Your SlideShare is downloading. ×
A-2-Compensation-&-Benefits
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

A-2-Compensation-&-Benefits

270

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
270
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
7
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. 47thBANK & CAPITAL MARKETS TAX INST IT U T Eannual A-2: COMPENSATION AND BENEFITS Fantasia C-F November 8th, 1:45pm – 3:15pm 47th ANNUAL BANK & CAPITAL MARKETS TAX INSTITUTE DISNEY CONTEMPORARY HOTEL Speakers: RICHARD GARRISON ANDREW GIBSON, CPA J. HENRY OEHMANN, III 47 BANK I N S T I T U MARKET th annual TA X & CAPITAL TE NOVEMBER 7-9, 2012 E.COM WWW.BANKTAX I N ST I T U T D I S N E Y C O N T E M P O R A RY H OT E L | ORLANDO
  • 2. Bank and Capital Markets Tax InstituteSession A2: Compensation and BenefitsPresented by:Richard Garrison, Jefferies & Company, Inc.Andy Gibson, BDO USA, LLP, andHenry Oehmann, Grant ThorntonAgenda• Dodd-Frank Section 956 and 952 rules• Golden parachute payments• Stock-based compensation• Cash bonuses: deductibility and timing• Restricted stock grants• Restricted stock units• Nonqualified deferred compensation© Grant Thornton LLP. All rights reserved. Page 2Dodd-Frank Wall Street Reform and ConsumerProtection Act• 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 to comply with many new compensation rules.• 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© Grant Thornton LLP. All rights reserved. Page 3 1
  • 3. Timing on Implementation of the CorporateGovernance and Compensation Rules under theDodd-Frank Act• The table below identifies the implementation plan for the executive compensation and corporate governance regulations under the Act.: Provision Description Status 971 — Proxy The SEC has been granted authority to adopt rules for including Proposed rules due access authority the names of shareholder board nominees in proxy solicitation date undetermined materials. 951 — Say-on-pay The Dodd-Frank Act mandates a say-on-pay vote for Final rules issued shareholders on the compensation of the issuer’s named January 25, 2011 executive officers. 957 — Broker Stock exchanges must prohibit brokers from voting customer No date set for discretionary shares without receiving voting instructions. issuance of regulations. voting 952 — The SEC must direct national securities exchanges to require • Released June Compensation member companies to satisfy heightened independence 27,2012 committee and standards similar to those that apply to audit committees. • Exchanges to issue adviser proposed rules Sept. independence 2012 972 — Disclosure The SEC must issue rules for filers to disclose the reasoning No date set for of board behind establishing the same or different roles for the chairman issuance of regulations. leadership and the CEO.© Grant Thornton LLP. All rights reserved. Page 4Timing on Implementation of Dodd-Frank (continued)• The table below identifies the implementation plan for the executive compensation and corporate governance regulations under the Act.: Provision Description Status 953 — Additional This is a requirement for public companies to explain Regulations due between executive the pay-for-performance relationship and to disclose August and December 2011. compensation the ratio of CEO pay to the median compensation for disclosures all employees. 954 — Clawback of This provision requires all public companies to Regulations due between incentive establish and enforce an incentive compensation August and December 2011. compensation clawback requirement for current and former employees. 955 — Hedging by The SEC is directed to issue rules requiring Regulations due between employees and companies to disclose policies on whether employees August and December 2011. directors or directors are permitted to hedge their stock-based compensation. 956 — Compensation Financial institutions with assets of $1 billion or more Regulations due between structures of financial must disclose the structure of all incentive August and December 2011. institutions compensation arrangements.© Grant Thornton LLP. All rights reserved. Page 5Section 952 – Final Rules for Compensation andCommittee and Advisor Independence• These rules provide guidance for the following: – Compensation Committee independence; – Compensation Committee Adviser, Oversight and Funding; – Compensation Committee Adviser Independence; and – Disclosure of Advisers and Conflicts of Interest© Grant Thornton LLP. All rights reserved. Page 6 2
