Recently, we wrapped up our annual review of total director compensation at Fortune 500 companies. We found that 2008 pay packages rose by a median of just 3% from 2007 rates, a modest increase compared to the median annual pay increases near 10% seen in recent years.
Total remuneration for nonexecutive directors at the companies studied rose to $199,949 in 2008, up from a median value of $193,965 in 2007. While cash compensation rose by a median of 5% (to $83,875, up from $80,000 in 2007), falling stock prices brought down the value of equity awards by a median of 1% overall from 2007 rates. For 2008, median equity values in director pay packages fell to $103,963 from $105,000 the year prior. This decrease in equity pay reverses a trend of rising annual equity award values for directors over the past four years, when values increased at rates between 5% and 13% annually. We expect to see even more of an impact from the economic and market downturn in the data for 2009.
The 3% median increase in total 2008 director remuneration reflects a general salary stability – and in some cases, stagnancy – seen across employees and executives at many companies during the current recession. In fact, more than half of all companies
included in the study made no change to their directors’ compensation package at all in 2008. Further, 17 companies in the 2008 study decreased the value of some element of their director pay programs, from cash compensation to equity grants.
We also also focused on the compensation premium placed on the role of nonexecutive chairmen and lead directors. At the median, a lead director receives $20,000 in additional annual compensation compared to a typical director. Nonexecutive chairmen receive a median of $150,000 in additional total compensation compared to a typical director.
Now that we have seen the SEC’s proposals and Congress’ say-on-pay legislation – that will force you to radically change your executive compensation disclosures and practices before next proxy season – we are wrapping up the ’10 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide,” which we will deliver to subscribers in October.
Act Now for $100 (Or More) Discount: To obtain this hard-copy ’10 Treatise when its printed in October (as well as get online access to the ’09 version right now on CompensationDisclosure.com, as well as the valuable quarterly “Proxy Disclosure Updates”), you need to try a no-risk trial to the Lynn, Borges & Romanek’s “Executive Compensation Service” now.
If you order by this Thursday, October 1st, you can take advantage of a $100 or more discount. The many of you that currently subscribe can renew by October 1st to also receive this discount. Get the new Treatise hot off the press when it comes out!
I want to put into context a quote of mine that you may have seen in this Reuters article relating to the G-20 summit discussions on bankers compensation. The quote does not all at represent my attitude or point of view about pay in general.
While the quote was accurate, it was in reply to a question about a list of 18 of the largest banks in the world (by market cap) and the reported 2008 compensation of their CEOs. My comment to the reporter related to comparing the compensation of the CEOs among that group of banks. I was remarking that there is a stark contrast between the $230,000 CEO pay at the named Chinese banks and $35+ million at two of the U.S. banks and the $5-13 million at the listed banks in Australia, Argentina, Canada, Italy and Spain.
In comparison, the $230,000 seemed “basically nothing” (less than 1% in some cases) and I was questioning whether the reported compensation numbers were comparing apples to oranges. It seemed to me that the Chinese compensation numbers were so far off the mark in terms of the peer group of banks that it was hard to imagine that we were looking at the whole picture. At the time, I did not realize (as the article points out) that the Chinese banks operate on an entirely different system – i.e., that their bank CEOs are government appointees, whose pay is capped at that level (exclusive of other benefits).
I am in no means an apologist for excessive compensation. Clearly something needs to be done to avoid pay systems that encourage excessive risk, regardless of the dollar amount. Nor, of course, do I think that $230,000 is “nothing” in compensation. However, as a pay cap for the world largest banks, that level is quite a far cry from the current compensation levels in the global peer group. This sharp contrast illustrates the difficulty in pursuing a universal pay cap strategy, as advocated by some in the G20. According to unofficial reports from last Thursday’s summit, the call for absolute caps on pay apparently has softened in favor of reforms that are designed to focus on controlling risks and safe-guarding the long-term health of the institution, which is in line with the recommendations of the Obama Administration.
CEO of Goldman Sachs Lloyd Blankfein’s remarks at the Handelsblatt Banking Conference recently were reported by a number of commentators. Breaking Views, for one, indicated that they were worth repeating.
Well, only if they have been changed, and it’s hard to tell precisely whether they have. Focusing yet again on compensation in the latter part of the speech he said: “There is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year.” But isn’t that exactly what Goldman did in 2008? Net income of $2.3 billion and bonuses of $4.8 billion, according to Andrew Cuomo’s report that I wrote about earlier. Don’t those bonuses wipe out that net income? Well, not really, but it’s worth thinking about anyway.
Let’s have another look at those compensation principles. He reiterated them:
“In short, we believe:
– The percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.
– For senior people, most of the compensation should be in deferred equity. Only the firm’s junior people should receive the majority of their compensation in cash.
– An individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect. To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.
