We just posted the registration form for our popular conferences – “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference” – to be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference (we’ll be posting the agenda for the Executive Compensation Conference in the near future).
Special “Half-Off” Early Bird Rates – Act by April 24th: We know that many of you are hurting in ways that we all never dreamed of – and going to a Conference is the last thing on your mind. But with huge changes afoot for executive compensation and the related disclosures, we are doing our part to help you address all these critical changes—and avoid costly pitfalls—by offering a “half-off” early bird discount rate so that you can attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 24th to obtain 50% off.
“Books & Records” Being Used to Check Compensation Committees
As noted in this NY Times’ article from Sunday, the Louisiana Municipal Police Employee Retirement System is using a books & records demand at Chesapeake Energy to determine whether the board met its fiduciary duties in approving a $75 million bonus, as part of a renegotiated employment contract with the CEO.
The CEO had lost 94% of his holdings in the company due to a margin call (when the company’s stock dropped 60%) – and he had an existing 5-year contract struck in ’07 that had not yet run its course when this new one was renegotiated. The books & records demand was the first step used in the Disney case a few years back.
A few weeks ago, the UK’s regulator – the Financial Services Authority – published a draft “Code of Practice on Remuneration Policies.” It is proposed that the Code will be relevant to all FSA-regulated firms, not just banks, and will relate to the remuneration of all employees. It would therefore apply to the UK FSA-authorised entities of non-UK firms operating in the UK.
The Code comprises one general principle and 10 specific principles and develops ideas first set out in a “Dear CEO” letter sent last year by the FSA to the CEOs of many banks. Although it is not clear when the final Code will formally become part of FSA regulation, it is expected to be in the near term.
Learn more in our “International” Practice Area about this development.
French Parliament Toughens Tax/Social Security Treatment of Golden Parachutes
This recent Latham & Watkins memo explains the new French changes to the social security treatment of indemnities, including golden parachutes, paid to a manager due to the forced termination of duties, as well as the new tax treatment of certain golden parachutes at the level of the paying company.
Fueled by the anger over the AIG bonuses, the focus now is on bonuses generally. As we all know, a focus on a single pay element doesn’t really make sense as the totality of the pay package is what really matters. But the public (and most of the media, Congress, etc.) isn’t used to dissecting complex executive pay packages.
Anyways, companies may now be moved to rename their “bonuses” as something else due to their stigma, as noted in this NY Times article yesterday. And the concept of retention bonuses may need to be reconsidered, as there clearly have been some abuses in this area. I agree that retention bonuses make sense in particular circumstances – and can even be critical to save a company from imploding. But – like everything in life – sometimes there are mistakes and even purely abusive situations.
Occasionally, it’s also hard to make retention bonuses sound “right” to the masses, even though it makes sense for the company. Perhaps some of the AIG bonuses fall into that category as I read this resignation letter from one of the AIG Financial Product Unit executives. Notice the letter has over 900 reader comments.
As a sidenote, the reality is that the economic downturn has forced many companies to cut executive bonuses, as noted in this Watson Wyatt report.
With say-on-pay being implemented by many more companies this proxy season – courtesy of TARP – and shareholders supporting these proposals in greater numbers (eg. Hain Celestial Group’s proposal recently received a 62% vote), I thought it would be useful to explore the different approaches to say-on-pay that companies can take in a series of blogs.
Narrow Retrospective Model – The Blockbuster Model
In 2007, shareholders of Blockbuster succeeded in having the following resolution included in its annual proxy statement:
“Resolved, that shareholders of Blockbuster, Inc. urge the Board of Directors to adopt a policy that Blockbuster shareholders be given the opportunity at each annual meeting of shareholders to vote on an advisory resolution, to be proposed by Blockbuster’s management, to ratify the compensation of the named executive officers set forth in the proxy statement’s Summary Compensation Table (SCT) and the accompanying narrative disclosure of material factors provided to understand the SCT (but not the Compensation Discussion and Analysis).”
