The SEC staff has released guidance for companies about how to properly recognize and disclose compensation cost for “spring-loaded awards” made to executives.
Spring-loaded 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.
According to Staff Accounting Bulletin (SAB) No. 120 prepared by the SEC’s Office of the Chief Accountant and the Division of Corporation Finance, non-routine spring-loaded grants merit particular scrutiny by those responsible for compensation and financial reporting governance at public companies.
SEC staff believes that as companies measure compensation actually paid to executives, they must consider the impact that the material nonpublic information will have upon release.
According to the SEC 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.
According to SAB No. 120, the staff has observed numerous instances where companies have granted share-based compensation while in possession of positive material non-public information. SAB No. 120 includes examples where adjustments may be necessary and reminds companies of their corporate governance obligations and disclosure obligations under U.S. GAAP with respect to share-based payment transactions, as well as the need to maintain effective internal control over financial reporting.