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During the “Taking a Fresh Look at Company Policies” panel that I moderated at the Northwestern Securities Regulation Institute yesterday, we discussed three compensation policies that companies should review in light of recent SEC action.

In light of the SEC’s recent focus on equity grant timing in Staff Accounting Bulletin No. 120 and new Item 402(x) of Regulation S-K, we discussed how companies should establish equity grant policies or revisit equity grant policies that have been adopted in the past. Equity grant policies have been an accepted corporate governance practice used to specify the timing of annual and off-cycle grants of equity awards, including both full-value awards and options. Equity grant policies will often contemplate annual grants of equity awards either at the same compensation committee meeting each year, or a specified number of days following the company’s release of earnings for the completed fiscal period following the meeting at which grants are approved by the compensation committee. With respect to off-cycle grants for new hires, individuals receiving promotions and retention awards, the equity award policy will typically specify monthly or quarterly dates for approval, particularly for grants to non-executive officer employees, subject to certain exceptions. In light of the SEC’s recent activity, companies should review their equity grant policy (or consider adopting such a policy) and should consider prohibiting the grant of awards within four days before or one day after filing of any Form 10-Q or 10-K or a Form 8-K with material nonpublic information, as well as limiting off-cycle grants to open window periods, or perhaps require consultation with the legal group to confirm there is no planned release of material nonpublic information that could impact the grant date value of an award.

On the topic of compensation clawback policies, we discussed the challenges of administering multiple clawback policies, and the impact that recent guidance from the DOJ’s Criminal Division regarding the importance of clawback policies to corporate compliance programs might have on the need to address a wider range of clawback triggering events or individuals than what is contemplated by the new exchange-compliant clawback policies adopted in 2023, which focus only on the company’s executive officers and the triggering event of financial statement restatements without regard to an executive officer’s misconduct. We also addressed the need to consider now how the board or the compensation committee will manage the timing of recovery in the event the clawback policy is triggered, as well as the method of recovery of compensation. We discussed the issues with enforcement of clawback policies generally, as well as the implementation of the restriction on indemnification for the recovery of incentive-based compensation in indemnification agreements and charter provisions.

Finally, in light of the SEC’s continued interest in pursuing enforcement actions against companies for disclosure and control violations related to perquisites, we discussed the need to adopt a perquisite policy addressing the following topics:

1. The underlying rationale for perquisites as an element of compensation and how perquisites fit within the company’s compensation approach;
2. The framework for identifying perquisites utilizing the SEC’s two-part;
3. The authorization for providing perquisites from the board or the compensation committee;
4. The methodology that the company uses for valuing perquisites for disclosure and tax purposes; and
5. The process for identifying, tracking, valuing and disclosing perquisites in accordance with the company’s disclosure controls and procedures.

We noted that, as with other company policies, such as the insider trading policy, the perquisites policy should be communicated to employees, and employees responsible for identifying, tracking, valuing and disclosing perquisites should receive training regarding the perquisites policy. Periodic follow-up training may also be appropriate, given that the perquisites that the company provides may change over time.

– Dave Lynn