– No one should get compensated with reference to only his or her own P&L. Compensation should encourage real teamwork and discourage selfish behavior, including excessive risk taking, which hurts the longer term interests of the firm and its shareholders.
– To avoid misaligning compensation and performance, multi-year guaranteed employment contracts should be banned entirely. The use of these contracts, unfortunately, is a common practice in our industry. We should all recognize that they are bad for the long-term interests of our industry and the financial system.
– And, senior executive officers should be required to retain the bulk of the equity they receive until they retire. In addition, equity delivery schedules should continue to apply after the individual has left the firm.”
With almost all of this we have absolutely no quarrel at all. But the key here is: “An individual’s performance should be evaluated over time….”
According to the Wall Street Journal article on the same remarks, the Dutch have now understood along with the British, the Germans and the French as the article notes that the Netherlands Bankers’ Association has indicated that it expects banks to have long-term targets.
Now Mr. Blankfein betrayed a basic misunderstanding of multi-year performance periods earlier in the year when these principals were first announced. Measuring performance over the long-term does not mean measuring it over 12 months and paying it out over the long term, even if the amount is subject to clawback. It means measuring it over the long-term. So it’s hard to say whether he actually means it when he says “evaluated over time.” I guess we’ll have to wait until the next proxy season and Goldman’s new compensation discussion and analysis to find out.
During the month leading up to today’s G-20 summit in Pittsburgh, there have been continuous developments as the various countries have worked behind the scenes to deliver a plan to control bankers’ bonuses. Reportedly, a number of compromises have been made among the Finance ministers from the Group of 20 as there has been disagreement about what is an acceptable approach (see this NY Times article about an agreement among the 27 EU countries). This front-page article from the NY Times last week explains how the US’ Federal Reserve has been preparing broad compensation rules, partly to stave off even more restrictive limitations from the G-20. In our “Bonuses” Practice Area, we have posted some documents noting some of the earlier positions taken this month.
My Ten Cents: Should the Government Restrict Banker Bonuses?
I’ve talked to a number of reporters who have asked the question “should the government restrict banker bonuses?” For what it’s worth, this has been my answer:
No, the governments shouldn’t get involved for these reasons:
1. Change Won’t Happen Until Boards Want Change – Unfortunately, the sad truth is that even if the legislated/regulated pay fixes were perfectly set so that pay would be aligned with performance, etc., the fixes still wouldn’t work until boards and their advisors wanted them to work. They always seem to find a “work around” to keep the excessive practices flowing.
Part of the problem is a culture of “all CEOs are deities and couldn’t possibly be replaceable” as well as a failure to recognize that the client is the company, not the CEO. The current state of executive pay remains a huge corporate governance problem – as pay has unintentionally racheted up over the past two decades – and needs to be rolled back.
2. Setting Compensation Beyond Senior Management Level is Not a Primary Board Duty – The reason why executive compensation (ie. compensation for the top officers) is so important is because its the truest window into whether the board is a tough one and willing to rein in a CEO and act forcefully. Setting pay for senior managers is the most sensitive duty a board has – and one of it’s most important. It’s at the heart of corporate governance.
In comparison, how a company decides to pay its general workforce is more of a corporate strategy issue – what types of assets should our company have? Paying a talented mid-level executive big bucks is akin to deciding to buy a fancy new machine for a factory. Should the government be telling companies which machines to buy? Banker bonuses isn’t a governance issue; it’s an operational one.
The board does indeed play a role in helping setting the company’s strategy – but in this case, management would inform the board of its proposed strategy and the board should help tweak it, etc. Unfortunately, because “pay” is involved – and there is a lot of justifiable anger over CEO pay – the issue of banker bonuses has become a big concern for the man on the street. But it’s apples and oranges with what should be the real concern – true executive compensation.
So the two reasons above are quite different one – the real answer to the query is #2 – but #1 plays a role too because “bonuses” could become “salary” if the government places artificial barriers on companies. And thus the unintended consequences make the situation even worse because the money is then truly guaranteed. It’s notable that investment banks – at least in the US – have been leaders in placing clawback provisions with teeth in their contracts with bankers, as we’ve covered in past issues of The Corporate Executive, available in our “Clawback Policies” Practice Area.
During the first U.S. proxy season with widespread advisory votes on compensation, there was broad investor support for corporate pay practices. For the 127 companies for which RiskMetrics Group has results, an average of 87.9% of votes were cast in support of management “say on pay” proposals this year. So far this year, every management proposal has passed; the lowest vote was 59% support at the Bank of the Ozarks. Nine other companies received less than 70% approval. (Editor’s note: This data doesn’t include vote results from small-cap firms below the Russell 3,000.)
Most of the advisory votes were held at the several hundred financial companies required by federal law to hold compensation votes because they received support from the Treasury Department’s Troubled Asset Relief Program (TARP). In addition, 17 non-TARP firms likely will conduct voluntary pay votes this year. However, the House of Representatives has passed legislation to impose marketwide annual votes on pay, so this year’s results may shed light on what might happen in the future.
