As 2015 comes to an end, we are pleased to present you with our traditional End of Year Plan Sponsor “To Do” Lists. This year we are presenting our “To Do” Lists in three separate Employee Benefits Updates. Part 1 of the series covered health and welfare plan issues, Part 2 covered qualified retirement plan issues, and this Part 3 covers executive compensation related issues. Each Employee Benefits Update provides you with a “To Do” List of items on which you may want to take action before the end of 2015 or in early 2016. As always, we appreciate your relationship with Snell & Wilmer and hope that these “To Do” Lists help focus your efforts over the next few months.

Executive Compensation “To Do” List

• Last Chance to Correct Certain Section 409A Document Failures Discovered in 2015: Although not specifically addressed in the Section 409A regulations, most commentators believe that Section 409A document failures can be corrected in years in which the deferred amounts are not yet vested or for which the substantial risk of forfeiture (or contingency upon which the compensation is paid) has not yet occurred. This means that Section 409A document failures discovered in 2015 may be corrected prior to December 31, 2015 without taxes and penalties if the deferred compensation amounts remain unvested through December 31, 2015. To take advantage of this correction opportunity, the amounts in question must remain unvested for the balance of 2015 and correction must occur prior to the date the compensation vests.
• Nonqualified Deferred Compensation Deferral Elections Should be Made on or Before December 31, 2015: As a general rule, Section 409A requires that compensation deferrals under a nonqualified deferred compensation plan be made during the taxable year before the year in which the underlying services are performed. There are some exceptions to this general rule, but employers should be mindful that Section 409A imposes strict requirements on the timing of compensation deferral elections and that most deferrals of compensation to be earned in 2016 must be made on or before December 31, 2015.
• Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2011: Section 162(m) of the Internal Revenue Code (the “Code”) limits the deduction a public company may take for compensation payable to “covered employees” to $1,000,000 per year. “Performance-based compensation” that meets the requirements of Section 162(m) is not subject to this limitation. The Section 162(m) regulations require that, every five years, the shareholders reapprove the performance goals that determine the amount of “performance-based compensation” to be paid. This means that companies that obtained shareholder approval of plans containing Section 162(m) performance goals in 2011 must resubmit the plans for shareholder approval in 2016. This is generally done by having the shareholders reapprove either the 162(m) performance goals or a new incentive plan that provides for the award of compensation that complies with Section 162(m).
• Review Whether Your Equity-Based Compensation Plan Has Sufficient Shares Remaining for 2016 Grants: Employers should review share pool information to determine whether to ask the shareholders to increase the number of shares available for grant. If additional shares are needed, the request should be submitted for shareholder approval at the 2016 annual meeting.
• Consider Adding Separate Annual Limits on Director Equity Awards: In response to the Delaware Chancery Court’s rulings in Seinfeld v. Slager and Calma v. Templeton, employers that are adopting or amending equity-based compensation plans in 2016 should consider adding a separate annual limit on director equity awards. In both Seinfeld and Calma, the Chancery Court refused to apply the “business judgment rule” to dismiss a challenge to directors who approved large equity awards for themselves under a shareholder-approved equity-based compensation plan. The Court ruled that the plan did not impose “meaningful limits” or “director-specific ceilings” on the amounts that directors could receive under the respective equity plans independent from the generic limits imposed on other equity plan participants. The questions for employers to consider in light of Seinfeld and Calma are whether to: (1) add a separate annual limit for director equity awards; and (2) ask the shareholders to approve the limit to afford protection under the “business judgment rule.”
