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Highlights from the 28th Annual NASPP Conference

While Covid-19 stopped us from meeting in person, virtual sessions at this year’s NASPP conference provided the opportunity to share thoughts on the state of equity compensation. Over the course of the conference, our experts weighed in on the following topics. (For conference attendees, rebroadcasts are available through the end of September.)

The ABCs of Adding ESG to Your Compensation Plan

Josh Schaeffer, JT Ho (Orrick), Mark Borges (Compensia), and Derek Standifer (HPE) discussed the state of the burgeoning world of ESG topics in compensation plans.

As time moves on, ESG is deepening its impact on companies’ resource allocation, shareholder messaging, and compensation practices. A comprehensive and robust ESG strategy benefits employees, customers, suppliers, and communities. It also helps maximize value for shareholders.

Via real-life examples, company proxies, and the results of various studies, the speakers illustrated how ESG goals can be part of a positive long-term strategy. The discussion then turned to ways companies are linking ESG goals to short-term and long-term compensation, and how prevalent these programs increasingly are. To round out the session, the panel discussed investment disclosures—including ones to explain ESG metrics and the compensation based on those metrics. As more and more companies include ESG-related metrics in their compensation packages, this will be an area to keep close watch on.

Nuances and Complexities in Performance Awards

Raenelle James, Michael Wallace (Raytheon Technologies) and Jessica Cope (Altria Group) discussed the complexities associated with performance awards.

The session aimed to educate participants about all the nuances that come up when issuing performance awards. Over 90% of S&P 500 companies use performance awards in their long-term incentive plan (LTIP) design portfolio. The designs for these awards are constantly changing and becoming more complicated as they gain popularity. As a result, they can be very misunderstood.

Part of the discussion was about the many dates present in a performance award, including the various FASB dates (service inception and grant date), performance start and end dates, legal service date, and interplay among the various award tranches. With a trend toward hybrid performance awards, which include both market and performance conditions, the interplay of different dates can be especially confusing.

Another focus area was on disconnects between the information stored in the equity administration system and what financial reporting models need in order to perform the accounting correctly. For example, mismatches often arise between the shares included in expense and the shares included in the dilution computation.

Finally, the presenters covered modifications and corporate transactions as two discrete events that can be very unwieldy in the context of performance-based awards.

Quarterly and Annual Disclosures: From the Basics to Advanced

Boxian Kolb, Megan Arthur Schilling (Cooley), and Winny van Veeren (Vanveeren Consulting) covered the rules and common pitfalls on equity compensation disclosures. They oriented the session around real-world examples from 10-K and proxy filings.

Discussion started with the ASC 718 disclosure requirements as spelled out in the guidance. The panelists went over how to present the roll-forward table for options, RSUs and performance awards. The most common approach for performance awards is the target unit approach. Under this method, companies reflect target shares granted in the shares granted line and any adjustments due to the performance outcome are captured in an adjustment line at the end of the performance period.

Given the drastic uptick in modifications due to COVID-19, the speakers also explained the three disclosure requirements for modifications: explaining the terms of the modification, quantifying the number of employees affected, and disclosing the incremental cost.

The second part of the session focused on how equity awards are disclosed in the proxy tables. Proxy tables aren’t always straightforward. For instance, the ASC 718 grant-date fair value and ASC 718 grant date should be used in the summary compensation table and the grants of plan-based awards table. Meanwhile, the closing stock price at the end of the fiscal year is used to compute the market value of equity awards in the outstanding equity awards table. The panelists also discussed common pitfalls when preparing the proxy tables and the proper disclosure treatment regarding Type I and Type III modifications.

How Is Your Performance Plan Performing When It’s Supposed to Stay at Home?

In this session, Alec Katric, Sara Shoaf (Schwab), Alicia Ritmaha (Schwab), and Rebecca Kargl (Concho Resources) talked about the performance awards of yesterday and how they expect designs to change going forward.

The session opened with some visuals around the prevalence of performance awards in an LTIP, metrics used, and the number of metrics used. Nearly all S&P 500 companies use performance awards due to ISS wanting to see at least 50% of pay being performance-based. The discussion then shifted to expected changes in 2021. They include an even greater reliance on relative metrics, shorter performance periods (to aid goal-setting), and more focused metrics (e.g., at the business unit level).

The speakers explored a variety of options companies have for dealing with their outstanding and future awards. For outstanding awards, companies might modify goals or change the performance metrics. For future awards, companies might widen the goal ranges or add relative metrics to the plan. COVID-19 has either prompted or furthered many of these changes.

TSR Award Implementation Risks

Nathan O’Connor conducted a fast-paced, 30-minute “power session” on the five key risks companies face when implementing a new total shareholder return (TSR) award during volatile time periods.

With the volatility in financial markets seen in 2020, companies are further embracing awards with relative performance metrics—such as relative TSR awards—as a way to shock-proof their LTIP.

Especially when adopting relative TSR designs, companies need to weigh the pros and cons of the primary two techniques for calibrating grant sizes, the fixed value and fixed shares methods. The former minimizes proxy disclosure risk, but can lead to executive confusion and frustration. The latter exposes the issuing company to a spike in the proxy and a pay-for-performance disconnect.

These kinds of policies also flow through to a consideration of how awards during volatile times may negatively impact share pools. With volatile stock prices, it’s important for the company to model the share pool implications of its award designs under different stock price and grant sizing scenarios.

As always, relative TSR awards require consideration of the downstream implications of key design details such as peer list construction and changes, ways to treat dividends in the award, and the impact of different price-averaging windows on ultimate payouts.

While relative performance awards—both relative TSR and relative financial metrics—are essential design strategies during an uncertain and volatile time, they introduce new risks that compensation, finance, and legal teams need to sort out carefully during the design phase.