I wanted to bring to your attention this opportunity to influence policies being considered by congress relating to “Say on Pay.” If you want to offer your views, you can comment on Professor Jeffrey Gordon’s pre-publication draft paper – entitled ““Say on Pay: Cautionary Notes on the UK Experience and the Case for Shareholder Opt-In” – which presents a company-specific “opt-in” as an alternative to the universal approach in last years house bill.
Professor Gordon’s idea generated both corporate and investor interest when he introduced it at a December meeting of the Shareholder Forum. As both a member of the Forum’s Program Panel – and as a compensation professional whose clients are interested – I have been following this carefully and I would like to know what other compensation professionals have to say about it. It’s also important that those making policy hear from people who know what they are talking about.
The following are excerpts from the summaries Professor Gordon provided to Forum participants of his paper’s thoroughly researched review of UK and US marketplace conditions relevant to “Say on Pay” policy decisions:
The paper provides a sober look at how a theoretically attractive idea like SOP is likely to play out in the real world….
In the face of recent lessons, it seems especially unwise to mandate SOP across all 14,000 public firms in the United States. A better approach is to provide federal assurance of the shareholder right to opt-into a SOP regime. This will lead to targeting of firms with the most problematic compensation issues and will reflect commitment of genuine shareholder engagement rather than delegation of decisionmaking to a third party rater. It will also lead to testing and rethinking of compensation ideas in a more thoughtful way.
…[conditions addressed in] this draft buttress the alternative proposal to limit any mandatory SOP rules to the largest firms by showing that the UK precedent itself makes such a distinction: firms listed on the LSE Main Market (1080 firms) are subject to mandatory SOP whereas the smaller firms listed on AIM (1546 firms) are not. In comparing institutional capacity to manage SOP responsibilities, it is also noteworthy that in the UK, 82 companies account for 85% of market capitalization, whereas in the US, the S&P 500 companies account for only 75%.
Comments can be sent to the Forum’s Chairman, Gary Lutin (gl@shareholderforum.com), either for private submission or for open Forum review. Please note, by the way, that the draft is not a published paper and should be treated accordingly; anyone wanting to refer to its statements should seek permission from the author.
In our Winter ’09 issue of the Compensation Standards print newsletter, we included a short piece on “Four Key TARP Fixes.” With Congress likely to act very soon on fixing TARP – and executive compensation excesses – we hope that this short article will influence those that will be making these regulatory changes.
We have posted the article on a non-member page so that anyone can access it. Please tell your friends in Congress!
I just put together a “Quick Survey on ’09 LTI Grant Practices.” Please take a moment to complete and and I’ll share the results soon. The survey closes Tuesday, 2/3/09, at 5 pm Central.
Dave just completed a Special Supplement to the Jan-Feb ‘09 issue of The Corporate Executive. Since we expect many will be borrowing extensively from Dave’s excellent, up-to-the-moment model disclosures – inserting them into current drafts of proxy statements – we have posted the issue so that ’09 renewers can access the issue now (the full issue, including the Supplement, will be mailed to current ’09 subscribers later this week).
Renew Now: Those that renewed for ’09 received a link to the Supplement yesterday with instructions on how to access it; if you haven’t renewed yet, renew now to receive it immediately.
Try a No-Risk Trial Now: To have this Special Supplement rushed to you via email so you receive it today, try a no-risk trial for ’09 now – as the Supplement includes pieces on:
– Timely “Best Practice” Disclosures for Your Compensation Discussion and Analysis
– Implementing “Hold Through Retirement” for Equity Awards
– Our Hold-Through-Retirement Policy
– Revisiting Perquisites
– Reassessment of Our Perquisites
– Making the Most of Clawback Provisions
– Revisiting our Compensation Recovery Policy
– Evaluating the Need for Pensions and SERPs
– Our Review and Analysis of Pensions and SERPs
– Tax Implications
– Deductibility of Compensation for Tax Purposes
Given the heightened importance of executive pay right now – and the high likelihood that Congress will pass “say-on-pay” legislation, this year’s compensation disclosures will receive unprecedented scruntiny by investors, employees, customers and the media.
