In the constantly evolving regulatory, litigation, and shareholder advisory environment for the executive compensation field, it’s difficult to keep up with all of the latest requirements, threats, and best practices. Partners Michael Falk and Mike Melbinger led an interactive webinar focused on the critical items that you need to add to your year-end and proxy season “to do” lists.

1. Preparing for the 2017 Proxy Season
November 10, 2016
Presented by: Michael Falk & Mike Melbinger
Brought to you by Winston & Strawn’s Employee Benefits and
Executive Compensation Practice

2. Today’s eLunch Presenters
Michael Melbinger
Employee Benefits and Executive
Compensation Practice
Chicago
mmelbinger@winston.com
Michael Falk
Employee Benefits and Executive
Compensation Practice
Chicago
mfalk@winston.com
2

3. Overview: Preparing for the 2017 Proxy
Season
1. Shareholder Approval Needed
2. Non-Employee Director Compensation Best Practices and Limits
3. Review ISS/Glass Lewis Report and SSOP Voting Results From
2016
4. Shareholder Say On Pay
5. Shareholder Say On Pay Frequency
6. Performance Measure Issues
7. Defensive Proxy Statement Drafting
8. Shareholder Proposals on Compensation
9. Preparing for CEO Pay Ratio Disclosure
10. General Annual Compensation Committee Review
3

4. Shareholder Approval of LTIP/Stock or Cash
Incentive Plan Needed?

5. Shareholder Approval Needed?
• Determine whether the company needs to amend its LTIP/Stock
or Cash Incentive Plans to satisfy the periodic shareholder
approval requirements (generally, every five years) of Code
Section 162(m) or to add shares to the authorized share pool
• Note: as SSOP approval has become routine, proxy advisory firms
and institutional shareholders seem to have shifted their attention back
to votes on stock plans
• However, in 2015 and 2016, only one equity plan failed to achieve
majority shareholder approval in each year, among S&P 1500
companies*
*Source: edwardhauder.com
5

6. Shareholder Approval
• How many shares will the company seek to add? What is the ISS
share value transfer (SVT) calculation? (discuss with
compensation consultant)
• Analyze the stock plan under ISS’s Equity Plan Scorecard
• Review plan document for protective provisions and best
practices
• Register on ISS Data Verification Portal to review ISS’s data on
the new or amended incentive stock plan
6

7. Non-Employee Director Compensation

8. Non-Employee Director Compensation Issues
• Litigation Surge
• Committee Best Practices
• October study reported that total board compensation increased
6%, which is the largest single-year increase seen in director pay
in the past four years
• Median total direct compensation increased from $265,000 to
$282,000 among the 100 largest companies based on 2016 proxy
statements
*Source: Compensation Advisory Partners
8

9. Director Pay Litigation: How Lawsuits Arise
• Shareholder derivative suits: plaintiffs sue a company “on
behalf of shareholders”
• Demand requirement under Delaware law
• The demand requirement is excused if:
• A majority of the board was “interested” in the allegedly wrong
decision or lacked independence, or
• The decision was not the product of a valid exercise of business
judgment
9

10. Director Pay Litigation: Significant Cases
• 2014
• Seinfeld v. Slager [Republic Services]*
• 2015
• Calma v. Templeton et al. [Citrix Systems]
• Binning v. Ogunlesi [Goldman Sachs]
• Friedman v. Dolan [Cablevision]
• In re Cornerstone Therapeutics Inc.
• 2016
• Espinoza v. Zuckerberg et al. [Facebook]*
• Cambridge Retirement Sys. v. Bosnjak [Unilife]*
• Skorski v. Chipotle Mexican Grill, Inc.
*Year refers to settlement date 10

11. How Can Boards Address These Issues
Proactively?
• There are at least three relatively simple ways that a board can
reduce the risk of a lawsuit over director pay:
1. Place limits on both the cash and the equity components of its
compensation–or an aggregate limit–and have these limits
approved by shareholders, generally as part of the larger stock
incentive plan
2. Submit the board’s compensation package to shareholders for
approval, either separately or as part of the larger stock incentive
plan
3. Embrace the new best practices in board compensation and gain
some protection that way
11

