Board Compensation Excessive board compensation has become a hot-button issue with stockholders in recent years. In response to this sentiment, ISS has begun to issue adverse voting recommendations relating to non-employee director compensation. ISS will vote “Against” or “Withhold” for members of the committee responsible for setting director pay if the company’s non-employee director pay is above the top 2-3% of all non-employee directors within the same index and sector. Additionally, largely as a result of the demands of institutional investors and proxy advisory firms, disclosure relating to board compensation is expected to become more robust and more closely mirror executive compensation disclosure, including having more focus on the board’s process for determining director compensation and the rationale for any changes to director compensation programs. Incentive Compensation Clawback Rules On October 26, 2022, the SEC adopted final rules that directed the national securities exchanges to establish listing standards requiring each listed company to develop and implement a policy (i.e., a clawback policy) providing for the recovery, in the event of a required accounting restatement (both “big R” and “little r” restatements, as discussed below), of incentive-based compensation received by current or former executive officers where that compensation was based on erroneously reported financial information. On June 9, 2023, the SEC then approved the NYSE’s and Nasdaq’s proposed listing standards implementing the final rules. The listing standards require listed companies to (i) disclose their clawback policy, (ii) file their clawback policy as an exhibit to their annual report and (iii) provide disclosure in their filings with the SEC if recovery of erroneously awarded incentive compensation is triggered by the clawback policy. A company that does not develop, implement and comply with a clawback policy would be subject to delisting. Under the compensation clawback rule, and the adopted listing standards, if an issuer is required to prepare an accounting restatement, the issuer must recover any incentive compensation that was erroneously awarded during the three-year period preceding the accounting restatement. For purposes of triggering recovery under an issuer’s clawback policy, the rule captures any accounting restatement, regardless of whether the accounting restatement corrects an error in previously issued financial statements that is material to the previously issued financial statements (a so-called “big R” restatement), or the accounting restatement corrects an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (a so-called “little r” restatement). Importantly, the rule does not limit the scope of recovery to those current or former executive officers who may be “at fault” for accounting errors that led to a restatement, nor to those who were directly responsible for the preparation of the financial statements. Furthermore, the issuer’s clawback policy only will require recovery of incentive-based compensation received by a person (i) after beginning service as an executive officer and (ii) if that person served as an executive officer at any time during the recovery period. Recovery of compensation received while an individual was serving in a non-executive capacity prior to becoming an executive officer will not be required. In the event of a restatement, the clawback policy must provide for recovery of the amount by which the incentive compensation actually received by the executive officer exceeded the amount that the executive officer would have been awarded based on the restated financial measures, computed on a pre-tax basis. Given the myriad types of incentivecompensation vehicles used by issuers, the SEC’s rules are principles-based, and determination of the amount of recovery will require–particularly in circumstances in which a direct mathematical calculation of the effects of a restatement is not feasible–the exercise of reasonable judgment in estimating the effects of an accounting restatement. To the extent that an issuer must estimate the effects of a restatement on previously awarded incentive compensation, the issuer must maintain 2024 Guide to REIT Executive Compensation | 36
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