  • 4. Section 952 - Final Rules for Compensation andCommittee and Advisor Independence• Key dates and deadlines – June 27, 2012- SEC publishes rules in the Federal Register; – By September 25, 2012 - Stock exchanges issue proposed listing requirements to be approved by SEC; – By June 27, 2013 – SEC approves final listing requirements© Grant Thornton LLP. All rights reserved. Page 7Section 956- New Rules on Incentive-BasedCompensation• On February 7, 2011 federal banking and securities regulators published notice of proposed rulemaking for standards on incentive compensation;• On April 14, 2011, the proposed regulations were published in the Federal Register and comment period expired May 31,2011;• Six months after the final rule is published in the Federal Register, the regulations will become effective.• 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;© Grant Thornton LLP. All rights reserved. Page 8What are the principal compliance requirements?• The three (3) compliance requirements of incentive-based compensation are as follows: – Balance of risk and financial rewards by: risk-based adjustment of awards, deferral of payment, use of longer performance periods, and reduced sensitivity to short-term performance; – Compatibility with effective controls and risk management by strong board oversight of compensation design and monitoring, integration with internal audit and risk management, and regular review of program effectiveness; and – Supported by strong corporate governance to include oversight of plan design, regular reporting of actual plan results, assurance of clawback actions in the case of restatement of financial data, access to special areas of expertise such and risk management and compensation advisors.© Grant Thornton LLP. All rights reserved. Page 9 3
  • 5. Developing an Integrated Solution• The major theme of compliance with the Dodd-Frank Act is to develop a multi-disciplinary approach to regulatory compliance. This applies especially to designing and implementing incentive compensation arrangements.• Integrating incentive, risk management, effective corporate governance requires a management team approach with the independent directors acting Strong Corporate in a broad-oversight capacity. Governance Practices© Grant Thornton LLP. All rights reserved. Page 10Section 280G Limit • There Are Four Elements • Payments: • In the “nature of compensation” • Made to a “disqualified individual” (DI) – (e.g. an officer, a shareholder, or highly compensated individual) • Contingent on a change in the ownership, control, or assets of the corporation • Have an aggregate present value of at least three times the individual’s “base amount” • The Golden Parachute Provisions Impose Two Basic Penalties: • The company loses its deduction for a portion of the payment, and • Individual pays 20% excise tax under Section 4999 on a portion of the payment© Grant Thornton LLP. All rights reserved. Page 11Section 280G/4999 Calculation CIC Contingent Payments: Transaction Bonus $ 500,000 Stock Options $ 285,000 Severance Pay $ 200,000 Health/Perks $ 15,000 Total Parachute Payments (A) $1,000,000 Base Amount (B) $333,333 3 X Base Amount Threshold (C) $999,999 Subject To Tax (Pmts ≥ 3 X Base)? (A) > (C) Yes Excess Parachute Payment (A) minus (B) $1 20% Excise Tax $133,333 Lost Tax Deduction $666,667© Grant Thornton LLP. All rights reserved. Page 12 4
  • 6. Section 280G Areas of Focus • FIN 48 Tax deduction for acquired companies • Private company vote • Equity grants within one year of the CIC • Noncompete agreements and valuations • Who is an officer?© Grant Thornton LLP. All rights reserved. Page 13Stock-based Compensation-ASC 718 BasicsWhat are some of the key provisions? – Equity awards – Liability awards – Performance conditions – Market conditions – Repricings – Income taxes – Fully diluted EPS© Grant Thornton LLP. All rights reserved. Page 14Stock-based Compensation Tax Provision IssuesASC 740 topics that require attention: – Understanding the timing differences – Permanent differences and IRC Section 162(m) provisions; – Deferred tax assets and the APIC pool; – ISOs, NSOs, disqualified dispositions, etc.; – Restricted stock or RSUs; and – NOLs.© Grant Thornton LLP. All rights reserved. Page 15 5
