With November just around the corner and, for many companies, perhaps the last compensation committee meeting of the year scheduled in the next two months, it is now critically important to start thinking about your Compensation Discussion & Analysis for the 2009 proxy statement. There is still time for companies and compensation committees to take appropriate actions that can serve as the foundation for the analytical disclosure in the CD&A that the SEC and others expect. Many of these actions were discussed in detail last week at our two conferences, “Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference” and the “5th Annual Executive Compensation Conference,” as well as at the “16th Annual NASPP Conference.”
To kick off the CD&A panels at the 3rd Annual Proxy Disclosure Conference, I noted my view that CD&A is really at a crossroads this coming proxy season. In many ways, the 2009 proxy season will likely determine whether CD&A slides into irrelevance like its predecessor, the old Board Compensation Committee Report, or whether it will finally provide the crucial analytical background to the compensation numbers that was intended all along. I don’t think that the possibility for irrelevance is overblown – complaints are surfacing that institutional investors are skipping over CD&A and going straight to the compensation tables, because they are not finding useful information presented in the CD&A. This trend was confirmed by Pat McGurn and others on “The Investors and Proxy Advisors Speak” panel at the 3rd Annual Proxy Disclosure Conference. This trend, in my view, can only lead to trouble, because investors are only getting part of the story if they skip the explanation and rationale that is supposed to be included in the CD&A.
Several factors will certainly contribute to the focus on CD&A in 2009 and beyond. If some form of say-on-pay is enacted and investors are given the opportunity to cast an advisory vote on the CD&A and the other compensation disclosures, then what is said this next proxy season will be an important backdrop for voting decisions, even if mandatory say-on-pay votes don’t occur until 2010. Further, while the recent Emergency Economic Stabilization Act and the TARP program implementing that legislation included executive compensation provisions that are only applicable to participating financial institutions, the existence of these provisions in the federal legislation are reason enough to compel companies to consider taking action now on executive pay concerns – whether analogous to the Act’s provisions or in other areas that remain a significant focus of investor criticism.
As Broc noted in the blog last week, John White’s speech at our 3rd Annual Proxy Disclosure Conference included White’s views on how the executive compensation provisions of the TARP may be instructive for other companies on how they should approach their executive compensation programs. Finally, with 2008 being a year when many companies faced significant challenges given the markets and the economy, all eyes will be on the CD&A in the 2009 proxy to see what compensation committees did do – or did not do – to address executive pay in the face of difficult conditions.
It may be that we now find ourselves at a broader tipping point on executive pay, marked by the recognition of some pay excesses in recent federal legislation and a clearly rising level of anger among investors over how compensation decisions may have contributed to the current situation.
Now it is up to all boards and their advisors to take the public and shareholder anger to heart when making compensation decisions. These developments make this year very different from what we have been dealing with in the past. As a result, disclosures must be different, and the company and compensation committee actions described in those disclosures need to be different. I don’t think that this is a situation where you can just look at the disclosure in a vacuum and try to tweak it here are there – there needs to be some deep consideration in the next two months as to how the compensation policies and decisions are going to be explained to investors in 2009.
For more on John White’s speech and how executive compensation disclosure should be changing in 2009, take a look at Mark Borges’ initial blog and follow-up blog on the 3rd Annual Proxy Disclosure Conference.
Yesterday, House Oversight and Investigations Committee Chairman Henry Waxman sent letters to nine Wall Street firms requesting compensation and bonus information (here are the letters). The concern is that government bailout money will be used to pay bonuses. In addition, Senator Carl Levin has sent a letter to Treasury Secretary Paulson inquiring into these bonuses.
Here is a disturbing excerpt from an article in today’s Washington Post:
But a new study suggests that financiers are still bullish about their bonuses. More than two-thirds of Wall Street professionals are expecting a bonus this year, and 36 percent are anticipating a larger bonus than last year, according to a survey by eFinancialCareers, a career networking company.
The idea of taxpayers funding the bonus pools of Wall Street won’t play well across the land – and likely will bolster the chances of new legislation being adopted to curb excessive pay packages early in the new Administration. I would say it’s hard to believe that Wall Street could be so ignorant to not expect a backlash – but then again, it’s Wall Street that got us into the mess we are in to begin with. Here is a related Bloomberg article (and this older article) and an Associated Press article.
