The staff of the Division of Corporation Finance has determined that Walt Disney Co. must include in its 2011 proxy materials a proposal recommending that it stop using multiple tests to determine senior executives’ eligibility for awards under Disney’s long-term incentive plan. Unite Here, the proponent, noted that in fiscal 2008 and 2009, Disney’s compensation committee allowed senior executives re-tests to determine whether they would receive performance-based restricted stock units. This increased the likelihood that the executives would receive the awards, according to the proponent, which wants Disney’s compensation committee to adopt a policy to use only one test to assess performance in determining eligibility for the awards.

According to Unite Here, Disney’s compensation committee modified the long-term incentive plan prior to the 2009 annual meeting to give top executives three tests in order to receive stock units granted in fiscal 2008. If performance units do not vest under the first criteria, the second criteria would apply, and if the performance units do not vest under the second criteria, the third criteria would apply. The arrangement was not approved by shareholders.

Unite Here believes that the re-testing practice delinks executive compensation from company performance by allowing senior executives multiple opportunities under different criteria to receive awards. RiskMetrics Group, which reviewed Disney’s arrangement, criticized the re-testing practice, saying that the company’s disclosure on the performance tests is convoluted and not transparent to shareholders. RiskMetrics believes that companies should not re-test their performance conditions, and if executives do not meet the performance requirements, then awards should be forfeited.

The proponent also said that the re-testing practice shines an unfavorable light on Disney director Frank Langhammer, who became the compensation committee chairman before the 2008 annual meeting. Langhammer was a director of AIG from January 2006 through November 2008, and sat on AIG’s compensation and management resources committee and its finance committee. Unite Here pointed out that during Langhammer’s tenure, AIG was criticized for paying large bonuses to, and allowing lavish junkets by, top executives while the company underperformed.

Disney argued that the proposal should be excludable under Rule 14a-8(i)(3) because the proponent’s statements about Langhammer serve no purpose other than to attempt to impugn his character, integrity or personal reputation. The company noted that Unite Here did not describe any specific action taken by him, AIG’s board or any committee of AIG’s board on which Langhammer sat that supports that claim that his service as a director of AIG and Disney reflects unfavorably on him. The staff was unable to conclude that the portions of the supporting statement cited by Disney impugn Langhammer’s character, integrity or reputation without factual foundation in violation of Rule 14a-9.

The staff also found that the proposal and supporting statement, when read together, are not so inherently vague or indefinite that neither the shareholders voting on the proposal nor the company in implementing the proposal would be able to determine exactly what actions or measures the proposal requires. Disney had argued that the proposal was excludable under Rule 14a-8(i)(3) because it was not clear whether the proposal addressed the application of separate tests after two years and four years for awards granted prior to 2010, the use of a goal for units awarded after 2009, or a combination of both.

Disney also suggested that the proposal conflicts with a proposal the company intends to present at the 2011 meeting to adopt a new stock incentive plan. According to the company, the terms of the 2011 plan allow for performance-based vesting of restricted stock unit awards "on the attainment of a specified performance goal (or goals) or on such other conditions as approved by the compensation committee in its discretion." As such, the terms of the proposed plan specifically permit the use of multiple goals for testing whether performance-based units will vest. Unite Here’s proposal, Disney said, would limit the compensation committee to one goal to test whether performance-based tests have been met, in contradiction of the terms of the proposed plan.

The staff was not swayed by Disney’s argument, noting that a "test" does not appear to be equated with a "goal." The staff found that the proposal’s reference to "one test" does not appear to directly conflict with the reference to performance "goals" in Disney proposed 2011 stock incentive plan. As a result, the staff said that Disney may not exclude the proposal under Rule 14a-8(i)(9).

Disney’s final argument was that it has substantially implemented the proposal. The company noted that the compensation committee revised the performance tests for all restricted stock units to be awarded to senior executives in calendar 2010 to provide that all performance-based units vest after three years if the performance goals are met at that time. Unlike awards granted in 2008 and 2009, achievement of the performance criteria for 2010 awards is not subject to additional testing at alternative dates. The staff ruled that Disney’s practices and policies do not compare favorably with the guidelines of the proposal and that the company has not substantially implemented the proposal.