  • 7. Stock-based Compensation Plan designconsiderations• Performance-based stock or performance shares – Alignment with shareholders – Sound incentive compensation – Cliff vs. graded vesting – Grant date fair value for multi-year grants• Stock options in tandem with RSGs – Leverage – Alignment – Governance issues© Grant Thornton LLP. All rights reserved. Page 16Stock-based Compensation – Other issues• CIC provisions, acceleration at CIC• Forfeitures• Stock settled SARS vs. options• Building the bank equity account• § 162(m) pre-IPO and grant restrictions• § 409A valuation requirements© Grant Thornton LLP. All rights reserved. Page 17Section 162(m) Deduction Limitation • $1 million Compensation Deduction limit for Covered Employee’s compensation • CEO • 3 highest paid officers (other than the CFO) • Applies to All compensation other than: • Commission-based compensation • Payments to qualified plans • Nontaxable fringes and the like • Qualified performance-based compensation • Qualified Performance-based Compensation • Compensation payable only upon achievement of pre-established performance goals • Written, pre-established goals • Goals must be objective and must preclude discretion to increase award sizes • Plan and performance measures must be approved by shareholders • Compensation committee administering performance goals must be two or more “outside directors” • Compensation committee must certify that the goals were obtained© Grant Thornton LLP. All rights reserved. Page 18 6
  • 8. Section 162(m) Problem Areas • Rev. Rul. 2008-13 • Payment of otherwise qualified performance-based compensation on account of death, disability or CIC does not cause a failure • However, if the compensation could be payable upon termination without cause or for good reason (i.e., involuntary termination without cause), plan fails Section 162(m) • Where does this come up? • Employment agreement that links to the annual bonus plan and accelerates the target bonus in the event of an involuntary termination without cause • Does it apply to acceleration of vesting of stock options on involuntary termination? • Impact of Corporate Transactions • Adjustment for corporate capitalization generally does not cause a failure as long as it is built into the plan and formulaic • Payment of bonus to account for an acquisition that causes the performance goals not to be met would generally fail Section 162(m) • IRS Position on Correcting Failures • Correction of exercise price on stock options© Grant Thornton LLP. All rights reserved. Page 19Section 162(m)Case Study #1: ABC Bancorp• Public company pays CFO Base salary of $2,000,000.• No other compensation is considered (stock, options, etc.) How much of the $2,000,000 is deductible?© Grant Thornton LLP. All rights reserved. Page 20Section 162(m) Case Study #1How much is deductible?Answer:$2,000,000, assuming it is reasonable compensation.Why?• CFO not subject to § 162(m) $1,000,000 deduction limit.• Current regulations under Notice 2007-49 clarified the covered officers subsequent to the new proxy rules which changed the reporting language.© Grant Thornton LLP. All rights reserved. Page 21 7
  • 9. Section 162(m) Case Study #2How much is deductible?CEO of World Financial Corp.• Base salary = $2,000,000• No other compensation is provided. How much is deductible?© Grant Thornton LLP. All rights reserved. Page 22Section 162(m) Case Study #2How much is deductible?$1,000,000, assuming it is reasonable• CEO is subject to § 162(m) $1,000,000 deduction limit;• Others for whom the deduction limit (Notice 2007- 49) include the three highest compensated officers for the taxable year (other than PEO or PFO)© Grant Thornton LLP. All rights reserved. Page 23Section 162(m) Case Study #3• COO of World Financial Corp. paid base salary of $25,000.00• Annual Bonus plan: – $3,000,000 if company’s EBITDA doubles, and – Overall performance rating of 5 for the year, at the discretion of the CEO How much is deductible?© Grant Thornton LLP. All rights reserved. Page 24 8
