On September 21, the SEC Staff issued a new Compliance and Disclosure Interpretation addressing the analysis of certain benefits arising from the COVID-19 pandemic for purposes of determining whether they should be treated as perquisites. The new guidance is found in C&DI 219.05:
In reporting compensation for periods affected by COVID-19, questions may arise whether benefits provided to executive officers because of the COVID-19 pandemic constitute perquisites or personal benefits for purposes of the disclosure required by Item 402(c)(2)(ix)(A) and determining which executive officers are “named executive officers” under Item 402(a)(3)(iii) and (iv). The two-step analysis articulated by the Commission in Release 33-8732A continues to apply when determining whether an item provided because of the COVID-19 pandemic constitutes a perquisite or personal benefit.
- An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
- Otherwise, an item that confers a direct or indirect benefit and that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, is a perquisite or personal benefit unless it is generally available on a non-discriminatory basis to all employees.
Whether an item is “integrally and directly related to the performance of the executive’s duties” depends on the particular facts. In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive’s duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive’s duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees. [Sep. 21, 2020]
I’m a bit unclear on how to interpret the guidance in a couple respects. For one, I’m not sure whether under the circumstances, making your personal residence your primary workplace would have an “integral and direct” relationship to the performance of an executive’s duties only if the executive were subject to a stay-at-home order. It seems to me that if a company has shut down its principal offices because of the pandemic, that ought to be a sufficient basis for concluding that enhanced technology to be able to work from home would be a business-related expense. Granted, this is just an “example,” but it can be read to suggest that the order is a prerequisite to determining that an item or items is integrally and directly related to the performance of the executive’s duties. Also, I’m not sure how one goes about establishing that a COVID-19 health-related or personal transportation benefit is integrally and directly related to the performance of an executive’s duties. I guess there may be a set of facts which could support such a conclusion, but I’m having a hard time coming up with one. One thing’s certain, however. There are certainly going to be a lot of interesting – and challenging – questions when we’re preparing our executive compensation disclosure next year.