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More Hard Choices in Drafting Compensation Clawback Policies

Excerpt: How far back in time should the compensation clawback provision reach? Should the policy limit the period of the look back? Should a clawback apply only to amounts earned during a period for which financials were restated? How do we treat compensation payable with respect to a several year period, some years for which financials were not restated?

Compensation Clawback Provisions as a Best Practice in Corporate Governance for Executive Compensation

"A company needs to be able to offer a level of certainty in compensation in order to recruit and retain executives. That is why companies usually strive for 'market' provisions. Interestingly, although institutional shareholders react positively to companies adoption of a clawback policy, they do not seem to make a distinction among the more severe and comprehensive policies and the less specific ones (at least so far). Institutional shareholders and the media have been giving companies 'good governance credit' for adopting almost any form of clawback."

A Response to 'It's Time to Deep-Six SERPs'

"I happen to think that a properly designed SERP at an employer with a qualified defined benefit pension plan still serves a valid purpose ... However, many corporation have eliminated, or are considering eliminating, their SERP plans. Among the other reasons are the appearance in the Proxy Statement and financial statements, the complexities of Section 409A, the financial cost, and the public/media perception of SERPs."

Review the Coverage of Your Top-Hat Plan -- Before Someone Else Does

Excerpt: Employers that make contributions to their non-qualified deferred compensation plans typically impose a vesting schedule that is at least as strict as the schedule in their qualified retirement plans. Many employers apply a stricter schedule, including the threat of forfeiture for 'bad boy' terminations or competition. Courts will uphold the vesting schedule and forfeiture provisions of an employer's non-qualified deferred compensation plan, but only as long as that plan is exempt from ERISA as a 'top-hat' plan.

Some Good News Under the 409A Correction Program

Excerpt: The good news is that the Notice permits the employer to amend the plan or agreement to precisely specify the designated period according to the requirements of the regulations. The bad news is that the employer had better amend the plan or agreement quickly, or its affected employees could face stiff penalties.

Notice with Plan Document Correction Procedures for 409A Goes Way Beyond Correction Procedures

"On January 5, 2010, the IRS issued Notice 2010-6, Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with section 409A(a).... Importantly, the Notice does much more than just offer correction methods. It contains numerous examples of situations that the 409A final regulations do not clearly address-- and provides for significant penalties for many plan provisions that a normal person might view as a foot fault."

New SEC Disclosures Rules: Reporting of Voting Results on Form 8-K

Excerpt: The new rules make one important change to reporting requirements for Form 8-K. The rules transfer the requirement to disclose shareholder vote results from Forms 10-Q and 10-K to Form 8-K. New Item 5.07 to Form 8-K requires companies to disclose on the form the results of a shareholder vote and to file that information within four business days after the end of the meeting at which the vote was held.

Risk Assessment under SEC's New Final Executive Compensation Disclosure and Governance Rules

Excerpt: The requirement for assessing whether the company's executive compensation plans encourage risk taking is included in the final rules. However, there are a couple of clarifications that should lessen the burden it imposes on reporting companies.

Year End Tax Planning: Consider Accelerated Recognition of Accrued SERP Benefits for FICA Purposes

Excerpt: Under Treas. Reg. ? Reg. ?31.3121(v)(2)-1(e)(4), the plan sponsor/employer under a nonaccount balance plan ? such as a defined benefit SERP ? may delay taking into account for FICA purposes the benefit amounts accrued until the amounts are 'reasonably ascertainable.' An amount deferred under a nonaccount balance plan is not 'reasonably ascertainable' as long as it is necessary to use any assumptions other than interest, mortality, and cost of living assumptions to value the benefit. In practice, this means a defined benefit SERP or excess plan often provides a benefit that does not need to be taken into account until the employee retires. Ordinarily, this is good, as it avoids withholding taxes before earnings are paid to the employee.

More 409A Relief Coming?

Excerpt: A hot new rumor in the world of executive compensation professionals is that the IRS will be announcing a 'one last chance to fix your documents for 409A' program in the very near future (okay, so we tend to get excited by little things). IRS Senior Counsel Stephen Tackney made the announcement at an ABA meeting. Apparently the document correction program would function like the operation failure correction program in IRS Notice 2008-113. That is, plan sponsors would have to self-correct the errors and bear any costs associated with the correction. However, Mr. Tackney also suggested the plan sponsors must attach information about their corrections to their tax returns for the year and affected participants must attach the same information to their personal returns.