  • 10. Section 162(m) Case Study #3How much is deductible?Deductible amount: $25,000 base salary (assuming it is reasonable) + $975,000 bonus (also assuming it is reasonable) $1,000,000 Why not the entire $3,025,000?© Grant Thornton LLP. All rights reserved. Page 25Section 162(m) Case Study #3Why not the entire $3,025,000?• Performance criteria must be completely objective – Third party having knowledge of relevant performance results must be able to calculate amount to be paid. Reg. Sec. 1.162-27(e)(2)(ii).• Other requirements for performance-based compensation – Pre-established – In writing no later than 90 days after commencement of period of service to which performance goal relates, and within the first 25 percent of the period of service; – Outcome must be substantially uncertain at time goal is established.© Grant Thornton LLP. All rights reserved. Page 26Bonus Deduction Case #1§ 404(a)(5) - Deductions for deferred compensation• General rule: Deductible for the employer’s taxable year with which or within which ends the taxable year of the employee in which includible in employee’s income.• Exception to general rule: Accrual basis employer can take deduction if paid within 2½ months after end of taxable year in which services are performed. – See Reg. Sec. 1.404(b)-1T, Q&A-2(b)(1). – But all events test must be satisfied as of the last day of the employer’s taxable year.© Grant Thornton LLP. All rights reserved. Page 27 9
  • 11. Bonus Deduction Case #1International Finance Group (IFG) is an accrual basis and calendar year taxpayer;• 2010 IFC met annual bonus targets: – Paid bonuses on March 1, 2011 – Employee must be present on payment date to receive bonus – Forfeited bonuses not allocated to other employees When is the bonus deductible?© Grant Thornton LLP. All rights reserved. Page 28Bonus Deduction Case #1When is the bonus deductible?2011Components of the all events test:All events have occurred that:1) Fix the fact of the liability;2) Amount of the liability can be determined with reasonable accuracy3) Economic performance has occurred How could the plan have been changed to get the deduction in 2010?© Grant Thornton LLP. All rights reserved. Page 29Bonus Deduction Case #1How could the plan have been changed to get thededuction in 2010?Redesign plan so that all events test is met• Employee receives payment if still employed on December 31, 2010 (or an earlier date) or• Bonuses forfeited by employees who aren’t still at Fowler on the payment date are allocated and paid to other employees© Grant Thornton LLP. All rights reserved. Page 30 10
  • 12. Bonus Deduction Case #2• IFG’s CFO, doesn’t like this either solution• CFO proposes giving all forfeited bonuses to his favorite charity; Does this meet the all events test?© Grant Thornton LLP. All rights reserved. Page 31Bonus Deduction Case #2Does this meet the all events test?• CCA 200949040 – forfeited bonuses paid to a charity within 2½ months after end of year;• Taxpayers position – Section 170(a)(2) has same 2½-month rule as under Section 404(a)(5) – Thus, all amounts paid within 2½ months are deductible, regardless of whether a bonus or charitable contribution• CCA position – Code Sections must be evaluated independently – All events test not satisfied for bonus, so not deductible on accrual basis© Grant Thornton LLP. All rights reserved. Page 32Bonus Deduction Case #3IFGs CFO has a great idea to improve Fowler’scash flowExample – 2011 annual bonus• Vests on December 31, 2011• Paid on March 1, 2013 When does Fowler get the deduction? 2011? 2012? 2013?© Grant Thornton LLP. All rights reserved. Page 33 11
  • 13. Bonus Deduction Case #3When does Fowler get the deduction?2013• Services were performed in 2011• 2½-month period starts running at end of year in which services are performed – Services performed in 2011 – Not paid by March 15, 2012 – Therefore, no accrued deduction – Not deductible until taxable year "with which or within which ends" the employees year ends – 2013 Any ideas for obtaining the deduction in 2012?© Grant Thornton LLP. All rights reserved. Page 34Bonus Deduction Case #3Obtaining the deduction in 2012• Pay the bonus in 2012 – If paid by March 15, 2012, would be deductible for 2011 – If paid later in 2012, would be deductible in 2012• Postpone vesting date from December 31, 2011 to sometime in 2012 – Services deemed performed in year of vesting (TAM 199923045) – Causes 2½-month period to start running on December 31, 2012 – If paid by March 15, 2013, deductible for 2012© Grant Thornton LLP. All rights reserved. Page 35Restricted Stock• Full value award, generally requires no cash outlay by recipient;• Subject to certain vesting restrictions (requisite service period: – Service – Both• Special features – Dividends – Voting rights• Generally, subject to same accounting treatment for RSGs and RSUs© Grant Thornton LLP. All rights reserved. Page 36 12
