MARKET TREND:  The increased and sustained focus on executive compensation since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) likely will gain momentum in light of the impending requirement under Section 953(b) of Dodd-Frank that such companies disclose information comparing their CEO’s compensation to the median compensation of their other employees (the “pay-ratio rule”).

SYNOPSIS:   Although the disclosure under the pay-ratio rule for calendar-year reporting companies likely will not be required until the spring of 2018 when such companies file their proxy statements in respect of 2017, in light of the complexity and anticipated implications associated with the disclosure, companies are advised to begin formulating their implementation approach now.  The rules include flexibility on methodology with respect to identifying a median employee, and the approach to selecting a methodology that best fits the company is likely to vary due to multiple factors, including industry.

TAKE AWAYS:   Companies required to disclose under the pay-ratio rule should take the following steps:

• Reporting companies are advised to begin discussing implementation approaches with their compensation committees well in advance of the time in which the 2017 proxy is prepared.  Thoughtful consideration should be given to the employee profile of the company and whether such profile is typical to the industry and/or the company’s peer group.  If the company or the compensation committee engages a compensation consultant, he or she may be in a position to provide data on models and methodologies found to be best suited to an industry to illustrate accurately the ratio and median employee compensation.
  

• In many cases, companies may benefit from analyzing 2016 compensation to estimate the likely ratio, experimenting with different methodological approaches.  

• Under the pay-ratio rule, a registrant is permitted to supplement the required disclosure with explanatory narrative discussion or additional ratios, provided that such additional disclosure is not misleading, is clearly identified, and is not presented with greater prominence than the require disclosure. Accordingly, thought should be given to a complementary narrative disclosure that will help round out for shareholders whether and how the ratio reflects the company’s pay philosophy, efficiency, and other similar considerations.

• As with the introduction of any new and recurring disclosure, the manner of presenting the information and the methodology employed should be determined with an eye to consistency across disclosure years, as any change in approach in future years likely will trigger explanatory disclosure regarding the change.

• Regardless of what methodology is ultimately chosen, companies should consider any potential implications indirectly resulting from the required disclosure (for example, if the employee population is unionized in whole or part, the disclosure may impact collective agreements, and in any event, may create employee relations concerns and/or disrupt periodic pay negotiations for those whose pay is below the median).

• Companies may wish to stay apprised of developing positions within the institutional shareholder and proxy advisor communities regarding ratios that are deemed unacceptable or egregious.

MAJOR REFERENCES:    Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act; Item 402 of Regulation S-K of the U.S. Securities Act of 1933; Compliance & Disclosure Interpretations for Regulation S-K updated October 18, 2016.

MARKET TREND:  Divorce rates have been on the rise nationally over the past several years.  Accordingly, it should play a larger role in legacy management.

SYNOPSIS:  Divorce related legacy planning is critical. Spousal inheritance rights continue to exist until the divorce is final. Merely filing a divorce petition may not terminate provisions for a spouse under existing legacy planning documents or sever survivorship interests in marital or joint tenancy assets.  To ensure a client’s assets pass to intended beneficiaries, it is critical that the client amend his legacy plan (or create one) to adapt to the changed circumstances. Although clients have the most leeway to change their plans before proceedings are initiated, there are still actions the client can and should take after proceedings commence.

TAKE AWAYS:  Before a divorce petition is filed, clients can execute new wills, amend, revoke, or create and fund revocable and irrevocable trusts, execute new powers of attorney and beneficiary designations, and make other legacy planning changes in anticipation of the divorce. After divorce proceedings begin, clients can still freely execute new wills and powers of attorney, but may need to notify the spouse, obtain the spouse’s consent, or secure a court order before implementing more extensive changes. State laws differ as to what a client is authorized to change and transfers that can be made during a divorce. Clients and their advisors must work closely with divorce counsel to determine the exact planning actions that can and can’t be taken once a petition for divorce is filed.

SUMMARY:  Co-shareholders in a closely held business purchased insurance on each other’s lives, arguably for the purpose of funding a death-time buyout of shares. However, no binding buy-sell agreement was ever signed. When one of the owners of the business died, the proceeds were paid to the surviving shareholder. The trial court and appeals court both concluded that the surviving owner was not required to use the life insurance proceeds for the purpose of purchasing the decedent’s stock.

CITE: Selzer v. Dunn, 2014 WL 356992, No. 12–12–00150–CV (Ct. App. Tex. Jan. 31, 2014).

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MARKET TREND:  With high-earning executives increasingly focused on income tax planning, deferring compensation often will be a primary objective.  Taxpayers and advisors will need to understand fundamental principles of income taxation to effectively implement deferred compensation arrangements as a part of the overall tax plan.

SYNOPSIS:  Individuals pay taxes not only on amounts actually received, but also on amounts they constructively receive, as well as the value of any economic benefit conferred upon them.  This report provides an overview of how these principles of taxation are applied, particularly with regard to compensation deferral.

TAKE AWAYS:  A fundamental understanding of the tax principles relating to constructive receipt and economic benefit will enable an advisor to better navigate the challenges of deferred compensation planning for his or her clients. PRIOR REPORTS: 12-32, 09-42, 09-12, 08-108, 07-44, 07-37, 04-135, 04-133.

MAJOR REFERENCES: IRC §409A, IRC §83, Treas. Reg. §1.415-2.

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