By now, the characterization of annual bonuses as “non-equity incentive plan compensation” for disclosure purposes has become so ingrained in me that I rarely look at the “Bonus” column in the Summary Compensation Table (assuming that the company has even bothered to include the column in the table). However, I came across a disclosure where a company actually explains why its annual incentive plan is a bonus plan for reporting purposes, rather than non-equity incentive plan compensation.
This was actually the second proxy statement filed by the company for its 2022 Annual Meeting of Stockholders. The first proxy statement was filed on April 29, 2022 for an Annual Meeting to be held on June 15, 2022. Subsequently, the annual meeting was postponed until July 28, 2022 and a new proxy statement was filed on July 1, 2022. What changed? Well, the company reported disappointing results for its phase 2/3 trials of its MultiStem cell therapy by its Japanese partner, leading to dramatic drop in its stock price and employee layoffs. As a result, the company decided to seek the approval of its stockholders to conduct a reverse stock split (if deemed advisable by the Board of Directors) as a precautionary measure – part of its initiative to undertake a restructuring and reduce costs. Unfortunately, not an unusual result for a biotech company that didn’t experience a successful outcome for its clinical trials.
In any event, in describing its annual cash incentive plan in its CD&A, the company notes the following:
When appropriate, we reward our named executive officers with performance-related cash compensation. We utilize annual incentive compensation to reward officers and other employees for achieving, on a discretionary “look back” basis, corporate objectives and for meeting individual annual performance objectives. These objectives relate generally to strategic factors, including advancement of our product candidates, manufacturing and process development activities, establishment and maintenance of key strategic relationships, and financial factors, including raising capital and cash management. As described above, target bonuses are generally compared to our peer companies for overall reasonableness.
The Compensation Committee approved a cash incentive compensation program for the year ended December 31, 2021 for our named executive officers other than Dr. Van Bokkelen. Under the 2021 incentive program, each participant was eligible to earn a target incentive compensation payment of a specified percentage of the named executive officer’s base salary rate during the award term, weighted on the achievement of specific corporate goals, with the remainder based on individual/functional performance, as set forth in the following table. The weighting on corporate versus individual/functional performance is based on the relative impact on overall corporate goals and the emphasis and incentives toward departmental performance.
. . . .
The evaluation of goal achievement is at the discretion of the Compensation Committee or the Board based on input from the Chief Executive Officer (with respect to the named executive officers other than the Chief Executive Officer). The material 2021 corporate goals consisted of advancing the Company’s clinical programs for MultiStem and manufacturing process development initiatives, executing against the established operating plan and capital acquisition objectives. Individual/functional goals were based on the named executive officer’s scope of responsibility and are closely related to the corporate goals. Attainment of individual/functional goals was evaluated as part of the annual performance appraisal process.
We do not disclose the specific corporate or individual/functional goals for our 2021 incentive compensation program. While the overall amount of incentive compensation is linked to predetermined metrics, the Compensation Committee or the Board has the discretion to adjust any amount ultimately paid under our annual incentive program after good faith consideration of executive officer performance, overall Company performance, market conditions and cash availability. We also do not have a formally adopted plan document for the 2021 incentive program, although the Compensation Committee approved the specific corporate goals, target compensation levels and weightings between corporate and individual/functional performance. As a result, we view any payments under our annual cash incentive program as discretionary bonuses as opposed to typical non-equity incentive plan compensation.
The disclosure then goes on to state that the Board, based on the recommendation of the Compensation Committee, determined that each named executive officer would receive a payment under the 2021 cash incentive program as a result of his individual performance and the achievement of operational and strategic goals in 2021, although the amounts paid were significantly below their incentive award targets and ranged from 25% to 36% of their annual base salary, depending on the executive.
While I’m sure there must be other instances where a compensation committee determined to use a discretionary, rather than a formulaic, bonus plan, thereby changing the way payments are reported in the Summary Compensation Table, this is the first time I’ve seen this type of detailed discussion explaining the basis for the disclosure. (Apparently, the company has taken this approach with its annual incentive plan for well over a decade, but only started including the explanation of why the payments are not considered non-equity incentive plan compensation in 2020. I’m not sure what prompted the additional disclosure.)