S&S – 12/15/2014
Executive Compensation and Corporate Governance
Spring 2015
Kenneth J. Laverriere
klaverriere@shearman.com
I.
Introduction
In this class, we will set the framework for our examination of executive compensation at public
companies. We will identify the general body of law that regulates pay and pay disclosure and
distinguish between the main types of compensation: base, bonus, long-term incentive
compensation, benefits and perquisites. We will discuss key concepts in designing
compensation, such as vesting, performance metrics, deferral and form and currency of payment.
We will explore the basic types of compensation contracts, including employment agreements,
plan documents, award agreements and severance and retention arrangements. We will also
identify the key constituents in the compensation process: boards of directors and compensation
committees; management and the related human resource and compensation officers; investors
and their advisers. We will also describe the key regulatory and self-regulatory authorities that
impact pay or pay disclosure in the U.S.
Materials:
II.
1.
Shearman & Sterling 2014 General Governance Practices Survey and
Compensation Governance Survey available at
http://corpgov.shearman.com/archives
2.
Compensation Committee Guide available at
http://www.wlrk.com/files/2014/CompensationCommitteeGuide.pdf
3.
“Primer on Executive Compensation” (June 2012), Fox Rothschild LLP
available at
http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=15032
386190
4.
Coca-Cola Company Proxy Statement, DEF 14A (March 7, 2014)
available at
http://www.sec.gov/Archives/edgar/data/21344/000130817914000049/lco
cacola2014_def14a.pdf
Pay Governance at Public Companies
In the next two classes, we will focus on the governance requirements applicable to those who
set pay at public companies. We will examine the SEC, NYSE and NASDAQ requirements for
compensation committees. We will explore the concept of “director independence” from the
1
perspective of the rules of the various exchanges but also under Section 162(m) of the Internal
Revenue Code and Rule 16b-3 under the Securities Exchange Act and as interpreted by the
courts. We will also separately examine the independence requirements of ISS and other
shareholder groups. We will explore the governance standards applicable under Delaware and
New York law to directors in setting pay. We will consider the SEC and exchange requirements
applicable to advisers to the Compensation Committee and the SEC disclosure requirements
applicable to adviser independence and conflict of interests. Finally, we will consider when
shareholder approval of compensation is required under various tax and exchange listing rules.
Lecture 1 – Materials:
1.
NYSE Listed Company Manual 303A.02 and 312.00 available at
http://nysemanual.nyse.com/LCMTools/PlatformViewer.asp?selectednode
=chp_1_4_3&manual=%2Flcm%2Fsections%2Flcm-sections%2F
2.
NASDAQ Stock Market Rules 5605 and 5635 available at
http://nasdaq.cchwallstreet.com/NASDAQTools/PlatformViewer.asp?sele
ctednode=chp%5F1%5F1%5F4%5F3&manual=%2Fnasdaq%2Fmain%2F
nasdaq%2Dequityrules%2F
3.
17 CFR 240.16b-3 available at
http://www.law.cornell.edu/cfr/text/17/240.16b-3
4.
26 CFR 1.162-27 available at
http://www.law.cornell.edu/cfr/text/26/1.162-27
5.
17 CFR 229.407 available at
http://www.law.cornell.edu/cfr/text/17/229.407
6.
Release Nos. 33-9330; 34-67220 (June 20, 2012), Securities and Exchange
Commission available at http://www.sec.gov/rules/final/2012/33-9330.pdf
Lecture 2 – Materials:
1.
2015 ISS and Glass Lewis proxy voting guidelines available at
http://www.issgovernance.com/file/policy/2015USPolicyUpdates.pdf
http://www.glasslewis.com/assets/uploads/2013/12/2015_GUIDELINES_
United_States.pdf
2.
In re Oracle Corp. Derivative Litigation, 824 A.2nd 917 (Del. Ch. 2003)
available at http://www.law.illinois.edu/aviram/Oracle.pdf
3.
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 2004 WL
739152 (Del. Supr. 2004) available at
http://courts.delaware.gov/opinions/download.aspx?ID=43320
2
III.
4.
In re The Walt Disney Co. Derivative Litigation, 825 A.2d 275 (Del. Ch.
2003) available at
http://courts.delaware.gov/opinions/download.aspx?ID=77400
5.
PepsiCo, Inc. Proxy Statement, DEF 14A (March 21, 2014) available at
http://www.sec.gov/Archives/edgar/data/77476/000119312514110415/d61
8133ddef14a.htm
Say-on-Pay
We will dedicate this class entirely to the concept of say-on pay, as it has been proposed and is
currently implemented in the U.S. for public companies, and we examine the consequences of
losing a non-binding say-on-pay vote for public companies and their directors. We will contrast
the U.S. style of say-on-pay with shareholder voting requirement in the EU and in the UK. We
will also explore the role that shareholder advisory groups are having in regulating pay in the
U.S. and the ways that public companies interact with investors within the confines of the SEC’s
disclosure rules. We will also distinguish shareholder initiatives for which a vote is required and
those instances where tax and other rules require a vote on compensation arrangements.