Several TARP companies, including Flagstar Bancorp, Home BancShares, and Bank of Kentucky Financial, received support from over 98% of votes cast. Notwithstanding the public outcry over the company’s bonuses, American International Group’s pay practices received 98.2% support, but that result was inflated by the U.S. government’s almost 80% voting stake.
Most major financial firms received wide support for their pay practices. Goldman Sachs, JPMorgan Chase, Wells Fargo, Bank of New York-Mellon, and Morgan Stanley all received more than 93% approval. The two notable exceptions were Citigroup (84.2 percent support) and Bank of America (71.3 %). While Citi’s pay practices didn’t spark significant investor complaints this year, the American Federation of State, County, and Municipal Employees (AFSCME) waged a “vote no” campaign against six long-serving audit committee members, and the company posted a 76% share loss during the preceding fiscal year.
At Bank of America, there were two “vote no” campaigns against board members; both dissident groups complained that the company failed to provide adequate disclosure over more than $3 billion in bonuses for Merrill Lynch employees before investors voted in December to acquire the ailing brokerage firm. At the same time, the advisory vote at Bank of America received little attention from investors or the news media, which focused on an independent chair proposal, which won majority support, and the “vote no” campaigns. The company’s ballot also included a shareholder proposal seeking a permanent advisory vote; that resolution received 40.1% support.
Implications
Supporters and opponents of annual pay votes draw different conclusions from this year’s vote results. Ed Durkin, corporate governance director at the United Brotherhood of Carpenters, who has called for multi-part votes every three years instead of annual votes, said the TARP results “reinforce our belief that annual votes would be a mindless process.”
“It is a process that does not allow for thoughtful analysis and voting,” Durkin said of annual votes. “It is going to turn into a ratification process,” particularly if votes are held at an even larger number of companies, he told R&GW.
Annual vote proponents respond by pointing out that this year’s support levels were inflated by the inclusion of uninstructed “broker” votes in vote tallies at many firms. Unlike shareholder votes on equity plans, advisory votes have been deemed a “routine” matter, and thus brokers are permitted by New York Stock Exchange rules to cast uninstructed client votes in support of the management proposals. At many companies, broker votes can account for more than 15% of the votes.
AFSCME’s Richard Ferlauto, an annual vote proponent, also pointed out that many activist investors were more focused this year on submitting shareholder proposals to establish advisory votes. Another significant factor was that institutional investors did not learn of the mandatory TARP votes until late February after U.S. Senator Christopher Dodd inserted that requirement in economic stimulus legislation and prodded the SEC to require advisory votes during the 2009 proxy season. “The vote legislation was enacted late so many investors did not have voting guidelines in place,” Ferlauto said.
Tim Smith of Walden Asset Management, another prominent advocate of annual “say on pay” votes, said investors will have more lead time next year to dissect pay packages. He attributed this year’s generally high TARP votes to the fact that many financial firms “cut back pay dramatically” during the economic crisis. He also observed that significant “against” votes will be rare, as most companies should receive overwhelming support during advisory votes when there are no “red flags” over their pay practices.
Recalling the experience of the United Kingdom and other markets, Ferlauto said: “It will take some time for shareholders to figure out how to use this new tool.”
In Britain, advisory votes have been held since 2003, but remuneration report rejections were quite rare until this year, when reports were voted down at Royal Bank of Scotland, Royal Dutch Shell, and three other firms. In Australia, many companies have improved their pay practices since advisory votes were first held in 2005, so the average opposition vote (which include abstentions) at S&P/ASX 200 companies has increased slightly from 10.6% to 12.9%, according to RiskMetrics data. At the same time, investors have become more willing to reject reports in cases of excessive pay practices. The first majority “against” vote at an S&P/ASX 200 firm didn’t occur until 2007, while eight reports were rejected during Australia’s most recent proxy season in late 2008.
Possible Reasons for Low Votes
During this year’s U.S. proxy season, investors also expressed significant reservations over the compensation practices at two TARP firms, MB Financial (60.8% support) and Berkshire Hills Bancorp (61.6%), as well as Motorola (63.8% approval), which held its first voluntary pay vote this year.
At Arkansas-based Bank of the Ozarks, where there was just 59% support, the company increased the CEO’s salary during the most recent fiscal year, offered discretionary bonuses to executives, and paid for an executive assistant who performed personal duties for the CEO and his wife.
At Massachusetts-based Berkshire, the board lowered the performance thresholds in December 2008, which triggered bonus payouts for the named executive officers in January. Another potential concern for investors is that the company uses a one-year performance period and adjusted earnings per share for both its short-term and long-term incentive programs.
