Spring-Loaded Compensation Awards

What are Spring-Loaded Compensation Awards and How Should Companies Handle Them?

December 7, 2021
Fulcrum Partners

New SEC Staff Accounting Bulletin helps answer the question: “what are spring-loaded compensation awards,” and draws attention to the need for scrutiny.

According to the Securities and Exchange Commission (SEC),  spring-loaded compensation awards are “share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction.” For all the obvious reasons, spring-loaded compensation awards inevitably attract attention both from stockholders and regulatory agencies.

In a recent Journal of Accountancy® (JofA), article, Ken Tysiac, JofA‘s editorial director, wrote that nonroutine spring-loaded grants “merit particular scrutiny by those responsible for compensation and financial reporting governance at public companies.”

In a similar vein, The Wall Street Journal described spring-loaded compensation awards as a time-honored practice for doling out “speedy profits to executives, assuming the announcement lifts the stock price.” And the article goes on to point out that investors have long considered the practice misleading.

SEC Staff Issues Accounting Guidance on Spring-Loaded Compensation Awards to Executives

Last week, (November 29, 2021) SEC staff released guidance for companies regarding how to properly recognize and disclose compensation costs for spring-loaded awards made to executives.

The announcement states, “…companies should not grant spring-loaded awards under any mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.”

While the announcement from the SEC appears to remind companies to “consider yourself warned,” it included the SEC’s routine disclaimer regarding Staff Accounting Bulletin (SAB) No. 120 which reminds readers, “The statements in SABs are not rules or interpretations of the Commission nor are they published bearing the Commission’s official approval.”

Alternatives to Stock Awards

For a diversity of reasons, including the complexity of, and scrutiny on, stock awards to executives, many companies have moved away from the use of company stock options to incentivize or reward key talent. The implementation of a customized and creatively designed nonqualified deferred compensation plan (NQDC) allows an organization, through tailored contribution and vesting schedules (which can be measured in phantom stock values) to position key talent to share in increases in the valuation of the organization. The result is an “ownership experience” for the participating executives without any actual dilution of equity rights.

NQDC plans provide plan participants a viable avenue for accumulating tax deferred savings above and beyond the limits of qualified plans, such as 401(k) plans or 403(b) plans. And their simplified regulatory disclosure and reporting rules may make them more appealing than ever.

If your organization is interested in learning more about NQDC plans or evaluating an existing plan to see if it is effectively maximized, contact Fulcrum Partners, a OneDigital Company. Reduce distractions that come with jumping through regulatory hoops while positioning your executives to focus on growing the company’s business.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

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