Executive Compensation News and Views – 1Q 2015
Post Vesting Holding Periods and Equity-Based Compensation
Over the past couple of years, there has been a marked increase in the number of companies (including REITs) that are incorporating mandatory holding periods (or no-sell provisions) in their equity-based compensation program. A mandatory holding period is an additional holding requirement that restricts an individual from selling stock awards after the vesting period has elapsed (generally for an additional 1 to 3 years). While the rise of post vesting holding periods can be attributed to several factors, including: (1) that proxy advisory firms (such as ISS) have clearly illustrated that the mandatory holding periods are a form of good compensation governance; and (2) they provide a mechanism for the recoupment of incentive-based compensation if a clawback policy ever needed to be enforced, one of the biggest benefits is that such provisions often result in a 5% to 20% accounting discount under ASC 718. This discount results in a reduction in stock-based compensation expense for the financial statements and also reduces the compensation value that will be disclosed in the Summary Compensation Table and Grants of Plan- Based Awards Table in the annual proxy statement.
Generally, such provisions only apply to restricted shares or performance shares granted to executive officers and in many cases are limited to only the CEO. One of the factors often overlooked in adopting post vesting holding periods is the tax considerations. Restricted shares are taxed upon vesting (notwithstanding if an 83(b) election was made), while restricted stock units are subject to income tax when the award is distributed (although FICA/FUTA taxes are still due upon vesting). Thus, it is often appropriate to permit individuals to sell stock to cover taxes and only subject the post-tax shares to the no-sell period.
ISS Releases 2015 U.S. Frequently Asked Questions
On February 11, 2015, Institutional Shareholder Services (ISS) released its Frequently Asked Questions for 2015 shareholder meetings to be held after February 1, 2015. While the majority of guidance provided is a replication of last year’s release, there are certain noteworthy additions and modifications, including an expanded group of companies that ISS will evaluate and ISS’ newly adopted Equity Plan Scorecard.