The rapidly escalating activity in, and debate about, “fixing” underwater equity has resulted in some public rifts. Much of the discussion centers on the technical complexity of option exchanges and performance plan resetting. Others, like our firm’s position, focuses more on Equity EffectivenessTM and the opportunity that the current market chaos presents for re-evaluating the role of equity compensation in total pay strategy.
Frankly, I think some are more interested in selling option exchange programs, and the time-intensive valuation, design, and disclosure processes that they require, though I would hope that the lucrative fee opportunities in these would not cause anyone to recommend these programs over simpler and more cost-effective strategies.
The phrase coined by our Firm – which is the name of this memo, “Stop Before You Swap” – is intended to encourage companies to step back and re-assess why they use equity compensation and, more importantly, the total financial return they are realizing from the related expenditures. While there are numerous obvious responses to this question – market practice, industry norms, financial efficiency – we believe all of these are called into a new light in this unprecedented environment.
Remember, the “cost” of equity compensation is not just FAS123R or IFRS2 accounting expense. The all-in cost of plan evaluation, design, valuation, implementation, and administration is rarely tracked but typically quite high. We believe that these cumulative costs sometimes exceed the pay delivered to plan participants, even before the recent market downturn. Equity compensation may be the sole business practice that is exempt from ROI calculations.
To suggest that underwater equity – inclusive of underwater options, RSUs with minimal value compared to values at grant date, and performance plans with little or no hope of payout – should only be dealt with through direct action on those awards is simplistic.
Similarly, in this era of heightened scrutiny to executive pay practices and the spillover to equity programs, it is irresponsible to suggest that conforming to a single proxy advisor’s arbitrary criteria as guidance for such actions is de facto “good governance.” We already have examples of companies that conformed to “the rules’ but whose programs failed as well as those who ignored the rules and proceeded with successful programs that made good business sense.
We are not in a time where programs and checklists can be the basis for good governance and good business decisions. We are in a time that requires comprehensive analysis about governance and financial issues, and not just how to optimize option exchange rates through manipulation of expected life assumptions.
Corporate governance advisors expect more and shareholders deserve more. When millions of Americans have lost one-third or more of their life savings, and some have lost their jobs and their homes too, a focus on restoring equity compensation value to “incent and retain” employees deserves critical thinking.
Dave Lynn and Mark Borges just wrapped up – and we have just posted the Winter 2009 issue of our quarterly “Proxy Disclosure Updates” Newsletter, which is free for all those that try a no-risk trial to Lynn, Romanek and Borges’ “The Executive Compensation Disclosure Treatise & Reporting Guide.”
This critical issue provides analysis, practice pointers – and model disclosures – regarding executive pay risks, a new type of disclosure that all companies will need to address in the wake of EESA and other regulatory responses to the crisis. The issue also provides new analysis regarding disclosures of pledged and hedged shares.
Try No-Risk Trial Now: Order now so we can rush a non-blurred copy of this first issue to you today – as well as a copy of the 1000-page Treatise; note there is a reduced rate if you are ’09 member of CompensationStandards.com. If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.
When you order the Treatise, not only do you get a hard copy mailed to you, you also get access to an e-version on CompensationDisclosure.com. And you also get access to the quarterly Updates newsletters that make up the “Lynn, Romanek & Borges’ Executive Compensation Annual Service.”
– Mark Poerio, Paul Hastings Law (with assistance from Michael Steele)
The financial downturn continues to swing the pendulum of public opinion further and further away from incentive-based compensation for executives. Consider, for example, an absolute prohibition on any incentives for the top-25 executives of bailed-out companies. That prohibition occurs within a TARP-governance bill (H.R. 384) passed this week by the House (and sponsored by Financial Services Chair Barney Frank (D-MA)). Although those who are bailed-out should expect greater regulation, the question for shareholders and the incoming Obama administration is nevertheless whether, at some point, the pendulum has swung too far away from motivation through proper incentives.
The reality is that well-drawn executive incentives are generally desirable, with a good litmus test being how well they promote key corporate interests, discourage excessive risk and disloyalty, and reward long-term performance. This is largely the point we make in our article entitled “Executive Insecurity—No Better Time for Employer Attention.”