12. Non-Employee Director Compensation Issues
• Committee Best Practices
a. Independent compensation consultant review, including
benchmarking board members’ compensation against the
company’s peer group
b. Enhance the compensation committee charter (or equivalent
document)
c. Enhance proxy statement disclosure on the process for setting
board compensation
12

13. Review ISS/Glass Lewis Report and SSOP
Voting Results From 2016

14. Proxy Advisors – Overview
• Review reports and SSOP voting results from 2016
• ISS Policies – Overview
• Proxy Voting Policies (expected mid-November)
• Equity Plan Scorecard (potential tweaks for 2017)
• Corporate Governance Ratings – QualityScore (formerly QuickScore)
• Glass Lewis (http://www.glasslewis.com/wp-content/uploads/2016/01/2016_Guidelines_United_States.pdf)
• Clarification of factors analyzing “one-off” awards
• Clarification of factors analyzing equity compensation plans
14

15. Proxy Advisors – ISS Updates – QualityScore
• ISS QuickScore 3.0 is now ISS QualityScore
• QualityScore Data Verification window open until
November 11th at 7 pm CST
• ISS selectively updated QualityScore factor weighting and
answer scoring
• ISS announced one new compensation factor for the
QualityScore*
• Does the company employ at least one metric that compares its
performance to a benchmark or peer group (relative performance)?
15

16. Other Changes to QualityScore
Board Structure:
• What proportion of non-executive directors has been on the board less than six years?
• Does the board have any mechanisms to encourage director refreshment? (non-scored)
• Does the company disclose the existence of a formal CEO and key executive officer succession
plan?
• What is the proportion of women on the board?
• Has the board adequately responded to low support for a management proposal?
Shareholder Rights and Takeover Defenses:
• Does the company have a fee shifting provision?
• Does the company have an exclusive venue/forum provision?
• Does the company have a representative claim limitation or other significant litigation rights
limitations?
• Can the board materially modify the company’s capital structure without shareholder approval?
• What is the ownership threshold for proxy access? (now scored, previously incorporated in non-
scored proxy access factor)
• What is the ownership duration threshold for proxy access? (now scored, previously incorporated in
non-scored proxy access factor)
• What is the cap on shareholder nominees to fill board seats from proxy access? (now scored,
previously incorporated in non-scored proxy access factor)
• What is the aggregation limit on shareholders to form a nominating group for proxy access? (now
scored, previously incorporated in non-scored proxy access factor)
Audit and Risk Oversight:
• What is the tenure of the external auditor?
16

17. ISS Updates to 2017 Pay-for-Performance
Methodology – November 8, 2016
• Generally, the changes apply to proxy advisory reports for annual
meetings on or after February 1, 2017. However, the potentially
most significant change will not fully apply in 2017.
• For companies subject to ISS’s quantitative pay-for-performance
screens, ISS will display three-year performance not only on TSR
but also on six financial metrics relative to its ISS peer group:
• Return on equity
• Return on assets
• Return on invested capital
• Revenue growth
• Growth in earnings before interest, taxes, depreciation, and
amortization
• Growth in cash flow from operations
17

18. ISS Updates to 2017 Pay-for-Performance
Methodology – November 8, 2016
• ISS will compute relative three-year measures for each of the
metrics, compared to the ISS selected peer group, compare
performance on these metrics with relative compensation levels,
and present the results, including an overall weighted financial
performance metric, in a new standardized table
• The weight for each metric will vary by industry
• Using data from S&P Compustat
• However, this new assessment will not be a component of ISS’s
quantitative pay-for-performance screening for 2017
• ISS states that it “may” use the new relative financial performance
information in its qualitative assessment of a company’s pay-for-
performance alignment in 2017, and its consideration may
mitigate or heighten identified pay-for-performance concerns
18

19. ISS Updates to 2017 Pay-for-Performance
Methodology (cont.)
• ISS welcomes companies to submit the peer groups they used in
setting compensation for the most recently completed fiscal year
(this means the 2016 peer group, not the 2017 peer group)
• Provides opportunity for companies that have made changes to their
compensation peer group in 2016 to update ISS
• The window for submitting these peer groups to ISS is November
28 – December 9
• Peer submissions must be made through ICS’s Governance Analytics
platform
• Only representatives of the company may log into the Governance
Analytics platform and complete the peer submission process
19