The resolution was supported by 57.8% of shareholders who voted and led Blockbuster to adopt a say-on-pay policy starting with the company’s 2009 annual meeting. Before the deluge of TARP companies, shareholders at least 14 US companies passed say-on-pay resolutions similar to Blockbusters’ and seven public companies have either officially adopted say-on-pay policies or committed to so. Among those that have adopted policies are Apple, Tech Data, Par Pharmaceutical and Verizon. None of these companies have yet submitted executive compensation to a shareholder vote. Nevertheless, the Blockbuster resolution indicates how a say-on-pay vote might be implemented.
The resolution seeks shareholder approval of only the Summary Compensation Table and the narrative disclosure of material factors accompanying the SCT. The SCT provides only historical information about the amount of compensation paid or payable in respect of the prior three years. As a result, this shareholder vote relates only to the amount of compensation and not the policies underlying it. Compensation in the SCT is broken down into a number of categories: salary, bonus, stock awards, options, non-equity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings, and a catchall, all other compensation (which includes perquisites).
– Ira Kay and Terri Shuman, Watson Wyatt Worldwide
Last week, we published a survey entitled “Effect of the Economy on Executive Compensation Programs,” which shows companies are making more dramatic changes to their executive pay programs in recognition of the recession and financial markets’ decline. The results reflect that companies continue to re-evaluate the long-term implications of their executive pay policies, but it is still not clear that the changes boards have made are aggressive enough to placate shareholders.
This update to our December, 2008 survey found:
– Fifty-five percent of respondents have frozen salaries – 34 percentage points higher than reported in the December 2008 survey.
– Twenty percent of respondents have reduced or are considering reducing salaries versus only 8 percent in the December 2008 survey.
– Approximately half (48 percent) of respondents plan to decrease this year’s bonus pool, with the decrease to average about 40 percent.
– Thirty-eight percent are making changes to their annual incentive plan performance measures and 30 percent are making changes to their long-term incentive plan measures.
– Twenty-three percent of respondents have added a clawback policy.
– About one-third of respondents are shifting toward time-based restricted stock and performance-based shares.
– One-third of respondents are reducing their long-term incentive grant values, with the average reduction to average at thirty-five percent.
– Only 1 percent of respondents have taken action on underwater stock options, although 17 percent are considering doing so.
We also surveyed company views on the current regulatory landscape. Approximately half of companies surveyed said that they were moderately to significantly concerned about “say on pay” measures (56 percent), expanded Compensation Discussion and Analysis (CD&A) disclosures (50 percent), deferred compensation limits (46 percent) and excluding “excessive risk” from compensation programs (43 percent). Despite the latter concern, more than seventy 70 percent of companies surveyed have not added a formal risk assessment process, and sixty-nine percent have not certified in their proxy that a risk assessment has been performed.
We see these TARP sections relating to excessive risk potentially being expanded (either by regulation or as a good governance practice) to companies outside the financial industry as the notion of actions compensation committees must take to fulfill their fiduciary obligations continues to evolve.
However, we would caution against adopting “conventional wisdom” in changing executive pay architecture, as companies need to find a balance between programs that create adequate incentives for executives to perform versus those that do not encourage excessive risk taking. Watson Wyatt will soon be publishing the results of some very important research on this issue that helps to empirically illustrate those pay elements that are risk “mitigators” versus those that are risk “aggravators.” We think this will be a “must-read” for compensation committees trying to balance these concerns.
For many compensation committees, the recent stock market nosedive has made decision-making about 2009 long-term incentive grants the most challenging in recent memory. One issue attracting a lot of attention right now is how to determine the appropriate number of options, shares or units to grant in light of the significant share price declines most companies have experienced over the past few months.
Companies that have followed a practice of granting a fixed number of options or restricted shares are concerned about how that practice may affect executive retention and motivation, in that a lower share price would mean a smaller expected grant value under this approach. The more common approach of targeting the specific dollar value of long-term incentives to grant, based on competitive levels and surveys, is also problematic in the current environment for a number of reasons.
The bottom line is that equity incentive grants are likely to be lower in value at many companies this year. Indeed, over 40% of the companies participating in our recent pulse survey on compensation issues in the economic crisis have already concluded that the expected value of their 2009 long-term incentive (LTI) grants will be lower than last year’s, and other recent studies have shown similar results. We expect when all decisions have been made, the percentage of companies reducing their grant values will end up being even larger than these studies suggest.