Materials:
1.
Section 951, Dodd-Frank Wall Street Reform and Consumer Protection
Act available at
https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf
2.
Release No. 33-9178 (January 25, 2011), Securities and Exchange
Commission available at http://www.sec.gov/rules/final/2011/33-9178.pdf
3.
Section 439, The Companies Act 2006 (United Kingdom) available at
http://www.legislation.gov.uk/ukpga/2006/46; Part 6, Sections 79—82,
The Enterprise and Regulatory Reform Act 2013 (United Kingdom)
available at
http://www.legislation.gov.uk/ukpga/2013/24/pdfs/ukpga_20130024_en.p
df
4.
High Level Group of Company Law Experts, Final Report (2002) p.65
available at
http://ec.europa.eu/internal_market/company/docs/modern/report_en.pdf
5.
“SEC Issues Proposed Rules on Say-on-Pay Voting and Disclosures”
(October 26, 2010), Shearman & Sterling LLP available at
http://www.shearman.com/~/media/Files/NewsInsights/Publications/2010/
10/SEC-Issues-Proposed-Rules-on-SayonPay-Voting-and__/Files/Viewfull-memo-SEC-Issues-Proposed-Rules-onSayo__/FileAttachment/ECEB102610SECIssuesProposedRulesonSayonP
ayVoting.pdf
3
IV.
6.
“Final SEC Rules on Say-on-Pay and Disclosures” (January 27, 2011),
Shearman & Sterling LLP available at
http://www.shearman.com/~/media/Files/NewsInsights/Publications/2011/
01/Final-SEC-Rules-on-SayonPay-Voting-and-Disclosures/Files/Viewfull-memo-Final-SEC-Rules-on-SayonPayVotin__/FileAttachment/ECEB012711FinalSECRulesonSayonPayVotinga
ndDisclo__.pdf
7.
“SEC Adopts ‘Say on Pay’ Rules” (February 3, 2011), Compensia
available at
http://www.compensia.com/tpa_020311_sec_adopts_sayonpayrules.html
8.
Semler Brossy 2014 Say on Pay Results (September 10, 2014) available at
http://www.semlerbrossy.com/wp-content/uploads/SBCG-2014-Say-onPay-Report-2014-09-10.pdf
Reporting and Disclosure
Over the next three classes, we will unpack the SEC’s reporting and disclosure requirements
applicable to executive pay. We will start by reviewing the SEC’s integrated disclosure rules.
We will then distinguish between reporting and disclosure. We will explore the concept of
“named executive officers” (NEOs) and consider how these NEOs are identified for reporting
and disclosure purposes. We will then consider various aspects of the reporting of compensation
in proxy statements and other periodic filings: the compensation discussion & analysis (CD&A);
the summary compensation table (SCT); the reporting of performance awards; pay equity and
risk disclosure; and the reporting of severance and termination payments. We will then look at
the SEC’s current reporting requirements as applied to the onboarding and termination of senior
executives and changes in executive pay. We will conclude by examining when executive pay
arrangements constitute material contracts that must be filed with the SEC.
Materials:
1.
17 CFR 229.401 available at
http://www.law.cornell.edu/cfr/text/17/229.401
2.
17 CFR 229.402 available at
http://www.law.cornell.edu/cfr/text/17/229.402
3.
17 CFR 229.404 available at
http://www.law.cornell.edu/cfr/text/17/229.404
4.
17 CFR 229.601 available at
http://www.law.cornell.edu/cfr/text/17/229.601
4
V.
5.
17 CFR 229.201(d)–(e) available at
http://www.law.cornell.edu/cfr/text/17/229.201
6.
Form 8-K available at http://www.sec.gov/about/forms/form8-k.pdf
Equity Securities and Registration
In this class we will examine the use of equity securities as a form of compensation and examine
when equity compensation is subject to registration under the Securities Act of 1933, as
amended. We will explore the SEC’s “no sale” doctrine and discuss and contrast various
approaches to compliance with the Securities Act of 1933 when securities are used as a form of
compensation: private placements and Regulation D; Rule 701; and Form S-8. We will end by
briefly considering state “blue sky” requirements that may apply when securities are used for
compensation purposes.
Materials:
VI.
1.
Form S-8 available at https://www.sec.gov/about/forms/forms-8.pdf
2.
17 CFR 230.144 available at
http://www.law.cornell.edu/cfr/text/17/230.144
3.
17 CFR 230.701 available at
http://www.law.cornell.edu/cfr/text/17/230.701
4.
17 CFR 230.500 et seq. (“Regulation D”) available at
http://www.law.cornell.edu/cfr/text/17/230.500
5.
