Highlights from the 26th Annual NASPP Conference
Once again, Equity Methods featured significantly among an impressive cast of speakers at the annual NASPP conference in sunny San Diego, CA. Over the course of the conference, our experts shared their views on the following topics.
The choices public companies make in how they time executive separations can have very different consequences for accounting, proxy reporting, and shareholder relations. Perhaps more importantly, because of tax law changes, an ill-timed executive termination may result in the loss of a significant corporate tax deduction—causing a significant cash flow impact.
Via real-life scenarios, charts, graphics and other examples, the speakers illustrated how companies can optimize the timing of these separations. The key is an interdisciplinary approach based on careful advance planning, modeling, and drafting. The results may help companies achieve positive say-on-pay results and maintain investor confidence in an otherwise challenging time.
Many companies have implemented rTSR programs in response to a continued push for performance-based accountability in long-term incentive plans. However, this “TSR-only” approach has increasingly met with pushback from investors and executives. Their view is that other metrics can align managerial incentives with positive shareholder outcomes.
Hybrid awards combine accounting-based performance conditions with a TSR payout condition. With these awards, companies can retain the benefits of TSR award programs while responding to executives’ concerns about line of sight and a desire to align executive pay with business goals. There are many ways to structure hybrid awards, and the accounting for them can be complex.
ISS doesn’t necessarily advocate TSR as a compensation metric. What the proxy advisory firm does look for is an explanation of the linkages between metrics, weights, goals, and long-term business strategy in a long-term incentive plan. Also of interest to ISS: greater transparency around the metric selection, weighting, and goal-setting processes.
Of course, ISS represents just one of many competing viewpoints about the place of TSR awards. The challenges that some companies have faced with their rTSR programs could largely be addressed by adding accounting-based performance conditions to the mix. The resulting combination of benefits is likely to keep TSR at the center of many long-term incentive plans for some time to come.
The Aftermath of FASB Standard-Setting
First up was an overview of how the FASB prioritizes technical activities, conducts stakeholder outreach, and deliberates toward a final accounting standard that is ready for adoption. From there, the speakers launched into a discussion of ASU 2016-09 and the practices that have emerged now that the standard has been live for over two years. APIC pool elimination has been a mixed bag that, at a minimum, has forced companies to invest in tax settlement forecasting processes. Raising the tax withholding liability trigger to the maximum statutory tax rate has been generally positive, except IRS rules have caused most organizations to change only their international withholding procedures.
ASU 2017-09, the minor revision to the modification accounting framework in ASC 718, has changed very little because the complex types of modifications must still be handled in the same way. The big revision this year was ASU 2018-07, which substantially harmonized the accounting for nonemployee equity awards with the employee accounting model in ASC 718. Upon adoption of ASU 2018-07, companies will be able to follow a mostly unified framework in ASC 718 instead of navigating to ASC 505 for their nonemployee awards.
Hot Topics in Equity Compensation
Takis Makridis, Art Meyers, and Mike Melbinger got the band back together for a second year, once again covering a potpourri of hot and timely topics affecting stock compensation. The content was cross-functional, spanning corporate governance, award design, legal matters, tax, and accounting.
Given the IRS’ recent guidance on grandfathering in IRS Notice 2018-68, the panel spent much of their time discussing competing interpretations. A strict reading is that any equity award with any sort of negative discretion cannot be grandfathered under the old 162(m) rules. A more liberal interpretation says that if negative discretion has never been used and is never intended to be used, then functionally it’s not a binding constraint that disqualifies grandfathering. Mike went into detail on a number of creative strategies for maximizing tax deductions. The panel agreed this issue needs careful monitoring in the months ahead.
Also up for discussion? Trends in executive compensation and award design—especially ISS’ signaling that they intend to begin measuring pay-for-performance using additional financial variables. Their 2019 policy guidance confirms ISS is even looking at metrics like economic value added (EVA). (Didn’t that go out of style in the 1990s?) From there, the panel moved on to other topics including on-employee director litigation, compensation committee independence, results from the first year of CEO pay ratio disclosures, and more.
The Top 10 SBC Accounting Waves in 2018
Accounting for equity compensation isn’t always straightforward. FASB legislative updates, corporate transactions, exotic modifications, tax windfalls and shortfalls flowing through the P&L, multi‐metric performance awards—these and many other moving parts can create pitfalls that ultimately require manual intervention. That, in turn, can lead to risky processes. Often, just understanding the rules surrounding all of these tricky situations can feel overwhelming.
Much of the session was dedicated to explaining the complexities that arose from recent legislation, including ASU 2016-09, 2017-09, 2018-07 and the Tax Cuts and Jobs Act. While some time has passed since the release of 2016-09, its ramifications are still being felt as tax teams set up tax settlement forecasting processes.
Novel award designs and employee-lucrative ESPPs have been on the rise. These are areas that impact HR and accounting alike as administrative complexity generally translates into accounting complexity. Similarly, the uptick in corporate transactions—including modifications, acquisitions, and spinoffs—come with their own challenges and nuances. Merely understanding the complexity is challenging.
Ultimately, the session aimed to equip companies with knowledge and tips to successfully surf the more common complexities found within equity compensation accounting.
Using real-world examples from inside and outside the proxy, Josh Schaeffer presented keys to developing clear, compelling visuals that tell a company’s story to investors. As the proxy becomes more of a visual marketing document each year, companies need to strive to provide accurate information that shows their company’s successes. Often, words aren’t the right way to do it.
Be clean, concise, honest, and clear. Don’t forget to tell a story. With those rules for effective visuals, the next step is to convert complex data to an easily-understood graphic. Recent proxies offer a number of inspiring examples that explain realized and realizable pay in intuitive ways.