Here is a memo with a closer look at the LTI granting issues companies are facing in the current climate, and some of the key considerations compensation committees need to keep in mind. The decisions companies are making today regarding their LTI values will have a ripple effect in the future as these grant values make their way into proxy statements and compensation surveys. As such, and since the recent volatility in the capital markets may continue for the foreseeable future, we don’t expect the issue of how best to determine LTI grant values to go away any time soon.
Tune in tomorrow for our webcast – “Compensation Arrangements in a Down Market” – to hear Blair Jones of Semler Brossy, Mike Kesner of Deloitte Consulting and James Kim of Frederic W. Cook & Co. discuss how boards are rethinking compensation practices in the wake of the down market.
Recently, Bank of America filed preliminary proxy statement that includes BOTH a management proposal on say-on-pay and a shareholder proposal on say-on-pay (from Kenneth Steiner, whose agent is John Chevedden). The management proposal is an actual vote, while the shareholder proposal is merely a non-binding vote regarding whether the company should have a policy requiring an annual pay vote.
BofA had tried to exclude this proposal through the no-action letter process, arguing that it (1) conflicts with management’s proposal and (2) the company has substantially implemented the shareholder proposal by including the management proposal. The proponent won the day with his argument that the two proposals are not the same because management’s proposal is limited to the period of time that the company is in TARP, while his proposal is unlimited as to duration. On Monday, Corp Fin posted its response, not permitting BofA to exclude the proposal on either ground (they did waive the 80-day advance requirement).
I think dueling “say-on-pay” proposals will be confusing to shareholders – and I certainly hope this won’t be a new trend. Over the past month, most proponents withdrew their “say-on-pay” proposals once management included their own; this position by the Staff may cause them to reconsider going forward…
We just released a survey entitled “Executive Pay in the New Economy,” which includes responses from two time periods: November 2008 and February 2009. Notably, there have been significant changes in the responses in that 3-month period. Among those:
– More than twice as many respondents to the Winter 2009 survey (38.3%) said that the recent financial turmoil would impact their pay-making decisions over the next 6 months, compared with only 16.5% percent of respondents three months earlier
– 28.1% of Winter 2009 respondents said that performance was “well off-target” compared to half as many—14.0% in Fall 2008
– While directors in the Fall 2008 survey tended to be more aggressive on the prospects for changes in executive pay programs than other respondents, Winter 2009 results show directors and executives to be generally like-minded
Yes, I’m angry too. I drafted a profanity-laced blog on Sunday, but held it back to calm down (you can get the profanity if you need it at “Daily Kos” – and the extremism at “Zero Hedge“). Even though I can understand why paying $165 million in guaranteed bonuses (plus another $239 million later) to wind down $2.7 trillion in risky derivatives (now wound down to 1.7 trillion) could make sense to a board (as Andrew Ross Sorkin argues), I’m still having trouble buying into the arguments made in this letter from AIG’s CEO Edward Liddy and AIG’s White Paper for these reasons:
1. Why Did the Government Wait So Long? – One maddening thing is the lost opportunity in dealing with these problems last Fall when the government started to shell out big bucks. The Obama Administration says it just learned about this bonus program, but ignorance is not an excuse when you own 80% of the company.
In any pre-bankruptcy workout, employees can be forced to make compensation concessions as a condition to the restructuring. The employees are given a reality check, based on the compensation they would receive if the company goes into Chapter 11. In the case of AIG, you and I were the lenders – but no one represented our interests to ensure the right people gave the right things up before the company was “saved.” Paulson, et al. screwed us from the start. As noted in this Washington Post column, the same negotiation tactics could be used today.
And what’s the response now that this fiasco has come to light? All sorts of “innovative” solutions are being promised from newly enlightened politicians (or some not so innovative: Geithner is talking about withholding $165 million from a $30 billion payment due to AIG now – as if that is a real solution). As one member told me: I’m from Iowa, so I understand the process of closing the barn door after the horse has bolted.
2. Avoiding a Lawsuit? – One of the primary reasons that the government – which controls just under 80% of AIG – allowed these bonuses to get paid was that it didn’t want to “risk a lawsuit” in paying out the bonuses. Risk a lawsuit? That was your worst case scenario in deciding not to challenge these bonuses? [Prof. Cunningham provides some examples of ways payment might have been avoided under the bonus plan; here is analysis from others.]