A combined threat of increased regulation, higher taxes and an economic downturn provide the context for executive pay decisions in the near term, and potentially longer term. Companies that have successfully focused on aligning executive pay and performance when financial results and stock price were improving now face the more difficult task of paying appropriately in a turbulent market and avoiding excessive pay for nonperformance.
As discussed in a recent Towers Perrin white paper, companies across all industries need to proactively review their existing executive pay practices in light of recent developments and the new world we find ourselves in. Executive pay programs developed in a different climate and under different business circumstances need to be assessed to ensure there is continued alignment with business strategy, financial results and shareholder returns in the environment ahead.
1. Accelerating Grants – We’re finding ourselves working w/ a lot of companies on taking advantage of the low prices we have out there and, in essence, “accelerating” next year’s grant to today. This was something that I actually did in 1987 after Black Monday while a partner at KPMG.
In addition, Microsoft did this immediately after the Justice Department handed down that negative ruling years ago, so there is good precedent—the trouble today is in the execution as well as the optics..like who should get it and who should not; how do you value the equity if one believes that the panic and hedge fund selling has created unrealistically low prices; and what type of long-term incentive vehicles do you grant? Again, where we find a strong argument that this will help significantly in the ability to retain and motivate, then it’s an idea worth pursuing;
2. This Year’s Grants—How should they be valued if 4 months ago you were at $70 and today you are at $10? And last years’ grant was at $60 and you have presentations saying that your enterprise value is $80? Is one LTI vehicle better than another for a time like this? Plus, whatever we do for the executives, we probably need to do for the directors as well, are all common issues that we are also working on and, in many cases, w/ no easy answers.
3. Change-in-Control—We have several projects as well dealing w/ CIC and how they are effected in an environment like this and again with multiple dynamics that need to be factored in…especially when these are front and center in DC.
4. Severance—And even in some cases, we’re having to work on employee severance packages while companies brace for the worst. Usually we find ourselves agreeing that standard norms don’t apply right now for the rank and file and that every bit of grace and consideration be given to those being put out into this market.
5. Ownership Guideline Issues—Again, as one can imagine, the low prices have impacted OGs significantly. The same was true in 1987, but there weren’t nearly as many companies w/ these back then as there are today. Again, care and consideration of all the factors are needed here like all the above.
I recently co-authored this article – along with Ethan Lipsig, Steve Harris, and Eric Keller of my firm – in which we addressed the following seven questions:
1. What are your most critical workforce challenges – e.g., retention, relocation, growth, reduction, or restructuring?
2. Who do you need to retain and motivate?
3. Are there opportunities to better deploy under-utilized personnel? If not, when and how will you contemplate layoffs, exit incentives, furloughs, forced vacations, reduced hours, or other temporary or permanent work force reductions?
4. Is your company perceived as being at risk of being sold, taken over, or going bankrupt?
5. Do your incentive bonuses or stock-based awards need recalibration?
6. Do you want to better discourage employees from pursuing competitive employment or improper behavior (such as unduly aggressive financial statement accounting practices that ultimately may require a financial restatement)?
7. How will you effectively communicate the actions taken to advance your workforce goals?
At our “3rd Annual Proxy Disclosure Conference” yesterday, Corp Fin Director John White delivered an important speech – entitled “Executive Compensation Disclosure: Observations on Year Two and a Look Forward to the Changing Landscape for 2009” – during which John talked briefly about how the TARP’s executive compensation provisions could potentially spill-over and impact the many companies not directly subject to TARP. Specifically, John addressed the TARP provision that requires participating financial institution’s compensation committees to meet with the senior risk officers of the institution to ensure that the incentive compensation arrangements do not encourage the senior executive officers to take “unnecessary and excessive risks that threaten the value of the financial institution.” Here is an excerpt from John’s remarks on this topic:
Most of you are not from financial institutions, so let’s talk for a moment about non-participating companies. This new Congressionally-mandated limitation on having compensation arrangements that could lead a financial institution’s senior executive officers to take unnecessary and excessive risks that could threaten the value of the financial institution obviously applies on its face only to participants in the TARP.