20. Proxy Advisors – ISS Equity Plan Scorecard
1
Maximum total score of 100 (53 is passing score for 2016, subject to override for problematic features like repricing or
liberal CiC definition)
2
Non-Russell 3000 model only includes Burn Rate and Duration factors
3
Special Cases (Russell 3000/S&P 500) include all Grant Practices factors except Burn Rate and Duration
4
Special Cases (Non-Russell) does not include any Grant Practices factors
*Formerly IPO/Bankruptcy
20
EPSC Model Plan Cost Plan Features Grant Practices
S&P 500 45 20 35
Russell 3000 (excluding
S&P 500)
45 20 35
Non-Russell 3000 45 30 25
2
Special Cases (Russell
3000/S&P 500)*
50 35 15
3
Special Cases (Non-
Russell)*
60 40 0
4
Maximum scores by EPSC Model and Pillars
1

21. Proxy Advisors – ISS Equity Plan Scorecard
21
Plan Cost
(45 pts)
Plan Features (20/30 pts) Grant Practices (35/25 pts)
SVT – new &
available shares
Automatic CiC vesting 3-yr average burn rate
SVT – new &
available shares
& outstanding
grants
Liberal share recycling (FV
and/or options)
Estimated plan duration
Board discretion to
accelerate vesting
% CEO equity with performance
conditions
Minimum 1-yr vesting for
one award type
CEO’s most recent grant
vesting period
Clawback policy for equity
awards
Post vesting/exercise holding
req.
General Factors in Each Pillar

22. Proxy Advisors – ISS Equity Plan Scorecard
• In 2016, 662 of the 953 equity plans received a “FOR” vote
recommendation from ISS*
• 291 plans failed to meet the threshold score and received an
“AGAINST” recommendation:
• 196 had excessive plan cost
• 84 failed due to excessive plan cost and an overriding factor
• 8% of plans permitted repricing**
• 8% of plans permitted cash buyouts**
• 4% of plans had a liberal change in control risk**
• 12 had independence issues with the compensation committee**
• 5 had a pay-for-performance disconnect**
*Reflects S&P 500, Russell 300, and Non-Russell companies
**Source: ISS 2016: Proxy Season Review – Compensation, issued through September 22, 2016
22

23. Proxy Advisors – Glass Lewis Policies (2016)
• Review of “one-off” and “transitional” incentive grants on a case-by-case basis
• Thorough description required in proxy
• Explanation of necessity of awards
• Subject to future service and/or performance
• Clearly disclose and explain sign-on arrangements or “make-whole” payments
• Problematic features affecting say on pay vote recommendation:
• Inappropriate peer group and/or benchmarking issues
• Inadequate or no rationale for changes to peer groups
• Egregious/excessive bonuses, equity awards or severance, incl. golden handshakes/parachutes
• Problematic contractual payments, such as guaranteed bonuses
• Targeting overall levels of compensation at higher than median without adequate justification
• Performance targets not sufficiently challenging, and/or providing for high potential payouts
• Performance targets lowered without justification
• Discretionary bonuses paid when short- or long-term incentive plan targets were not met
• Executive pay high relative to peers not justified by outstanding company performance
• Terms of long-term incentive plans are inappropriate
• Insufficient disclosure of compensation policies
23

24. Shareholder Say on Pay

25. Shareholder Say on Pay
• Depending on SSOP frequency (annual, biennial, or triennial) –
remember to include SSOP proposal in 2017 (as applicable)
• Disclose in the CD&A the extent to which the Compensation
Committee considered the results of previous SSOP votes (if only
to state that “we believe that the overwhelming shareholder
approval in 2016 further validates our executive compensation
program”). Determine whether the result of last year’s SSOP
resolution suggests or requires action. If a low SSOP vote results,
what changes can/did the company make, and which best
practices can the company adopt, to improve the likelihood of
shareholder approval this year?
26

