basis Taxpayers
      Regina Olshan
      Skadden, Arps, Slate, Meagher & Flom LLP
      New York, NY 10036
      Regina.olshan@skadden.com
      For the education of administrators only. Not for use with the public. Any graphics and charts are copyright to their owners and are used for educational purposes only.
      SEGMENT 3:
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      April 28,2010
    • Introduction
      Regina Olshan’s practice focuses on advising companies, executives and boards on navigating the regulatory complexities of executive compensation and benefits. Ms. Olshan regularly advises public companies, boards, private equity clients and members of management on these issues, including those arising in the context of major corporate transactions. She is the author and editor of Section 409A Handbook published by BNA, lectures frequently on executive compensation issues, and has been quoted in various major publications on issues arising under Internal Revenue Code sections 409A and 457A, and other executive compensation matters.
      SEGMENT 3:
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      39
      April 28,2010
    • 40
      Background
      Most cash incentive compensation plans (annual or long-term) condition payment upon both performance and service vesting criteria.
      Because of the need to measure whether performance metrics have been achieved, most plans pay out after the end of the performance period.
      • For example, an annual bonus plan based on 2010 performance typically pays out sometime early in 2011.
      Companies generally have deducted the bonus payment for federal income tax purposes in the year for which paid rather than for the year in which paid.
      • For example, a company’s payment in 2011 for a 2010 annual bonus plan has generally been deducted in 2010.
      Some companies generally require the bonus plan participants to remain employed through the date of payment while others require employment only through the end of the performance period.
      • A company’s approach typically was governed principally or solely by plan design/incentive considerations that balanced the desire to foster retention with the desire to reward performance.
      • Until recently, few if any companies considered the federal income tax treatment of the payments in this regard.
      April 28,2010
    • 41
      Typical Factual Scenarioand Issue Presented
      Factual Scenario
      • Employer maintains an annual bonus plan (or multi-year incentive plan) that pays out only if the participant remains employed on the date of payment, which is made on or before March 15 of the year following the performance year (or last year in the performance period, in the case of a multi-year plan)
      • The performance year (or last year in the performance period) is referred to here as “Year 1” and the year of payment as “Year 2”
      Issue
      • For an accrual basis taxpayer, is the payment deductible in Year 1 or Year 2?
      SEGMENT 3:
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      April 28,2010
    • Relevant Tax Lawand Employer Practice
      42
      Section 404(a) of the Code provides generally that nonqualified deferred compensation is not deductible by an employer until the year in which it includible in an employee’s income.
      • This general rule thus would require deduction of the payment in Year 2 because, as cash basis taxpayers, employees do not recognize income from wages until they are actually or constructively received.
      However, Treas. Reg. § 1.404(b)-1T provides that a compensation arrangement, such as a bonus plan, will not be treated as deferred compensation subject to this rule for a year if payment is made within 2½ months (i.e., by the March 15) following the end of the year.
      • Employers have typically relied on this rule to deduct bonus payments in Year 1 if paid on or before March 15 of Year 2 even where continued employment through the payment date was a condition of payment.
      In late 2009, the IRS release a “Chief Counsel Memorandum” (Number 200949040) in which it determined that such bonus payments are properly deducted in Year 2 and not deductible in Year 1.
      SEGMENT 3:
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      April 28,2010
    • Chief Counsel Memorandumand All Events Test
      43
      The IRS position is based on the “all events” test for deduction by an accrual basis taxpayer, which requires that, for a liability to be deductible:
      • all events must have occurred that fix the fact of liability; and
      • the liability must be determinable with reasonable accuracy
      In effect, the all events test goes to if and when a deduction is available, whereas the 2½ month rule regulation goes only to whether a deduction otherwise available in Year 1 can be taken in Year 1 if not paid in Year 1.
      Pursuant to Section 461 of the Code, the all events test cannot be satisfied before economic performance has occurred.
      • In the context of services to an employer, economic performance occurs as the service is provided.
      • The IRS concluded in the Chief Counsel Memorandum that “even though bonuses may be based on the company’s performance in Year 1, economic performance does not occur and the liability is not fixed until the date that bonuses are paid because service must continue until that time.”
      SEGMENT 3:
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      April 28,2010
    • Design Alternatives
      44
      There are limited ways to preserve a Year 1 deduction if the IRS position is respected:
      • Require continued employment only through the end of the performance period and thus pay the bonus regardless whether the participant remains employed on the payment date.
      • Commit before the end of Year 1 to allocate payment of the entire bonus pool (or some portion thereof) among those participants who do remain employed on the payment date.
      The latter approach raises the issue of what happens to the money in the (perhaps unlikely) scenario that no participants remain employed on the payment date.
      • Where this is unlikely, employers typically make no provision.
      SEGMENT 3:
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      April 28,2010
    • Conclusion
      45
      Employers should review their incentive compensation plans to determine if their current or historical deduction practices are subject to challenge based on this position.
      Employers who claim a Year 1 deduction notwithstanding a Year 2 service requirement risk challenge on audit, particularly in light of recently increased employment tax compliance audits and pressures on the IRS to raise revenue.
      SEGMENT 3:
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      April 28,2010
    • A Global Law Firm
      46
      CANADA
      EUROPE
      SEGMENT 3:
      ASIA
      USA
      • Toronto
      • Brussels
      • Frankfurt
      • London
      • Moscow
      • Munich
      • Paris
      • Vienna
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      • Beijing
      • Hong Kong
      • Shanghai
      • Singapore
      • Tokyo
      • Boston
      • Chicago
      • Houston
      • Los Angeles
      • New York
      • Palo Alto
      • San Francisco
      • Washington, D.C.