But, consider the broader implications and ask yourself this question: Would it be prudent for compensation committees, when establishing targets and creating incentives, not only to discuss how hard or how easy it is to meet the incentives, but also to consider the particular risks an executive might be incentivized to take to meet the target — with risk, in this case, being viewed in the context of the enterprise as a whole? I’ll let you think about what Congress might want. We know what our rules require. That is, to the extent that such considerations are or become a material part of a company’s compensation policies or decisions, a company would be required to discuss them as part of its CD&A. So please consider this carefully as you prepare your next CD&A.
Also, more broadly speaking, I expect that current market events are already affecting many companies’ compensation decisions and thus should be affecting the drafting of their upcoming CD&A’s. Regardless of whether your company participates in the TARP and consequently finds itself having to make new material disclosures, you should not merely be marking up last year’s disclosure. Instead, you should be carefully considering if and how recent economic and financial events affect your company’s compensation program.
For example, have you modified outstanding awards or plans, or implemented new ones? Have you reconsidered the structure of your program, or the relative weighting of various compensation elements? Have you waived any performance conditions, or set new ones using different standards? Have you changed your processes and procedures for determining executive and director pay, triggering disclosure under Item 407? These questions and more should be addressed as you consider disclosure for 2008.
Corp Fin’s ’09 Narrowly Selected Review of Executive Compensation Disclosures
Regarding Corp Fin’s review of compensation disclosures filed during the upcoming proxy season, John said this during his speech:
We also are looking at how we will shape our Corporation Finance review program for 2009 in light of recent market events, including the new executive compensation provisions in TARP and continued investor interest in executive compensation. As you know, our selective review program is guided by Section 408 of Sarbanes-Oxley, which requires that we review all public companies on a regular and systematic basis, but in no event less frequently than once every three years. The Act also sets out criteria for us to consider in scheduling these regular and systematic reviews, including considering companies that “experience significant volatility in their stock price,” companies “with the largest market capitalizations,” and companies “whose operations affect any material sector of the economy.” As you also will recall, in 2007 we did a targeted review of the executive compensation disclosure under our then-new rules for 350 companies of all sizes.
Our plan for 2009 will be responsive to current conditions. In 2009 we will select for review and review the annual reports of all of the very largest financial institutions in the U.S. that are public companies. This group will include the nine large financial institutions that have already agreed to participate in the Treasury’s capital purchase program. Our reviews will include both the financial statements and the executive compensation disclosures of these companies. We also intend to monitor the quarterly filings on Form 10-Q and current reports on Form 8-K of these companies.
Today is the “5th Annual Executive Compensation Conference.” Note you can still register to watch online – and note that the archived video for yesterday’s “3rd Annual Proxy Disclosure Conference” is now available.
– How to Attend by Video Webcast: If you are registered to attend online, just log in to TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference” on the home pages of those sites will take you directly to today’s Conference.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is the Conference Agenda; times are Central.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except Pennsylvania (but hours for each state vary; see the list for each Conference in the FAQs).
Today is the “Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference”; tomorrow is the “5th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our Staff (but you can still interface with them if you need to).
– How to Attend by Video Webcast: If you are registered to attend online, just log in to TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference” on the home pages of those sites will take you directly to today’s Conference.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is the Conference Agenda; times are Central.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except Pennsylvania (but hours for each state vary; see the list for each Conference in the FAQs).
– How Directors Can Earn ISS Credit: For those directors attending by video webcast, you should sign-up for ISS director education credit using this form. This is meant to facilitate providing information to ISS; they are the ones in charge of accreditation and any disputes will need to be taken up with them.
Soliciting Queries for Our “Compensation Consultants Speaks” Panel
Among the more popular panels during Wednesday’s “5th Annual Executive Compensation Conference” will be the panel entitled “The Consultants Speak: Straight Talk from the Top Experts.” I am soliciting issues or questions to be addressed by the panel if you want to shoot me an email beforehand (they will be posed anonymously).
Setting the tone for our big executive compensation conferences that start tomorrow, we have posted an important new alert from Fred Cook, founder of Frederic W. Cook & Co. In Fred’s piece – “Moral Hazard and Executive Compensation” – he addresses what moral hazard means and lays out a number of ways that you can use to mitigate it. We strongly urge you to read this piece and show it to your CEO and directors.