26. Shareholder Say on Pay
• Disclose the current frequency of shareholder advisory votes on
executive compensation
• How was last year’s stock price performance? Are there other
performance metrics that may be useful to show? As noted
above, pay-for-performance “alignment” (in reality, stock price
performance) is becoming the leading area of scrutiny for proxy
advisory firms in SSOP voting
• What was last year’s CEO compensation compared to stock price
(may be unnecessary if stock price has gone up)?
27

27. Shareholder Say on Pay
• Review ISS 2016 Proxy Report. What is the Governance
QualityScore? Is ISS correctly summarizing the company’s
governance and compensation practices?
• Were there any changes to compensation plans or program that could
lead to ISS disapproval, e.g., addition of tax gross-ups of any kind or
single trigger change in control provisions
28

28. Say on Pay Results* and Strategies
• Overall passage rate for Say on Pay remains high (average
support of 91% in 2016)
• So far in 2016, 31 Russell 3000 companies failed to obtain
majority approval of their Say on Pay proposals
• 76% of companies have passed with over 90% approval in 2016
• ISS recommended a vote AGAINST Say on Pay at approximately
12% of companies it reviewed in 2016
• ISS effect?
• Average approval with ISS “for”: 94%
• Average approval with ISS “against”: 66%
*Data from Semler Brossy October 12, 2016 Say on Pay Report
29

29. Say on Pay Results and Strategies (cont.)
30
Voting Manager
Followed GL Against
Rec on SoP
Followed ISS
Against Rec on
SoP
BlackRock 15.30% 27.00%
Vanguard 20.10% 36.80%
State Street 24.20% 44.40%
FMR 26.00% 43.00%
Fidelity SelectCo 24.60% 43.00%
Proxy Advisor Influence Over Largest Fund Managers (2012-2016)*
*Proxy Insight, Measuring the Influence of Proxy Advisors—October 26, 2016

30. Say on Pay Results and Strategies (cont.)
• Usual reasons for failed Say on Pay votes:
• Pay and performance disconnect
• Rigor of performance goals
• Special awards or mega-grants
• Solid TSR and financial performance don’t insulate companies from scrutiny
(Chipotle)
• Non-performance-based equity
• Problematic pay practices
• Benchmarking practices
31

31. Say on Pay Results and Strategies (cont.)
• Typical company changes in response to Say on Pay
challenges:*
• Improving proxy disclosure
• Ensuring incentive plan goals are sufficiently challenging
• Shifting pay mix to performance-based
• Changing severance plan
• Increasing weight of performance shares
*NYSE Governance Services / Corporate Board Member / Pay Governance Fall 2013 Survey
32

32. Say on Pay Results and Strategies (cont.)
• Ensure that required and “best practices” disclosure and
procedures are included and followed
• Supporting statement for Say on Pay proposal (include current
frequency and when next vote will occur)
• Proxy statement and proxy card language – SEC guidance
• CD&A disclosure re: consideration of Say on Pay result
• Executive summary in CD&A
• Pay for performance emphasis in disclosure
• Proxy summaries
• “Good governance” highlights
• User-friendly format
• Telling your story
33

33. Shareholder Say on Pay Frequency

34. Shareholder Say on Pay Frequency
• Proxy must include a separate resolution subject to a non-binding
shareholder vote to determine whether future SSOP votes will
occur every one, two, or three years—no later than the annual
meeting of shareholders held in the sixth calendar year after the
immediately preceding vote on this matter (also sometimes
referred to as “Say When on Pay”)
• Companies that last provided this voting opportunity to shareholders in
2011 (which, in our experience, is most companies) must include the
advisory vote in their 2017 proxy
35

35. Performance Measure Issues

36. Non-GAAP
• On May 17, 2016, SEC published updated Non-GAAP Financial
Measures Compliance and Disclosure Interpretations (“CDIs”)
that present new and updated interpretations of the rules
regarding non-GAAP financial measures
• Regulation G requires extensive additional disclosure when non-
GAAP figures are used in filings
• Exception: In CD&A, disclosure of target levels that are non-
GAAP financial measures will not be subject to Regulation G -
but disclosure must be provided as to how the number is
calculated from the company’s audited financial statements
[reference to definition in Form 10-K]
• Use of or reference to non-GAAP financial measures in areas of
the proxy other than the CD&A may not qualify for this exemption
37

