The Advisors' Blog

– Colin Diamond, White & Case

Here is the third in a series of blogs exploring the different approaches to say-on-pay that companies can take:

Retrospective and Prospective Model – The RiskMetrics ’08 Model

RiskMetrics Group is, among other things, the largest proxy advisor in the United States. As a result, it is expected to meet the highest standard of governance with respect to its own affairs. RiskMetrics voluntarily implemented a say-on-pay policy in June 2008 following its IPO in 2007 and put the following three resolutions to a shareholder vote in its 2008 proxy statement:

(1) that shareholders approve the Company’s overall executive compensation philosophy, policies and procedures, as described in the Compensation Discussion and Analysis in the Proxy Statement;
(2) that shareholders approve the compensation decisions made by the Board with regard to named executive officer performance for 2007, as described in the Compensation Discussion and Analysis in the Proxy Statement; and
(3) that shareholders approve the application of the Company’s compensation philosophy, policies and procedures to evaluate the 2008 performance of [sic], and award compensation based on, certain key objectives, as described in the Compensation Discussion and Analysis in the Proxy.

The first and second resolutions essentially separate the “Broad Retrospective Model” into two resolutions. The first resolution addresses the company’s philosophy, policies and procedures and the second resolution addresses actual compensation decisions. Separating these two resolutions arguably enables shareholders to indicate displeasure with a company’s overall compensation philosophy while, at the same time, approving actual compensation paid. The third resolution, however, breaks from both the “Narrow Retrospective Model” and the “Broad Retrospective Model” by asking shareholders to approve the application of the company’s compensation philosophy to the then-current fiscal year.

To this end, RiskMetrics included in its 2008 proxy statement both the metrics and the specific targets for each metric that the compensation committee would use in determining whether management is entitled to incentive compensation for the 2008 fiscal year. The third resolution represents a radical departure from the say-on-pay policies that most companies would be willing to implement and that are envisaged by most shareholders, because it requires disclosure of information that is not required to be disclosed under SEC rules and, as discussed above, that most companies strongly resist disclosing.

The wording of RiskMetrics’ third resolution also leaves some areas of doubt. For example, RiskMetrics’ 2008 CD&A states prospectively that the CEO’s target incentive compensation for 2008 will be twice his base salary. It is not clear whether the third resolution calls on shareholders to approve the amount of the CEO’s target incentive compensation or whether it solely calls on them to approve the application of the Company’s “compensation philosophy, policies and procedures” in determining whether to pay that amount. In addition, the resolution states that the “compensation philosophy, policies and procedures” are based on “certain key objectives,” but it is unclear whether shareholders are being asked to approve those objectives.

Note that RiskMetrics’ didn’t use the same wording for this year’s proxy statement. For unknown reasons, it dropped the third resolution.