Our article singles out the following general questions for employers to consider in view of the anxiety we currently face:
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?
If you would like to see our answers and commentary on the above questions, see this article.
Last month, the Millstein Center published a final version of its policy brief on board-shareowner communication entitled “Talking Governance: Board-Shareowner Communications on Executive Compensation.” In this podcast, Dr. Stephen Davis describes his thoughts about the Millstein Center’s paper, including:
– What is the goal of your board-shareowner communications paper?
– What type of comments did you receive on the draft? What changes were made?
– Which board-shareholder communication model do you think is the most feasible in the near-term?
– What about the long-term?
In our “Clawbacks” Practice Area, I have started posting memos regarding two recent cases that deal with Section 304 of SOX. The first case was from the 9th Circuit Court of Appeals – In re Digimarc Corporation Derivative Litigation – the court found that material errors in financials, in the absence of an actual restatement, is not sufficient to support a Section 304 claim. One day later, a second case – U.S. v. Shanahan – in the US District Court of Missouri. Both cases have a common theme: strict, narrow construction of Section 304.
The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!
Don’t forget to tune in today for the CompensationStandards.com webcast – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!,” featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller. This is the first of a two-webcast series, with the second one taking place the following Wednesday, January 28th.
Given the heightened importance of executive pay right now – and the high likelihood that Congress will pass “say-on-pay” legislation, this year’s compensation disclosures will receive unprecedented scruntiny by investors, employees, customers and the media.
Earlier this week, Pat McGurn, Special Counsel of RiskMetrics’ ISS Division, participated in a TheCorporateCounsel.net webcast: “Forecast for 2009 Proxy Season: Wild and Woolly.” The excerpt below was culled from the webcast transcript and it deals with “say-on-pay” (Pat also discussed a number of other “hot” compensation issues):
Issue number four is last year’s number one issue, which is say-on-pay. I think it’s going to go from what I call “stagnation” to “legislation” over the course of the year. I think it’s pretty clear right now that Rep. Barney Frank is going to follow through very quickly by reintroducing the say-on-pay legislation, which he passed through the House with a 2/3 vote back in 2007.
The big question, of course, is when will the mandate become effective? I think it’s pretty clear that you’re not likely to see a federal mandate playing a major role in the 2009 proxy season. By the time the regulations would get written, I think we’re looking more at impacting public companies in 2010.
As a result, say-on-pay is going to remain a top shareholder proposal topic in 2009. I think we will see a huge increase in voting support this year, as more and more investors figure this is a fait accompli due to the likelihood of legislation being adopted.
I think last year support stagnated in the 42% range, although we did see a bump up in the number of companies with majority votes on the topic, including a couple of strong votes at Apple and Sun Microsystems. Apple’s meeting will be coming up shortly and we may get a good feel on how the issue is going to fare this year.
Suffice it to say, we’re likely to see some of the mutual fund complexes that have held out and continue to vote against say-on-pay perhaps flipping this year and supporting the resolutions given the likelihood of a legislative solution on this issue. I think management votes have already been promised by more than ten firms. We saw very strong support at Aflac, the first company in the US to have a management-proposed say-on-pay vote, and the resolution on the ballot was supported by 95% of the votes cast range.
We’ve also seen the first major significant “thumbs down” on a say-on-pay resolution offered by a board this past season at Jackson Hewitt Tax Services, where nearly 40% of the votes cast were cast “thumbs down” on that management proposal. Clearly Jackson Hewitt has not sunk into the sea, so the naysayer’s notion that this will cause corporate calamity if there’s a high “no vote” on a management proposal did not come to bear. I think this will eliminate one more argument that’s been used to urge people to vote against say-on-pay.
Board members still don’t appear to be warming up to the concept of say-on-pay. Even though it is looking highly inevitable at this point in time, we do expect to see a number of boards break ranks this season and become early adopters on management proposals, if for no other reason than it gives them some discretion at least for 2009 to design a management proposal on say-on-pay in the fashion that they’d like to see it designed. In doing so, they could actually have some impact perhaps on how the SEC finally writes regulations that will mandate these annual advisory votes for all public companies.