Attorney Mike Melbinger always brings us informative insights. Deferred Compensation News is pleased to share Mike’s recent post on the topic of foregone compensation and related reporting requirements. This information was first published on the Executive Compensation Blog on March 31, 2020.
As with almost every aspect of our current economy, conditions, events, and the regulations that govern them are subject to change or further refinement. In many ways, the COVID-19 economy is uncharted waters. Corporations, lawmakers, and regulatory agencies are exploring new solutions and redefining best practices, day by day and in some cases, hour by hour.
Equipped with this understanding, it is more important than ever before that companies, compensation committees, and executives discuss their unique situations with an experienced executive benefits consultant, as well as their other legal, accounting, and tax advisors.
Reporting Requirements for Waived or Foregone Compensation
You may have been reading about (and some may have facilitated) senior executives announcing that they will forego all or a portion of their salary, bonus, or other compensation due to the ongoing pandemic. For example, yesterday The Walt Disney Company filed this Form 8-K announcing that:
As part of a series of measures to better enable the Company to weather the extraordinary business challenges occasioned by the current national health crisis, on March 30, 2020, each of the Company’s named executive officers agreed by irrevocable waiver to effect a temporary reduction in the base salaries otherwise payable under their respective employment agreements, effective with the payroll period commencing April 5, 2020. The Company is also effecting reductions in base salary among a broad group of its executive level employees. Mr. Iger has agreed to forgo, through the last payroll period in the Company’s current fiscal year, receipt of all but that portion of his base salary necessary to fund, on an after-tax basis, his contributions to continue to participate in the Company’s health benefits plan. He is also waiving his right to receive his car allowance payable during the same period the salary waiver is in effect. Mr. Chapek will forego receipt of 50% and each of Mr. Braverman, Ms. McCarthy, Ms. Parker and Ms. Mucha will forego receipt of 30% of the base salary that would otherwise be payable under his or her employment agreement for as long as the Company determines to continue in effect salary reductions generally for its executives.
Good for them. However, if you are like me (God forbid), you instantly wondered how this would affect compensation reporting for next year’s proxy statement. Fortunately for folks like us, the SEC’s C&DI* Question 119.25 provides the answer – telling us the amount salary or incentive amount awarded still must be reported in the proxy for next year and used to determine whether the executive officer is a named executive officer for the year.
Answer: Yes. The executive officer’s decision not to accept payment of the award does not change the fact that award was granted in and earned for services performed during 2010. Accordingly, the grant of the award should be included in the Grants of Plan-Based Awards Table, which will reflect the compensation committee’s decision to grant the award in 2010. The earnings pursuant to the award, even though declined, should be included in total compensation for purposes of determining if the executive is a named executive officer for 2010 and reported in the Summary Compensation Table. The company should disclose the executive’s decision not to accept payment of the award, which it can do either by adding a column to the Summary Compensation Table next to column (g), “Nonequity Incentive Plan Compensation,” reporting the amount of nonequity incentive plan compensation declined, or by providing footnote disclosure to the Summary Compensation Table. Moreover, in Compensation Discussion and Analysis, the company should consider discussing the effect, if any, of the executive’s decision on how the company structures and implements compensation to reflect performance. [Mar. 12, 2010]
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