37. Accounting Rule Changes
• Amend LTIP/Stock Incentive Plan for accounting rules
changes:
• elimination of “extraordinary items”
• to provide more flexibility as to tax withholding on vesting or exercise of awards
38

38. Performance-Based Compensation Issues
• The SEC’s proposed Pay Versus Performance Disclosure rules
rely on relative TSR as the basis for reporting the relationship
between executive compensation and financial performance
• The rules likely will require companies to report their TSR and
compare it in easy-to-read chart form against the average TSR of
their peers. Committees that do not currently use relative TSR as
a metric in executive pay will need to explain in the CD&A why
the performance metric the Committee uses to determine
executive pay is preferable
• Committees should discuss this issue and at least consider
switching to TSR as a performance measure, despite its many
flaws
39

39. Defensive Proxy Statement Drafting

40. Defensive Proxy Statement Drafting
• Apply defensive proxy statement drafting to reduce risk of
strike suits
• Litigation “hot buttons” include:
• Section 162(m) disclosure and compliance, including new and
proposed regulations
• Item 405 disclosure as to late Form 4 filings
• Proposals requesting additional stock plan shares without adequate
disclosure of the dilutive effect
41

41. Compensation Litigation Update
• Stock Plan Proposal Litigation – don’t be a target
• Incentive Plan “Oops” Litigation – do your diligence
• Are your 162(m) performance goals due for SH approval? (every five
years)
• Dust off the plan document to review plan and award limits
• Review 162(m) disclosure in proxy statement
• Corporate formalities
• Monitor form S-8 share usage in all plans
• Section 16 – Review Filing Procedures, Approach, and
Disclosures
42

42. Proxy Disclosure Tools and Tips
• Do Your Homework
• Review company’s performance and model P4P connection
• Read prior year’s proxy advisor reports
• User Friendly Format
• Most institutional investors skip to specific sections of proxy when
reviewing it (CD&A executive summary and proxy statement summary,
especially) and no one reviews a hard copy
• Director independence, pay for performance alignment and disclosure
of performance measures ranked as most important subject matters
• Proxy Summaries (in CD&A and Proxy Introduction)
43

43. Proxy Disclosure Tools and Tips (cont.)
• “Good Governance” Highlights and, if applicable,
Shareholder Engagement Efforts
• Disclosure targeted to impact QualityScore and proxy advisory firm
reports and recommendations
• Telling Your Story Consistently, including “Pay for
Performance”
• "Anticipate” P4P disclosure rules?
• But remember “non-GAAP” rules (Reg S-K C&DI 118.08 and 118.09)
• Follow-Through on Commitments Made in Prior Disclosure
• SEC comment letter responses
• Say on Pay proposal disclosure
44

44. Shareholder Proposals on Compensation

45. Shareholder Proposals on Compensation
• Did shareholders make or threaten any proposals in 2015 or
2016?
• Does the company have vulnerability with respect to frequent
challenges?
• Consider whether to deploy (or adopt) shareholder engagement
policy
46

46. Shareholder Proposal Trends
• There were 57 compensation-related stockholder proposals in
2016,* with the most common being:
• Pro-rata Vesting of Equity Awards (n=15)
• Stock Retention/Holding Period (n=13)
• Adjust Metrics for Share Buybacks (n=6)
• Clawback of Incentive Payments (n=6)
• Average Support of Proposals, 2016
• Pro-Rata Vesting of Equity Awards (31.3%)
• Stock Retention/Holding Period (17.6%)
• Adjust Metrics for Share Buybacks (18.9%)
• Clawback of Incentive Payments (14.3%)
*Source: ISS United States 2016 Proxy Season Review – Compensation, September 22, 2016
47

47. Apple Shareholder Proposal for Multiple
Compensation Consultants
• The SEC’s Division of Corporation Finance issued a no-action response
to Apple regarding a shareholder proposal that the company sought to
exclude under Rule 14a, arguing that:
• The proposal was inherently vague (rule 14a-8(i)(3))
• The company lacked the power to implement (rule 14a-8(i)(6))
• The proposal relates to hiring—an ordinary business matter (rule 14a-8(i)(7))
• The proposal recommended that the company engage multiple outside
independent experts or resources from the general public to reform its
executive compensation principles and practices
• Corporation Finance found that (i) the proposal was not vague, (ii) the
company was capable of implementing the proposal, and (iii) a proposal
for multiple compensation consultants focuses on senior executive
compensation and should not be excluded
48

