Selected Recent Developments in Executive Compensation

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Employment Agreements (Including Severance, Parachute, Clawback, Noncompete and §409A Issues) by Charles C. Shulman, Tax Management Compensation Planning Journal 9-2-2016 at Employment agreements, which are very common for executives and senior management, raise a number of issues relating to terms of employment, severance on termination, change in control, excess parachute tax under Internal Revenue Code §280G, noncompete provisions, clawback provisions, SEC disclosure requirements, and restrictions on nonqualified deferred compensation under §409A.  The terms of employment agreements and severance arrangements are of particular relevance in corporate transactions. Executives may be terminated as a result of a transaction, and the general severance provisions in the employment agreements may be triggered. Severance provisions are often triggered on termination of employment only if there is also a change in control of the employer, or the amount of severance may be more generous if the termination occurs after a change in control. Some agreements may allow an employee to quit for any reason and still receive severance, if the quitting is in connection with a change in control. Employment and change in control agreements often provide that options will vest on a change in control typically even without a termination of employment.

Notice 2010-80 - Relief With Respect to 409A Correction Methods and Payment Conditioned on Executing ReleaseSee EB/EC Law Update 12/06/10 regarding Notice 2010-80, which: provides relief for severance conditioned on terminated employee signing release, in that payment can be set within, e.g., 60 (or 90) days and if such payment period stradles two years the payment must be made in the second year.  There is transition relief for correcting this documentary error through Dec. 31, 2012; and also provides relief regarding certain linked plans and stock rights are included in documentary correction, information and reporting requirements for operational corrections, and information and reporting requirements for documentary corrections.


Memo re executive compensation provisions of Dodd-Frank Wall Street Reform And Consumer Protection Act Of 2010 , Dodd-Frank Act (July 21, 2010) contains say-on-pay and other shareholder-accountability executive compensation proxy rules.  There must be a nonbinding say-on-pay vote every 1, 2 or 3 years.  There must also be non-binding say-on-golden parachutes in a transaction proxy.  These votes effective on the first shareholder meeting occurring on or after January 21, 2011 are effective on the first shareholder meeting occurring on or after January 21, 2011.  There are proposed regulations on say on pay and say on golden parachute.  Listing exchanges must provide for more stringent recoupment/clawback for current or former executive officers of incentive compensation paid during the past three years based on erroneous data if the company is required to restate the financials.  Stock exchanges shall require that listed companies have compensation committee members who are Board members and are also “independent”. A compensation consultant or other advisor may be selected only after the compensation committee has taken into account relevant factors determining independence.  The compensation committee will be directly responsible for appointment, compensation and oversight of the work of the consultant or advisor. These provisions go into effect July 16, 2011.   The proxy must contain a policy regarding permissibility of employees or directors purchasing derivatives to hedge against equity grants. Under the Act  rules are to be issued by Jan. 17, 2011 requiring listed company proxies to disclose why CEO and Chairman are the same person or two separate people.


Roadmap to Employment And Change in Control Agreements (Customary Provisions, Noncompete Issues, Excess Parachute Tax and §409A Rules),  38 Tax Management Compensation Planning Journal 151 (June 4, 2010)


Summary of 2009  Enhanced Exec Comp Proxy Disclosure Changes - 1/4/2010 Summary of 12/23/2009 Amendments to SEC rules - Proxy Disclosure and Solicitation Enhancements - amending the proxy disclosure rules (1) to require enhanced disclosure regarding broad-based compensation policies, director qualifications, leadership structure and compensation consultant fees and (2) to record the value of stock awards in the summary comp table, etc. (word doc).  See also CCS BNA Summary of Proposed Enhanced Exec Comp Proxy Disclosure Changes


Update re New TARP Executive Compensation Developments - EB/EC Update 7/9/09 - Items recently issued re exec comp restrictions in Troubled Asset Relief Program (“TARP”): (i) IRS notice providing that a TARP equity acquisition is generally not a Code § 409A change in control; (ii) Treasury Interim Final Rules on TARP Standards for Executive Compensation and Corporate Governance; and (iii) SEC rule regarding a nonbinding say-on-pay requirement for TARP recipient companies.

Update re 409A Documentary Corrections Prior to Year of Vesting - EB/EC Update 7/4/09 - Way to correct even form failures if correction takes place before the year in which the deferred compensation vests. Proposed regulations re calculation of amount includible in income provide that there will only be tax and penalties in the year of failure, and only if the deferred amounts will have vested prior to the end of such year.  Thus, if deferred amounts are unvested, and a deferral election acceleration that does not comply with § 409A occurs in such year but the plan complies in the year in which the amounts vest, there will be no § 409A tax.