How many times in your life have people broken a contract to drive you to a better deal? This is “Business 101” stuff. Real business people realize that breaking contracts is an acceptable way to renegotiate terms – for starters, look at all the broken merger deals over the past year. The government is probably right to be wary of unilaterally abrogating employment contracts willy-nilly. But a little renegotiation could have gotten a lot of results here.
For example, I don’t understand why they didn’t offer to swap cash for equity (e.g., restricted stock that doesn’t get paid back until after AIG gets back on its feet.) That approach would recognize market realities and still provide a decent incentive for current employees. It’s done all the time by Silicon Valley companies that have fallen on hard times. I suppose a disgruntled employee could still file a wage claim, but it’s hard to see a court ruling in favor of a well-compensated employee that refused a reasonable settlement.
3. Feels Like Blackmail – One of AIG’s arguments is that “retention” bonuses were necessary to retain the employees of their Financial Products unit because they are the only ones who could understand AIG’s complicated mess (note when the bonus plan was created last year, the stated purpose was not retention!). It sure sounds like blackmail on the part of the quants who control AIG’s derivatives book. There have been a lot of layoffs on Wall Street lately – would hiring talented individuals to work for AIG really be so difficult?
My personal favorite is Liddy’s claim that these bonuses were necessary to prevent the competition from stealing these outstanding employees. Some reports say that some of these employees are indeed being courted because knowledge of counterparty strategies can be lucrative; others claim that the employees getting paid the biggest bonuses no longer have any relevance to AIG since that unit is no longer soliciting new business. I imagine both of these thoughts might be correct, but there are bigger issues at stake here (not to mention that a total of 52 bonus recipients are not even employed by AIG anymore, including one who received over $4 million).
4. Who’s In Charge Here? – I guess owning 80% doesn’t get you much when you’re the government – not even the courtesy of transparency when you repeatedly request it. Now under heavy fire, AIG has started to disclose counterparties that received some of the bailout money. I can’t imagine any other situation where a 80% owner appeared to have so little clout.
5. Some Will Be Connecting Dots – It’s already being reported that bonuses were paid out to some executives at some of the institutions who received money from AIG. Brace yourself as this story has “legs” and I imagine is just the first in what will be a long series of pieces about misuse of taxpayer money. The cycle will be the government rushing to bail someone out (sometimes against the recipient’s will!), abuse of the bailout money, Congressional outrage, repeat.
6. Can Everyone Stop Treating Us Like Children? – I’m so sick of the corporate executives and the government feeding us a bunch of bull. I’m having trouble trusting anyone. I imagine this is a widely-held belief. It doesn’t help when so many lies are thrown at us to explain the latest foul-up.
Executive Pay: Once Again, Where Do We Go From Here?
I sure hope the furor over these AIG bonuses is yet again a wake-up call for the pay apologists among us. As I recently wrote, it’s time for all board advisors – lawyers and consultants – to start providing responsible advice and get their head out of the sand. Times have changed and it’s not going back. The days of arguing that excessive pay is necessary to retain an executive who might jump ship are over. Excessive pay is never justifiable. It’s just excessive.
Unless – and until – boards and their advisors take charge of their own destiny and fix all that is broken, all the legislative and regulatory fixes in the world won’t stop them from finding loopholes and continuing the excesses. When boards recognize that the causes of these excesses are a relatively recent phenomenon (for starters, read this) – and that excessive pay arrangements aren’t some type of birthright for CEOs – it’s easy to go back two decades and recreate what was a more reasonable way of doing things in the executive compensation area.
A board with the proper mindset can employ the few simple tools we have identified to fix CEO pay and save themselves a lot of heartache easily. They just need the will to do so, along with advisors with the backbone to speak full truths.
I’m the kind of guy who likes to think in terms of T-shirts. For this AIG debacle, my idea of a cool T-shirt would look like this:
– Front – “AIG, I love you even more today than yesterday…”
– Back – “…Yesterday, you really pissed me off.”
Express Yourself Anonymously: An AIG Poll
Feel free to select more than one choice in this poll: