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Executive Compensation Disclosure Handbook: a Practical Guide to the SEC’S Executive Compensation Disclosure Rules Revised October 2016

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Executive Compensation Disclosure Handbook: a Practical Guide to the SEC’S Executive Compensation Disclosure Rules Revised October 2016 Executive Compensation Disclosure Handbook: A Practical Guide to the SEC’s Executive Compensation Disclosure Rules Revised October 2016 Elizabeth A. Ising, Gibson, Dunn & Crutcher LLP Ronald O. Mueller, Gibson, Dunn & Crutcher LLP Krista P. Hanvey, Gibson, Dunn & Crutcher LLP James Kroll, Willis Towers Watson Heather Marshall, Willis Towers Watson EXECUTIVE COMPENSATION DISCLOSURE HANDBOOK: A PRACTICAL GUIDE TO THE SEC’S EXECUTIVE COMPENSATION DISCLOSURE RULES Revised October 2016 Elizabeth A. Ising, Gibson, Dunn & Crutcher LLP Ronald O. Mueller, Gibson, Dunn & Crutcher LLP Krista P. Hanvey, Gibson, Dunn & Crutcher LLP James Kroll, Willis Towers Watson Heather Marshall, Willis Towers Watson ABOUT GIBSON, DUNN & CRUTCHER LLP Gibson, Dunn & Crutcher has over 1,200 lawyers in 19 offices located in major cities throughout the United States, Europe, Asia, the Middle East and Latin America. We are committed to providing the highest quality legal services to our clients in a personal, responsive manner. Our firm is a recognized leader in representing companies ranging from start-up ventures to multinational corpo- rations across diverse industries from high-technology to manufacturing, finan- cial institutions and other service companies to government entities. On behalf of its clients, the firm handles every aspect of litigation, crisis management, corporate transactions and counseling, corporate governance, regulatory law, antitrust law, business restructurings and reorganizations, tax, employment and labor law, intellectual property and real estate law, and many related practice areas. Our lawyers have extensive Securities and Exchange Commission, executive compensation and corporate governance experience. We advise many Fortune 500 and other companies concerning disclosure, accounting and regulatory issues domestic and foreign regulatory bodies. We also advise senior manage- ment, boards of directors and their audit, compensation, governance and spe- cial committees on a wide range of issues relating to board and committee structure and operation, fiduciary duties, and relationships with institutional shareholders. Please visit our website at www.gibsondunn.com Attorney Advertising: This publication has been prepared for general informa- tional purposes only and is not intended as legal advice. Many thanks to Gibson Dunn associates Krista P. Hanvey, Dina R. Bernstein, Allison Balick, Julia Lapitskaya, Sarah Fortt, Kasey L. Robinson and Needhi Vasavada for their valuable contributions to this publication. ABOUT WILLIS TOWERS WATSON Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employ- ees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas—the dynamic formula that drives business performance. Together, we unlock poten- tial. Learn more at willistowerswatson.com. ABOUT DONNELLEY FINANCIAL SOLUTIONS Donnelley Financial Solutions provides technology and expertise to help compa- nies deliver accurate and timely business communications to shareholders, regulators, and investors. A single point of contact helps you stay on top of the dynamic regulatory landscape and manage the logistics of your critical commu- nications. Of course, we adhere to strict security protocols to protect your sensitive data. With 3,500 employees in 61 locations across 18 countries, we provide thousands of clients with innovative tools for content creation, secure storage, manage- ment and distribution, as well as data analytics and multi-lingual translations services. For more information, contact your sales representative or visit www.dfsco.com. TABLE OF CONTENTS 1.0 INTRODUCTION 1 2.0 COMPENSATION DISCUSSION AND ANALYSIS 2 2.1 Format and Presentation 3 2.2 Identification of Named Executive Officers 4 2.3 Required CD&A Topics 6 2.4 Additional and Voluntary CD&A Topics 7 2.5 Taking Your CD&A to the Next Level 11 3.0 EXECUTIVE COMPENSATION TABLES AND RELATED NARRATIVE DISCLOSURES 21 3.1 Summary Compensation Table 21 3.1.1 Salary and Bonus Columns 24 3.1.2 Stock Awards and Option Awards Columns 26 3.1.3 Non-Equity Incentive Plan Compensation Column 29 3.1.4 Change in Pension Value and Nonqualified Deferred Com- pensation Earnings Column 31 3.1.5 Perquisites and the All Other Compensation Column 32 3.2 Grants of Plan-Based Awards Table 37 3.3 Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table 42 3.4 Outstanding Equity Awards at Fiscal Year-End Table 43 3.5 Option Exercises and Stock Vested Table 46 3.6 Pension Benefits Table 47 3.7 Nonqualified Deferred Compensation Table 50 3.8 Potential Payments Upon Termination or Change in Control 52 3.9 Golden Parachute Compensation 54 4.0 DIRECTOR COMPENSATION DISCLOSURE 58 4.1 Director