Week in Review: Oct 25, 2013

Week in Review: Oct 25, 2013

October 25 2013

ISS Releases 2014 Draft Policies for Comment

ISS has posted its 2014 Draft Policies for comment by institutional investors, companies and other members of the governance community.  These draft policies have traditionally served as a preview of the final policies expected next month which will be effective for the 2014 proxy season.  We will be publishing a client alert on the policy update early next week in Client Alerts.

Link: http://www.issgovernance.com/2014draftpolicycommentperiod

California reduces state 409A excise tax rate from 20% to 5%

Until recently, California imposed a 20% excise tax on individuals who receive nonqualified deferred compensation under a plan that is not 409A compliant (there is no penalty imposed on the company that paid out the compensation).  The California state tax was in addition to the 20% excise tax imposed by the federal government for the same non-compliance.  Starting with the 2013 calendar year, the tax imposed under California law will be reduced from 20% to 5%.  Individual California tax payers will now only be subject to a 25% excise tax (5% CA + 20% federal) as opposed to the previous 40% in the even they receive 409A non-compliant compensation.  See the California Bill for additional detail on this change.

Link: http://legiscan.com/CA/text/AB1173/2013

63 Companies have Failed Say on Pay in 2013

Two additional companies failed their Say on Pay votes, bringing the 2013 total to 63.  One of these fails, Looksmart, was notable in that it received 100% ‘Against’ on their Say on Pay vote.  It was also the first company to recommend an ’Against’ vote to shareholders.

“The current directors of the Company and the current compensation committee members believe that the executive compensation and the related practices of the former directors and former executive officers were ineffective and inappropriate and that the former directors and former executive officers consistently awarded themselves excessive compensation without regard to performance or what was in the best interests of the stockholders.”

Looksmart proxy:  http://www.sec.gov/Archives/edgar/data/1077866/000114420413053646/v356562_def14a.htm

2013 Say on Pay Voting Results
List of companies that have failed Say on Pay in 2013

SEC Comment Letter of the Week

This week’s letter comes from Jeffrey Morgan, President & CEO of the Nation Investor Relations Institute (NIRI) written on behalf of the members of NIRI.  Mr. Morgan’s letter is very thorough and makes the following recommendations “to help reduce the cost of compliance while providing more useful data to investors:”

  • The SEC should design disclosure requirements that fulfill the general intent of Section 953(b) without imposing undue costs or complexity on issuers. The SEC should use its rulemaking discretion to interpret the statutory text so the final rule does not unfairly penalize companies based on their business structure or the location of their employees.
  • Companies should be permitted to use BLS data on average employee compensation by industry to determine their pay ratios.
  • Given the difficulty of gathering worldwide employee data and the reality that many companies will have to rely on estimates, the SEC should treat pay ratio disclosures as “furnished,” rather than “filed.”
  • The rule’s pay ratio calculation should be limited to full-time, U.S.-based employees.
  • If the Commission decides to extend this mandate to non-U.S. employees, companies should receive at least two years to prepare before they have to include those overseas employees in their calculations.
  • If part-time and seasonal employees are included, the Commission should permit companies to annualize the pay data of those employees to provide more meaningful comparisons.
  • To help companies more easily identify their median employee, issuers should be allowed to exclude employee pension accruals and non-cash benefits from this initial determination.
  • The Commission should extend the comment period on this release for another 60 days to allow issuers more time to prepare estimates of their potential compliance costs.
  • The Commission should undertake an education effort to help retail investors understand the limits of pay ratio disclosure and remind them that they can find other information (such as an executive summary of the Compensation Discussion and Analysis section of a company’s proxy statement) that can provide a more complete understanding of corporate pay practices. 

Link: Jeffrey D. Morgan, President & CEO, National Investor Relations Institute, Alexandria, Virginia