Section 4(a)(2), Securities Act of 1933 available at
https://www.sec.gov/about/laws/sa33.pdf
Taxation of Compensation
For the next three classes, we will delve into the primary federal tax provisions that apply to
executive compensation and consider whether the tax code is an effective vehicle for setting
federal compensation policy and regulating pay. We will begin with a review of the basic rules
applicable to the taxation of compensation and the deduction of pay by employer corporations
and then will examine in detail the following: Constructive receipt and the economic benefit
doctrine; Section 83 of the IRC, as it relates to the taxation of property transferred in connection
with the performance of services; Section 162(m) of the IRC and its application to annual
compensation in excess of $1 million; Section 409A of the IRC, as it relates to the deferral of
compensation by service providers and service recipients; and Section 280G of the IRC, as it
taxes so-called “golden parachute” payments to disqualified persons in connection with a change
in control.
Materials:
5
VII.
1.
26 USC § 83, and regulations thereunder available at
http://www.law.cornell.edu/uscode/text/26/83
2.
26 USC § 280G, and regulations thereunder available at
http://www.law.cornell.edu/uscode/text/26/280G
3.
26 USC § 409A, and regulations thereunder available at
http://www.law.cornell.edu/uscode/text/26/409A
Financial Institutions
In this class we will explore how the compensation at financial institutions has been regulated
following the recession of 2008-2009. We will examine the rules of the Federal Reserve related
to current and deferred compensation and compare and contrast the comparable rules of in the
EU and the UK.
Materials:
1.
12 CFR Part 236, Proposed Rule on Incentive Compensation available at
http://www.gpo.gov/fdsys/pkg/FR-2011-04-14/pdf/2011-7937.pdf
2.
Capital Requirements Directive (CRD) IV. Summary available at
http://www.fca.org.uk/firms/markets/international-markets/eu/crd-iv
3.
Federal Register Vol. 75, No. 122 available at
http://www.gpo.gov/fdsys/pkg/FR-2010-06-25/pdf/2010-15435.pdf
4.
Board of Governors of the Federal Reserve System “Incentive
Compensation Practices: A Report on the Horizontal Review of Practices
at Large Banking Organizations available at
http://www.federalreserve.gov/publications/other-reports/files/incentivecompensation-practices-report-201110.pdf
VIII. Claw backs
In this class, we will examine the application and structuring of compensation claw backs. We
will begin the discussion with an examination of the claw back provisions mandated by
Sarbanes-Oxley and then will explore the alternatives for structuring an effective claw back
program.
Materials:
1.
“Financial Reform Act Requires Compensation Claw backs” (June 22,
2010), Shearman & Sterling LLP available at
http://www.shearman.com/en/newsinsights/publications/2010/07/financial
-reform-act-requires-compensation-clawb__
6
IX.
2.
Section 304, Sarbanes Oxley Act of 2002 available at
https://www.sec.gov/about/laws/soa2002.pdf
3.
ISS and Glass Lewis Guidelines noted above
4.
Equilar 2013 Clawback Policy Report available at
http://info.equilar.com/rs/equilar/images/equilar-2013-clawbacks-policyreport.pdf?mkt_tok=3RkMMJWWfF9wsRoisqjPZKXonjHpfsX54%2Bgt
W6C%2FlMI%2F0ER3fOvrPUfGjI4FScpjI%2BSLDwEYGJlv6SgFS7fF
Malt0LgFXBY%3D
5.
Executive Compensation: Clawbacks 2013 Proxy Disclosure Study (April
2014), PricewaterhouseCoopers available at
http://www.pwc.com/en_US/us/hr-management/publications/assets/pwcclawbacks-2013-proxy-disclosure-study.pdf
Institutional Investors and Problematic Pay Practices
In this class we will identify those compensation practices identified as problematic by ISS and
other investor advisers, such as tax gross-ups, excessive severance payments, single trigger
vesting arrangements, multi-year employment contracts and hedging and pledging of employer
stock, and identify the consequences for a public company and its board of directors of utilizing
these problematic approached to pay.
Materials:
X.
1.
ISS and Glass Lewis Guidelines noted above
2.
Proxy voting guidelines for U.S. securities (April 2014) BlackRock
available at http://www.blackrock.com/corporate/en-us/literature/factsheet/blk-responsible-investment-guidelines-us.pdf
3.
Fidelity Funds’ Proxy Voting Guidelines (November 2013) Fidelity
available at
http://personal.fidelity.com/myfidelity/InsideFidelity/InvestExpertise/gove
rnance.shtml#fulltext
Synthesis
In the final class, we will review a number of examples of compensation programs in an attempt
to synthesize the governance, disclosure and tax principles that impact the design,
implementation and efficacy of these arrangements. We will also explore the pros and cons of
compensation regulation at the federal level.
Materials: To be provided case studies.
7
XI.
In-class guidelines and grading
A. Grading: 75% final examination; 25% class participation
B. Textbook: Required readings are generally available from the internet and are listed in
the syllabus
C. Class format: Lecture and discussion
D. Use of cellphones, Blackberries, pagers: Not permitted
E. Use of computers, IPADs, and equivalent: Permitted solely to access course materials and
to take notes
F. Texting in class: Not permitted
G. Recording or videotaping of lectures: Not permitted
8