An Opportunity to Comment on RiskMetric’s ’09 Proxy Policies
Last week, RiskMetrics’ ISS Division put up a “Request for Comment” for a number of potential modifications to its policies for 2009. Take advantage of this opportunity to influence these important proxy voting policies through an easy-to-use online form. This year, the topics include:
– Poor Accounting Practices (U.S.)
– Discharge of Directors (Europe)
– Independent Chair (U.S.)
– Names of Director Nominees Not Disclosed (Global)
– Net Operating Loss Poison Pills (U.S.)
– Peer Group Selection for Executive Compensation Comparisons (U.S.)
– Poor Pay Practices (U.S.) Pay for Performance (U.S.)
– Corporate Social Responsibility Compensation Related Proposals (U.S.)
– Share Buyback Proposals (Global)
This Gibson Dunn memo summarizes RiskMetrics’ proposed policy changes. In addition, RiskMetrics has made these survey results from institutional investors available.
As noted in this Reuters article, hold-til-retirement and say-on-pay will be two popular shareholder proposals topics during this proxy season as investors turn their attention to pay practices that encourage excessive risk-taking.
Note that you will need your Conference ID and password to access the course materials (if you’ll be in New Orleans, a set will be handed out to you). It’s not too late to register!
Instructions for Those Watching Online Next Week: Come to the home page on the day of the Conference and click the prominent link that will be posted that day. Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or Flash) and the speed of the connection that you have. Panels will be archived a day after they are shown live.
On Monday, the United Kingdom’s Financial Services Authority issued informal guidelines to help its Staff gauge whether a company’s executive pay practices are aligned with sound risk management practices; more formal guidance is expected at some point (for analysis of the US Treasury’s new guidelines issued yesterday, see Mark Borges’ and Mike Melbinger’s blogs and this Washington Post article). Below is a related WSJ article:
As the U.K. government unveiled a far-reaching plan Monday to rescue failing banks, it signaled it would make limits on executive compensation a cornerstone of the effort. In doing so, it went further than the U.S., for now, in tackling an issue that has spurred a voter outcry on both sides of the Atlantic. Prime Minister Gordon Brown promised taxpayers that they wouldn’t lose out in the bank rescue, in which the government intends to take large stakes in two of the country’s biggest banks. “This crisis has proved beyond doubt the virtues of the sound business practice of rewarding responsible risk-taking and not irresponsibility,” Mr. Brown said Monday.
At the same time, the U.K.’s markets regulator issued guidelines aimed at clamping down on outsize compensation packages, saying that pay structures at investment banks might have encouraged risky practices. In a sternly worded letter to bank chiefs, Hector Sants, chief executive of the Financial Services Authority, said that banks’ boards had a responsibility to make sure they have effective structures in place to set pay policies. “It would appear that in many cases the remuneration structures of firms may have been inconsistent with sound risk management,” Mr. Sants said. “It is possible that they frequently gave incentives to staff to pursue risky policies, undermining the impact of systems designed to control risk.”
In Britain, where top executives have long earned less than their counterparts in the U.S., corporate compensation has become a potent political issue. Since 2003, U.K. shareholders have cast advisory votes on executive-compensation policies and how much they pay executives. The financial crisis has spurred calls for a crackdown on executive compensation in both the U.S. and the U.K. The rescue package that U.S. President George W. Bush signed into earlier this month contains a provision barring incentives for “unnecessary and excessive risks” at companies in which the U.S. government takes a “meaningful” stake. The law also contains certain limits on corporate-tax deductions for executive compensation and bars hefty exit packages for some executives. But the vague wording of the excessive-risk clause might make it difficult to enforce, some corporate-governance experts have said.
In the U.K., the pay crackdown produced quick initial results Monday. Both the Royal Bank of Scotland Group and HBOS said their departing chief executives wouldn’t receive severance packages, after the government unveiled plans to take large stakes in both banks.
While the U.K. regulator said it wasn’t seeking to get involved in setting pay levels, it signaled that it would be pressing the issue with financial firms. Mr. Sants said that the FSA held a number of high-level discussions with U.K.-based firms last month about remuneration policies, and that before the end of the year it would arrange a further round of visits to make certain that “bad practices” aren’t present and that good practices are being followed. He also stressed that action on compensation needs to be international in scope and said that the regulator would report on “global discussions” on compensation issues early next year.