Compensation Table 58 4.2 Narrative to Director Compensation Table 60 5.0 ANALYSIS OF RISKS RELATED TO COMPENSATION FOR ALL EMPLOYEES 61 6.0 COMPENSATION COMMITTEE & COMPENSATION CONSULTANTS 63 6.1 Compensation Committee Independence 63 6.2 Compensation Adviser Conflicts of Interest 65 6.3 Disclosure of Compensation Consultant Fees 66 6.4 Compensation Committee Practices and Procedures 67 6.5 Compensation Committee Report 68 7.0 SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION & EQUITY PLAN PROPOSALS 70 7.1 Say-On-Pay Proposals 70 7.2 Say-On-Frequency Proposals 71 7.3 Say-On-Golden Parachute Proposals 72 7.4 Compensation Plan Proposals 72 7.5 Equity Plan Information Table 76 7.6 Voting Standards 78 7.7 Proxy Advisory Firm Recommendations 79 8.0 REPORTING COMPENSATION ON FORM 8-K 84 8.1 Item 5.02 of Form 8-K 84 8.2 Item 5.07 of Form 8-K Disclosure of Shareholder Voting Results 8 86 9.0 BENEFICIAL OWNERSHIP TABLE 89 9.1 Management Shares Subject to Stock Pledges 89 9.2 Directors’ Qualifying Shares 89 10.0 RELATED PARTY TRANSACTIONS 90 10.1 Broad Principle for Disclosure 90 10.2 Interplay with Item 402 of Regulation S-K 91 10.3 Procedures for Approval of Related Person Transactions 92 11.0 EMERGING GROWTH COMPANIES, SMALLER REPORTING COMPANIES AND FOREIGN PRIVATE ISSUERS 94 11.1 Emerging Growth Companies (EGCs) 94 11.2 Smaller Reporting Companies 95 11.3 Foreign Private Issuers 96 12.0 FORTHCOMING REQUIREMENTS 97 12.1 Pay Ratio Disclosure 97 12.2 Pay vs. Performance Disclosure 100 12.3 Recovery of Executive Compensation 101 12.4 Disclosure Regarding Employee and Director Hedging 102 APPENDICES Appendix A: Full Text of Regulation S-K Items 402, 403, 404 and 407 (through October 18, 2016) Appendix B: Applicable SEC Compliance and Disclosure Interpretations (through October 18, 2016) 1.0 INTRODUCTION Executive compensation disclosures in proxy statements and annual reports continue to garner attention and scrutiny by the Securities and Exchange Commission (SEC), shareholders and the public. This updated handbook pro- vides an overview for public companies navigating the SEC’s compensation disclosure rules, anticipated rulemaking mandated by the Dodd-Frank, Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) other regulatory requirements and the views of proxy advisory firms. This handbook also offers practical advice to help companies produce understandable disclosures that thoughtfully tell their stories about executive compensation. See Appendix A to this handbook for a copy of the full text of the rules, as amended through October 18, 2016. See Appendix B for the Compliance and Disclosure Interpretations issued through October 18, 2016 in connection with these rules. 1 2.0 COMPENSATION DISCUSSION AND ANALYSIS A key component of a company’s executive compensation disclosure is the Compensation Discussion and Analysis (CD&A), which discusses the material information necessary to understand the objectives and policies of a company’s compensation programs for its “named executive officers” (see Section 2.2 regard- ing the determination of named executive officers). The CD&A should explain and put into perspective the numbers in the compensation tables that follow it. CD&A Is Principles-Based Disclosure. The CD&A is required to address certain topics, but is a principles-based report, which means that each company must determine in light of its particular facts and circumstances what elements of the company’s compensation policies and decisions are material to investors. The CD&A’s overview of executive compensation is intended to be similar in scope to the MD&A section of an annual report that discusses a company’s results of operations and financial condition. Like the Management’s Discussion and Analysis (MD&A), the CD&A must not use “boilerplate” language or simply repeat the information provided in the executive compensation tables and related narrative to the tables. The goal is to have meaningful and readable dis- closure that is not legalistic. Focus Must Be on Analysis. Companies should focus the CD&A on analy- sis, explaining how they arrived at the particular forms and levels of compensa- tion that they chose to award and why they pay that compensation and made the compensation decisions they did (rather than simply describing what they decided or their process for making compensation decisions). Increasingly, shareholders want the CD&A to explain how the amounts and forms of execu- tive compensation, including specific performance measures utilized in execu- tive compensation programs, relate to a company’s performance. CD&A Is Company Disclosure. The CD&A is company disclosure, not compensation committee disclosure, and is filed, not furnished. The general disclosure and liability provisions of the Securities Exchange Act of 1934 (Exchange Act) apply to the CD&A, and it is covered by the CEO and CFO cer- tifications required under the Sarbanes-Oxley Act of 2002. CD&A Must Discuss All Named Executive Officers.
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