48. Preparing for CEO Pay Ratio Disclosure

49. Dodd-Frank Implementation Overview
50
Provision Proposed Final Effective Applicable To
Clawback July 1, 2015 TBD SEC – TBD; exchanges
have one year to adopt
rules following
effectiveness of SEC rule;
companies then have 60
days to adopt policy
All issuers listed on a
national exchange.
Covers compensation
based on financial info
for periods ending on
and after SEC
effectiveness
Pay for
Performance
Disclosure
April 29, 2015 TBD TBD; phase-in for number
of covered years in the
new table
Reporting companies
other than emerging
growth companies and
foreign private issuers
Hedging
Disclosure
February 9,
2015
TBD TBD Reporting companies
other than foreign
private issuers

50. CEO Pay Ratio
• The Dodd-Frank Act requires the SEC to adopt rules requiring
companies to disclose:
a. The median of the annual total compensation of all employees of
the company, excluding the CEO
b. The annual total compensation of the CEO of the company
c. The ratio of (a) to (b)
• In August 2015, the SEC issued final rules on the CEO pay ratio
rules
• Applies to compensation in fiscal years beginning on or after
January 1, 2017 (reported in 2018 proxy statement)
51

51. CEO Pay Ratio
• The new disclosure requirements do not apply to:
• Smaller reporting companies
• Foreign private issuers
• Multi-jurisdictional filers
• Emerging growth companies
• Registered investment companies
• Transition rule for newly public companies
52

52. CEO Pay Ratio – Final Rule
• Executives, board members, and the company’s HR and legal
functions should begin to study these rules
• The information the company will be required to collect for
compliance with the rules is extensive and the calculations are
likely to be complicated. Most companies will require a
combination of services from internal functions, such as HR and
legal, and external providers, including counsel, compensation
consultants, and accountants
• Some institutional investors and pension funds have expressed
the desire to see this disclosure before 2018
53

53. Calculating the Ratio: Suggested Action
Steps
• Briefing the Board and/or Compensation Committee on the pending
requirements of the final rules
• Organizing a team of internal professionals to comply with the rules
• Develop an action plan for compliance. Implementation of the new
rule will require certain decisions
1. Evaluate Alternative Methodologies for Identifying the Median
Employee. Each company may select a methodology to identify its
median employee based on the company’s facts and
circumstances, including total employee population, a statistical
sampling of that population, or other reasonable methods. For
example, a company could identify the median of its population or
sample using any consistently applied compensation measure from
compensation amounts reported in its payroll or tax records
54

54. Action Steps (cont.)
2. Consider Cost-of-Living Adjustments. The rules explicitly allow a
company to apply a cost-of-living adjustment to the compensation
measure it uses to identify the median employee
a) SEC acknowledged that differences in the underlying economic conditions of
certain countries in which companies operate would have an effect on the
compensation paid to employees in those jurisdictions, resulting in a statistic
that does not appropriately reflect the value of the compensation paid to
individuals in those countries
b) The rules give companies the option to adjust for these differences
c) The rules allow a company to make cost-of-living adjustments to the
compensation of its employees in jurisdictions other than that in which the CEO
resides
55

55. Action Steps (cont.)
3. Determination of Total Compensation. Assess your ability to
calculate precisely all items of compensation or whether reasonable
estimates may be appropriate for some elements. Companies may
use reasonable estimates when calculating any elements of the
annual total compensation for employees other than the CEO (with
disclosure)
4. Select a Testing Date. The rules allow a company to select a date
within the last three months of its last completed fiscal year on
which to determine the employee population for purposes of
identifying the median employee
a) The company would not need to count any individual who is not employed on
that date
b) Companies that employ temporary or seasonal workers should pay particular
attention to this rule
c) The rules permit the company to identify its median employee once every three
years
56

