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New Regulatory Rules Require Careful Drafting of all Executive Compensation Agreements

New Regulatory Rules Require Careful Drafting of all Executive Compensation Agreements

By uriasc

Executive compensation agreements covering different aspects of recompense entail myriad rules and regulations.  The result of these intricacies and varying governing bodies can lead to unexpected consequences.

In “Avoiding Unknown (and Fatal) Foot Faults in Executive Compensation Arrangements,” a panel of experts spoke about new rules on executive compensation and tax issues relative to deferred compensation and severance.

Regulations in the Dodd-Frank Wall Street Reform Bill stipulated that shareholders of public companies be required to hold periodic, nonbinding votes on executive pay.  In 2011, the vast majority of Russell 3000 companies passed — only about 40 companies failed.

Charmaine Slack, a Jones Day lawyer in New York, outlined some areas that might be a problem for companies vis-à-vis their employment agreements, to include evergreen renewal provisions; excessive non-performance-based elements to compensation, such as “lifetime” perks, country club memberships and housing allowances; and guaranteed or discretionary bonuses.

Slack also recommended that companies take a holistic and integrated approach in reviewing executive compensation arrangements, evaluating such arrangements with both a top-down and a bottom-up evaluation process.  Such an approach can offer insight into problems that might arise in the near term.

When modifications are made in one area of compensation, Slack said, businesses should be mindful of whether such alterations will require a new SEC or other filing.

Often the general counsel bears responsibility to alert the board and CEO of policies that may raise red flags with regulatory agencies.  If a company is not doing well financially, such arrangements are likely to be frowned upon.

Dodd-Frank also mandated, in Section 954, that the SEC adopt rules requiring national securities exchanges and associations to enact listing standards that require issuers to provide information about incentive-based disclosure, and to enact clawback policies that allow issuers to recover such compensation from current or former executives.

Lawyers should also be aware that the Institutional Shareholder Services will begin applying its 2012 policy updates to shareholder meetings held on or after Feb. 1, 2012.

Panelist Jeremy L. Goldstein of Wachtell Lipton Rosen & Katz, spoke to Section 409A of the IRS Code, which governs the tax of deferred compensation.  The provision imposes strict rules on the timing of distributions, as well as the timing of deferral and distribution elections.  Documentary evidence to insure compliance is required in all of these areas.

Because certain “like” plans of an employer must be aggregated for determining compliance and imposing taxes in the event there is noncompliance, if a 409A violation occurs, warned Goldstein, all plans of that type are deemed to have violated Section 409A.

Brigen Winters, with the Groom Law Group in Washington, D.C., also participated in the panel; Martha Steinman, Dewey & LeBoeuf LLP in New York, moderated.

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