At Chicago-based MB Financial, the CEO’s employment agreement, which was revised in 2008, provides for automatic vesting of equity and supplemental retirement credits upon a change in control. The CEO also is entitled to up to 10 years of guaranteed retirement contributions (at 20% of salary). The company also agreed to provide tax gross-ups to executives for their change-in-control payments.
Illinois-based Motorola, which plans to split into two public companies, now has two co-CEOs after recruiting Sanjay Jha to join the firm. Both executives have been granted various perks, including personal use of the company aircraft, with the company paying the taxes on the perks. The 2008 employment contracts with Jha and co-CEO Gregory Brown provide for compensation in excess of 3,257 percent and 401 percent, respectively, of the company’s peer group median.
Last week, I blogged about US District Court Judge Jed Rakoff’s refusal – with a stinging rebuke to both the SEC and Bank of America – to approve a $33 million settlement between the SEC and BofA over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed. I noted how the SEC had limited options because it argued before Rakoff that that there was insufficient evidence to charge individuals – and that the SEC’s best bet may be to dismiss the case and file an administrative claim that wouldn’t be heard in federal court.
Well, what do I know. Yesterday, the SEC filed a case management plan in Rakoff’s court and issued a statement that it would proceed “vigorously” to pursue its case against Bank of America, including:
“As we alleged in our complaint last month, Bank of America did not provide investors with complete and accurate information about the bonuses to be paid by Merrill Lynch to employees. We believe that this disclosure failure violated the federal securities laws.
We firmly believe that the settlement we submitted to the court was reasonable, appropriate and in the public interest. As we consider our legal options with respect to the court’s ruling, we will vigorously pursue our charges against Bank of America and take steps to prove our case in court. We will use the additional discovery available in the litigation to further pursue the facts and determine whether to seek the court’s permission to bring additional charges in this case.
In deciding how to proceed, we will, as always, be guided by what the facts warrant and the law permits.”
As part of it’s announcement, as noted in this Washington Post article, the SEC intends to broaden its investigation into alleged wrongdoing at the company and may seek additional charges as it prepares for the trial…
Late Friday, Microsoft announced that its board authorized moving forward with a triennial say on pay approach starting with this year’s meeting, being held on November 19th. On the “Microsoft on the Issues” Blog, the company’s General Counsel and Deputy General Counsel provide more background on the issue and details of the plan adopted.
You may recall that the Carpenters Union had been pushing this triennial alternative (as noted in this blog) – but that it had more recently withdrawn the proposals it had submitted to 20 companies on the topic in the wake of the House considering but rejecting the idea when it passed a say-on-pay bill in early August. Maybe Microsoft’s action will provide some momentum towards the idea, although it could be too late as the Senate plans to consider a bill in the coming months…
Yesterday, pay czar Ken Feinberg spoke at a FDIC conference on executive compensation here in DC (this Reuters’ article reports he has 8 speaking gigs before his end of October deadline) and, according to this BNET article, he said he would issue his blueprint for the top 25 employees at financial institutions receiving TARP funds within the next 30 days.
Here is a notable excerpt from the article:
Feinberg suggested the rules he lays out for these companies should serve as a precedent for the entire financial industry, said Jaret Seiberg, a policy analyst with Concept Capital’s Washington Research Group who attended the event. But how broadly the rules are applied is up to officials with the Federal Reserve and SEC, Feinberg noted.
A Light-Hearted Look at Harvard
Harvard has become well-known for its “Corporate Governance Blog,” founded by outspoken pay critic, Professor Lucian Bebchuk (the blog mostly has devolved into law firms posting the text of their firm memos unfortunately). That’s why I had a light-hearted Friday chuckle when a friend forwarded something called “The Daily Stat” which provides stats regarding “Which CEOs Took a Base Pay Cut?”
The stats only consider base salaries. Anyone remotely familiar with the topic of executive compensation recognizes that base salary is just a drop in the bucket of an executive’s pay package and that’s been the case for a few decades. Incentive compensation dwarfs salaries – and even bonuses, retirement pay or even perks can exceed salary amounts. Just so much misinformation out there about exec pay…
Now that we have seen the SEC’s proposals and Congress’ say-on-pay legislation – that will force you to radically change your executive compensation disclosures and practices before next proxy season – we are wrapping up the ’10 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide,” which we will deliver to subscribers in early October.
Act Now for $100 (Or More) Discount: To obtain this hard-copy ’10 Treatise when its printed in October (as well as get online access to the ’09 version right now on CompensationDisclosure.com, as well as the valuable quarterly “Proxy Disclosure Updates”), you need to try a no-risk trial to the Lynn, Borges & Romanek’s “Executive Compensation Service” now.
If you order by October 1st, you can take advantage of a $100 or more discount. The many of you that currently subscribe can renew by October 1st to also receive this discount. Get the new Treatise hot off the press when it comes out in a few weeks!