  • 14. Restricted Stock Grants- RSGs• Grants made to recipient and shares are issued, legend with restrictions;• Holder deemed as a beneficial owner and eligible for all rights of a shareholder;• Counted as outstanding stock for beneficial ownership and EPS purposes;• Shares forfeited if term of restrictions not met;• Non-transferable, non-assignable, and generally non-pledgeable.© Grant Thornton LLP. All rights reserved. Page 37Restricted Stock Grants-Pros and Cons• Pros – Employees enjoy rights of ownership and are shareholders in fact; – Fixed charge to earnings at grant date; – Dilution set at grant date; – Eligible for § 83(b) election – Aligns shareholder and employee interests; – Generally avoids § 409A issues.• Cons – Requires tracking of stock ownership, vesting, and forfeitures; – Greater recordkeeping burden on company; – Must have immediate access inventory in order to award shares; – Creates voting and dividend rights that dilute existing shareholders; – Clawback of awards can be problematic;© Grant Thornton LLP. All rights reserved. Page 38Restricted Stock Grants - Design Considerations• Eligibility or participation• Grant Size• Award frequency• Vesting requirements• Performance goals• Share authorization• Dilution• Burn rate• Other© Grant Thornton LLP. All rights reserved. Page 39 13
  • 15. Restricted Stock Units - RSUs• Grants to recipients and shares accounted for as book entry; no shares issued;• Recipient not a shareholder or beneficial owner• Not counted as outstanding stock;• Shares forfeited if restrictions are unmet;• No evidence real ownership; just a promise to pay shares at some future date based on whether conditions are met.© Grant Thornton LLP. All rights reserved. Page 40Restricted Stock Units – Pros and Cons• Pros – No requirement to issue shares to recipient; – No dilution of shareholders; – No requirement to extend dividend or voting rights; – Less recordkeeping required; book entry and tracking; – Aligns employee interests with shareholders.• Cons – Recipient lacks perception of real share ownership; – Creates § 409A treatment – No § 83(b) eligibility – Generally no voting or dividend rights to recipient – More complicated fully diluted EPS calculation.© Grant Thornton LLP. All rights reserved. Page 41Restricted Stock Units – Design Considerations• Eligibility or participation• Grant Size• Award frequency• Vesting requirements• Performance goals• Share authorization• Dilution• Burn rate• Other© Grant Thornton LLP. All rights reserved. Page 42 14
  • 16. Section 409ADeferred Compensation Noncompliance • Immediate Income Inclusion • triggers immediate income inclusion of all amounts deferred under plans of same type • 20% Additional Tax On Plan Balance • Additional “Interest Tax” –Underpayment Rate Plus 1% • California Doubles Federal Taxes • Fed + CA = >80% tax rate© Grant Thornton LLP. All rights reserved. Page 43Section 409A - Coverage • Supplemental Executive • Nonqualified Defined Retirement Plans Contribution and Defined Benefit • Severance Arrangements Plans • Stock Option Plans • Phantom Stock Plans • Split-Dollar Life Insurance • 401(k) “Wrap” Plans • 457(f) Plans • Excess Benefit Plans • Commission Arrangements • Bonus & Incentive Plans • Medical or Other • Employment Agreements Reimbursements • Change in Control • Arrangements including Tax Agreements Gross-Up© Grant Thornton LLP. All rights reserved. Page 44Other topics• Additional topics may be added if new issues emerge before the November presentations.• What are your questions?© Grant Thornton LLP. All rights reserved. Page 45 15
  • 17. Richard GarrisonSenior Vice President, Director of Tax Accounting andComplianceJ. Henry Oehmann, IIIDirector – National Executive Compensation ServicesAndy Gibson, BDO USA, LLPPartner – National Partner in Charge Compensationand Benefits and Expatriate TaxT: 919.881.2773E: Henry.Oehmann@gt.com© Grant Thornton LLP. All rights reserved. 16

×