• Public Companies Should Familiarize Themselves with Recent Changes to the ISS Equity Plan Scorecard: Public company employers that are adopting or amending equity-based compensation plans in 2016 should familiarize themselves with ISS’ “Equity Plan Scorecard” approach to evaluating public company equity plans and should consider registering to gain access to the ISS Equity Plan Data Verification Portal to verify the data points being considered by ISS. While the Scorecard methodology remains largely unchanged for 2016, the following adjustments have been made: (1) the “IPO” model was renamed the “Special Cases” model and now, in addition to IPOs, analyzes bankruptcy emergent companies; (2) a separate “Special Cases” model has been introduced to apply to Russell 3000/S&P 500 companies; (3) the manner in which vesting following a change in control is scored has been adjusted (full points are now awarded if the plan provides for: (i) with respect to time-based awards, either no accelerated vesting or accelerated vesting only if the awards are not assumed/converted; and (ii) with respect to performance-based awards, either forfeiture or termination of outstanding awards or vesting based on actual performance as of the change in control and/or pro-rata vesting for time elapsed during the current performance period, no points are awarded if the plan provides for automatic accelerated vesting of time-based awards or payout of performance-based awards above target, and half points if the plan provides for any other vesting terms related to a change in control); and (4) certain other scoring factors have been adjusted, but the maximum of 100 total points and threshold of 53 points to receive a favorable recommendation (in the absence of egregious pay practices) remains.
• Code Section 6039 Information Statements Due by January 31, 2016: Section 6039 of the Code requires companies to file a return and provide a written information statement to each employee or former employee regarding: (1) the transfer of stock pursuant to the exercise of an Incentive Stock Option (“ISO”); and (2) the transfer by the employee or former employee of stock purchased at a discount under an Employee Stock Purchase Plan (“ESPP”). For ISO grants and ESPP transfers occurring in 2015, the Section 6039 information statements must be provided no later than January 31, 2016.
• Review Grant Procedures for Upcoming Equity-Based Grants: The stock option backdating scandals were solemn reminders of serious corporate, tax, accounting and legal issues that can be resolved by an employer carefully reviewing its grant practices and procedures. An employer may wish to carefully review its stock plan to determine which governing body is charged with making grants under the plan and put in place best practice procedures to ensure the proper entity takes the appropriate action as of the date the awards are considered granted.
• Prepare for Final “Clawback” Rules: As described in our fall issue of the Corporate Communicator, earlier this year, the Security and Exchange Commission (the “SEC”) proposed rules, that require the SEC to direct the national securities exchanges to prohibit the listing of any security that is not in compliance with certain requirements relating to the “clawback” of executive compensation. Even though these rules have not yet been finalized, public company employers should consider familiarizing themselves with the proposed rules and may even consider adding “clawback” enabling language to their equity plans and award agreements to better facilitate compliance with these rules.
• Prepare for Pay Ratio Disclosure: Earlier this year the SEC finalized rules that require public companies to disclose the: (1) median of the annual total compensation of all employees (other than the CEO); (2) annual total compensation of the CEO; and (3) ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO. Although these rules are not effective until the first full fiscal year beginning on or after January 1, 2017, public company employers should consider familiarizing themselves with the final rules and how they might, among other things, identify the methodology that will be used to identify the median employee.
• Prepare for Pay Versus Performance Disclosure: Earlier this year the SEC proposed rules that require public companies to disclose, in a clear manner, the relationship between the amount of executive compensation paid and the company’s financial performance. Generally speaking, the rules will require companies to disclose the company’s and its peers total shareholder return over the five most recently completed fiscal years. Although the proposed rules did not identify an effective date, public company employers should consider familiarizing themselves with the proposed rules and whether certain components of the disclosure will be in a narrative, graphic, or hybrid format.
• Prepare for Hedging Disclosure: Earlier this year the SEC proposed rules that require public companies to disclose whether employees and board members are permitted to engage in transactions to hedge or offset decreases in the market value of company securities that were granted as compensation or held, directly or indirectly, by the employee or board member. Although the proposed rules did not identify an effective date, public company employers should consider familiarizing themselves with the proposed rules and whether now is an appropriate time to adopt an anti-hedging policy.
• Revise Incentive Programs in Response to FASB’s Elimination of Extraordinary Items Concept: Under existing accounting guidance, extraordinary items that are both unusual in nature and infrequently occurring are segregated and reported separately on income statements. For fiscal years beginning after December 15, 2015, separate reporting on the income statement should occur when an item is unusual in nature or infrequently occurring. Incentive compensation programs that use the old accounting terminology (e.g., to describe an adjustment to a financial performance measure) should be amended to reflect this new accounting guidance.