by Cydney Posner
At the recent Bloomberg BNA Conference on Revenue Recognition, a Deloitte partner observed that, to the extent that, in awarding compensation, companies use metrics that are keyed to revenue, the new revenue recognition standard could affect compensation or bonus plans because the ways of measuring and the timing of recognition of revenue change. He reminded attendees that, “‘when those plans were put into place, whatever they were, they overlap years. You then have the question of, ‘they set up some sort of benchmark and we’re going to pay someone a bonus based on how they do against this metric’— the problem is that metric was designed based on the old rules and you basically changed how you’re going to keep score.’” (See this article in Bloomberg BNA.) Continue reading
by Cydney Posner
At an open meeting this morning, the SEC voted, three to two, to propose rules implementing Section 954 of Dodd-Frank, the clawback provision. Both Commissioners Gallagher and Piwowar voted against the proposal.
As you may recall, Section 954 required the SEC to direct the national securities exchanges to adopt listing standards requiring each listed company to develop and implement a policy for recouping executive compensation that was paid on the basis of erroneous financial information, the theory being that it is compensation to which the executives were never really entitled in the first place. Under Dodd-Frank, the policy would apply in the event the company had to prepare an accounting restatement due to the company’s material noncompliance with any financial reporting requirement under the securities laws. The policy must provide that the company will recover from any current or former executive officer an amount of incentive-based compensation (including options awarded as compensation) equal to the excess, if any, of the amount that was paid to the executive officer, in the three years preceding the date on which the company was required to prepare the restatement, over the amount that would have been paid to the executive officer based on the accurate financial data. Additionally, the SEC must require each listed company to have a policy providing for disclosure of its policy on incentive-based compensation that is based on financial information required to be reported under the securities laws. The purpose of the provision was to encourage high quality financial statements. (The press release can be found here.)
The proposal would create new rule 10D-1, which would mandate the new listing standards, and amend Reg S-K to require disclosure of the policy and compliance with the recovery provisions. Companies that did not comply would be subject to delisting. The proposal addressed a number of questions that remained open under Dodd-Frank, and, in the view of the two dissenting commissioners, addressed them improperly. Continue reading
by Cydney Posner
Compliance Week reports on the “tectonic shift” anticipated to result from implementation of FASB’s new revenue recognition standard and the impact of that shift on executive pay. The new standard is scheduled to go into effect at the beginning of 2017; however, companies that include revenue goals as part of multi-year compensation performance structures may want to begin now to consider how the new standard will affect those goals. Continue reading