      • Wilmington
      • Sydney
      April 28,2010
    • 47
      Introduction
      SEGMENT 4:
      Carol Silverman PrincipalMercer LLC
      Carol S. Silverman is a principal in the Washington Resource Group (WRG) of Mercer. The WRG is a national legal resource for Mercer consultants and clients on legislative and regulatory developments. Ms. Silverman advises employers on corporate governance and regulatory issues, and executive and director compensation strategy and design, with an emphasis on employment and change in control agreements and equity programs. She also specializes in employee benefit issues that arise in the context of corporate transactions and initial public offerings.
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      Investor perspective
      Agenda
      SEGMENT 4:
      Carol Silverman PrincipalMercer LLC
      • Say on pay
      • Proxy access
      • Key influencers
      • Review pay practices
      • Start a dialogue
      • Enhance pay disclosures
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      Investor perspective
      Say on pay: overview
      Effective for shareholder meetings on or after Jan. 21, 2011 (Jan. 21, 2013 for smaller reporting companies)
      • Say on executive pay
      • Shareholder vote required on named executive officer (NEO) pay programs -- as disclosed in proxy statement Compensation Discussion & Analysis (CD&A) and related tables -- at least once every 3 years
      • Say when on pay
      • Vote required on frequency of say-on-pay at least once every 6 years: should it occur every 1, 2 or 3 years?
      • Say on merger pay
      • In merger proxy statements, must disclose agreements or understandings with named executive officers on any transaction-related pay, including:
      • Total dollar value
      • Conditions triggering payment
      • Separate shareholder vote required on any golden parachute not already subject to periodic say-on-pay vote
      • Effective for meetings on or after July 25, 2010
      • Tallying votes
      • For votes on say on pay, director elections, executive pay or other significant matters, can count only votes from shareholders and brokers specifically authorized to vote on shareholder’s behalf
      • Effective for meetings on or after July 21, 2010
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    • Investor perspective
      Say on pay: voting results
      50
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    • Investor perspective
      Say on pay: voting results
      51
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      Investor perspectiveProxy access: overview
      • SEC issued rules in August under Dodd-Frank Act allowing shareholders to use company proxy statements to nominate directors
      • Applies to a shareholder or group of shareholders owning at least 3% of the company’s voting securities for at least 3 years
      • Number of shareholder nominees is limited: greater of 25% of board or one nominee
      • Nominating shareholders must notify company no later than 120 days but no earlier than 150 days before anniversary of prior year’s proxy mailing
      • Originally scheduled to take effect Nov. 15, 2010, the SEC has granted a stay pending resolution of a lawsuit filed by the Business Roundtable and the US Chamber of Commerce
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      Proxy Advisors
      • ISS
      • Glass Lewis & Co.
      Influential Investors
      • Fidelity
      • Vanguard
      • CalPERS
      • TIAA-CREF
      • AFL-CIO
      Interested Organizations
      • Corporate Library
      • Council of Institutional Investors
      • Conference Board
      Investor perspectiveKey influencers
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      Investor perspectiveAction step: Review pay practices
      • If a SOP resolution is on the ballot of a company that has problematic pay practices, Institutional Shareholder Services (ISS) may recommend a vote against the resolution (yellow card)
      • If the company fails to address those problems by the next year, ISS is likely to advise voting against compensation committee members or, in some cases, all directors (red card)
      • If a company with problematic pay practices does not have a SOP resolution on the ballot or has “egregious” pay practices, ISS may go directly to a red card, recommending a vote against compensation committee members or all directors
      • Companies can no longer avoid a negative vote recommendation by committing to eliminate a pay practice in the future
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      Investor perspectiveAction step: Start a dialogue
      1
      2
      3
      4
      5
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      Investor perspectiveAction step: Enhance pay disclosures
      • Use CD&A to tell the company’s story
      • Include executive summary, tables and graphics
      • Disclose rationale for amount and form of compensation paid to each NEO
      • Demonstrate pay-for-performance link and alignment with shareholder interests
      • Disclose performance targets and benchmarking
      • Avoid legal and financial boilerplate
      • Spotlight changes that demonstrate good corporate governanceand respond to shareholder concerns
      • Limiting severance
      • Eliminating single-trigger change-in-control provisions
      • Downsizing or capping executive perquisites, including eliminating personal use of company aircraft
      • Eliminating tax gross-ups
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      Investor perspectiveAction step: Enhance pay disclosures
      SEGMENT 4:
      Carol Silverman PrincipalMercer LLC
      • Demonstrate how compensation policies mitigate excessive risk
      • Base salary is sufficient component of total compensation
      • Incentives are tied to multiple time periods
      • Payout curves are not steep or overly leveraged
      • Performance goals are both quantitative and qualitative
      • Incentive compensation has large stock component
      • Stock ownership guidelines are significant but reasonable
      • Holding periods and bonus deferrals encourage long-term perspective
      • Clawback provisions are broadly applicable and enforceable
      • Hedging is prohibited
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      Q&A:
      SEGMENT 1:
      SEGMENT 4:
      Carol Silverman PrincipalMercer LLC
      J. Henry Oehmann IIIDirector-National Executive Compensation ServicesGrant Thornton, LLP
      SEGMENT 2:
      SEGMENT 3:
      J. Mark Poerio Partner, Employment DepartmentPaul, Hastings, Janofsky & Walker LLP
      Regina Olshan Partner, Executive Compensation and Benefits Skadden, Arps, Slate, Meagher & Flom LLP
      ►You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type your question in the box that appears and click send. ►Questions will be answered in the order they are received.
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    • Notes:
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      March 9, 2011