56. Action Steps (cont.)
5. Non-US Employees. The rules allow a company to exclude non-
U.S. employees from the determination of its median employee in
two circumstances:
a) Non-U.S. employees that are employed in a jurisdiction with data privacy laws
that make the company unable to comply with the rule without violating those
laws. The rules require a company to obtain a legal opinion on this issue
b) Up to 5% of the company’s non-U.S. employees, including any non-U.S.
employees excluded using the data privacy exemption. Under this exception, if a
company excludes any non-U.S. employee in a particular jurisdiction, it must
exclude all non-U.S. employees in that jurisdiction
57

57. Action Steps (cont.)
6. New Employees. The rules allow a company to exclude certain
new employees from its calculation
a) A company can exclude any employees obtained in a business combination or
acquisition for the fiscal year in which the transaction becomes effective
b) Companies may annualize the total compensation for a permanent employee
who did not work for the entire year, such as a new hire or an employee on an
unpaid leave of absence
c) Companies may not annualize the compensation of part-time, temporary, or
seasonal workers when calculating the required pay ratio
58

58. Action Steps (cont.)
7. Independent Contractors. Individuals employed by unaffiliated
third parties or independent contractors would not be considered
employees of the company. However, the rules do not appear to
allow companies to exclude many of the individuals that other areas
of the law would recognize as independent contractors
a) Companies should re-examine the workers they currently characterize as
independent contractors
8. Other Benefits Provided to Employees. The rules allow a
company to include personal benefits that aggregate less than
$10,000 and compensation under non-discriminatory benefit plans
such as health and retirement plans in calculating the annual total
compensation of the median employee as long as these items are
also included in calculating the CEO’s annual total compensation
59

59. Action Steps
9. Consider Tweaking the Structure of the Company’s Work
Force. The excluded employee rules, together with the ability to (i)
select a test date within the last three months of the last completed
fiscal year, and (ii) to identify the median employee once every
three years, appear to present a planning opportunity for many
companies
60

60. General Annual Compensation Committee
Review

61. Preparing for the 2017 Proxy Season
• Did the company or Board commit itself to any disclosure actions
for the next proxy, e.g., pursuant to SEC comments (tri-annual
review) or ISS badgering?
62

62. Compensation Risk Assessment
• Item 402(s) of Regulation S-K, issued by the SEC in December
2009, requires a company to assess whether its compensation
policies and practices for all employees, including non-executive
officers, are reasonably likely to have a material adverse effect on
the company
• In light of the recent media and political focus on incentive-based
compensation, this year might be a good time to review your
compensation risk assessment process and disclosure
• Most Compensation Committee Charters make that Committee
responsible for reviewing employee compensation programs as
they relate to risk management and risk-taking incentives
63

63. General Annual Compensation Committee
Review
1. Verify that the Compensation Committee has updated its
Committee Charter for changes in the law (Dodd-Frank Act and
new SEC rules), new NYSE and NASDAQ rules, and/or best
practices
2. Is the Committee actually performing all the duties listed under
its Charter? Does the Charter include all of the Committee’s
duties? Do the listed duties unnecessarily create fiduciary
liability risk?
3. Has the Committee added a Compensation Clawback Policy?
4. Has the Company provided any recent training or education for
the Committee members?
64

64. Other Hot Button Issues and Actions
• Review Section 16(a) reporting procedures and compliance in light of
SEC Enforcement Actions
• Review the non-disclosure, non-disparagement, and release
language in employment, severance, and change in control
agreements and plans in light of SEC Enforcement Actions
• Review Rule 10b5-1 Trading Plans
• Consider review and update of indemnification provisions and D&O
coverage for officers and directors
• Review whether Form S-8 and Prospectus are up-to-date and have
enough registered shares remaining for all plans (including 401(k)
and non-qualified retirement plans with company stock fund)?
[These are not requirements for the proxy, but matters that companies should
review annually]
65

65. Questions?

66. Thank You.
Michael Melbinger
Employee Benefits and Executive
Compensation Practice
Chicago
mmelbinger@winston.com
Michael Falk
Employee Benefits and Executive
Compensation Practice
Chicago
mfalk@winston.com
68