Form 8-K Developments - Update - EB/EC Law Update 5/21/09 - SEC Form 8-K required within 4 business days of material events. NYSE eliminates the need for press releases if information made public in form 8-K or otherwise; minor revisions to Form 8-K C&DI's and to Regulation S-K C&DI's.

Summary of AARA 2009 Exec Comp Changes to TARP Provisions - EB/EC Law Update3/7/09 - ARRA 2009 Revisions to Executive Compensation Provisions of EESA 2008, including: $500,00 limit for top 5 executives, bonuses and incentive compensation to top 25 employees only allowed for certain restricted stock, clawback of bonuses and incentive compensation of top 25 employees where payments due to materially inaccurate financial statements, no severance to top 10 employees, independent compensation committee required, and nonbinding say on pay vote.

Summary of Exec Comp EESA (TARP) 2008 Provisions - Summary revised 11/6/08 - Executive Compensation provisions in Emergency Economic Stabilization Act of 2008 - Limitations on compensation of senior executives of financial institutions that benefit: (i) where Treasury makes direct purchases from the financial institutions of troubled assets - broad executive compensation limits on incentives for top 5 executives to take excessive risk, clawback for financial irregularities and prohibition of golden parachute payments; (ii) where $300 million of financial institution’s troubled assets purchased in auction - no new golden parachutes; and (iii) additional restrictions where troubled assets in excess of $300 million are acquired by auction [has not been relevant to date].   Exec Comp provisions in Extenders and Alternative Minimum Tax Relief Act of 2008 - taxation of deferred compensation from certain tax-indifferent entities under IRC § 457A.

Memo re Notice 2008-113 - Correction Procedures for 409A - EB/EC 2/28/09 summary of Notice 2008-113, which provides relief from Code § 409A operational failures by providing certain methods for correcting such failures, provided the corrections are made in the year of failure or in certain cases in the first or second year following the year of failure. These are self-correction methods and do not require individual IRS approval. The notice also provides transitional relief for certain operational failures occurring before 2008.

Memo - Prop Regs Re Calc of Amounts Taxed Under 409A;  Notice re Info Reporting and Withholding - EB/EC 1/6/09 summary of Dec. ’08 proposed regulations regarding calculation of amounts includible in income and additional 20% tax under 409A (§ 1.409a-4), which covers: (i) amounts includible in income for year of 409A failure; (ii) included in taxable year of failure based on amount deferred and vested at end of year; (iii) amounts nonvested for full year(s) of violation escape immediate taxation; (iv) general definition of total amount deferred – present value of future payments (for non-account balance plans); (v) where amount is not knowable at end of year; (vi) alternative times or forms of payment; (vii) payment triggers; (viii) amounts that may qualify as short-term deferrals; (ix) definition of total amount deferred for non-account balance plans; (x) anti-abuse provision; (xi) additional 20% tax; (xii) premium interest tax; (xiii) payments of deferred compensation in years after year included in income under § 409A; and (xiv) permanent forfeiture of deferred amount previously included in income.   Also, Notice 2008-115 (Dec. ’08) dealing with information reporting and withholding for deferred compensation plans under § 409A, and extending the transition period of earlier IRS notices during which § 409A compliant plans need not provide information reporting to after the above regulations are finalized.


Code § 409A Outline (updated 7/6/09) - CCS detailed outline of Code § 409A and regs issued 4/07, which impose new rules on nonqualified deferred compensation arrangements. All arrangements that are subject to the new rules had to be in full compliance by Dec. 31, 2008. Outline discusses the types of arrangements that are potentially subject to § 409A and the requirements that must be satisfied in order to be in full compliance with the Final Regulations.

409A 2007 Final Regulations - Fed Reg Version - Final 409A regulations, 4/17/07, 73 F.R. 19234, plus table of contents, and hand-marked corrections from 7/13/07 and 7/31/07, as well as original release page #s.

Outline of S-K Exec Comp Disclosure Rules - CCS outline (last updated 8/4/08) of Final executive compensation disclosure rules adopted 7/26/06 - SEC Release 33-8732A, Executive Compensation and Related Person Disclosure, (Sept. 8, 2006), as amended 12-29-06 - amends 1992 Item 402 of S-K Rules, with CD&A, summary comp table, grants of plan-based awards table, outstanding equity awards at fiscal year-end table, option exercise and stock vested table, pension benefits table, nonqualified defined contribution and other deferred compensation plans table, potential payments upon termination or change of control, director compensation table, etc.

SEC 2006 Exec Comp S-K Proxy Disclosure Rules - Fed Reg - 7/26/06 - SEC Release 33-8732A, 71 F.R. 53158 (Sept. 8, 2006) (Adopting Release) and amendments from Release 33-8765, Executive Compensation Disclosure, 12-22-06, printed in 71 F.R. 78338 (Dec. 29, 2006) (Amending Release).