– Julie Scott, RiskMetrics’ Canadian Research Team
Nine of the 13 Canadian companies that will give shareholders their first vote on executive compensation have agreed in principle on a draft resolution that will appear on proxy ballots in 2010. The resolution is drawn from a draft model “say on pay” policy crafted by the Canadian Coalition for Good Governance (CCGG), which represents 41 investors managing over $1 trillion in assets.
The CCGG, which drafted its model policy in consultation with Canadian issuers, has urged companies to standardize their “say on pay” policies. While the board will decide the final wording of the proposal in the proxy circular, the nine companies are expected to recommend the CCGG’s draft.
“A lot of drafting and consultation went into this policy,” CCGG director of research Paul Schneider told Risk & Governance Weekly.
The draft resolution is prefaced by a statement noting that the purpose of the “say on pay” vote is to ensure directors are accountable for their compensation decisions. While shareholders provide their collective advisory vote on compensation, directors remain fully responsible for investment decisions. The draft policy suggests the following wording for the say on pay resolution: “Resolved, on an advisory basis and not to diminish the role and responsibilities of the board of directors, that the shareholders accept the approach to executive compensation disclosed in the Company’s information circular delivered in advance of the [insert year] annual meeting of shareholders.”
The CCGG’s model policy states that say on pay resolutions should be seen as part of ongoing engagement efforts between companies and shareholders. At the heart of the policy is the board’s belief that it is important to have regular and constructive dialogue with shareholders. The model policy provides examples of how to elicit feedback, including through meetings between boards and shareholders, investor surveys, town hall meetings, and web-based tools enabling shareholders to ask questions of the board.
The model policy also addresses the question of how the board responds to the results of the say on pay vote. The policy states that companies will disclose the results of pay votes and take the results into account when considering future compensation policies. In the event that a “significant” number of shareholders oppose the resolution, the policy states the board will further consult with shareholders to discuss specific concerns. The company will then disclose, no later than in the proxy circular for the next shareholders’ meeting, a summary of the comments from shareholders and any subsequent changes to compensation policies.
The draft policy does not specify the level of opposition to a “say on pay” resolution which would be considered significant and would prompt the company to consult further with shareholders. The CCGG appears to prefer a case-by-case approach to analyzing against votes, taking into account the shareholder base of each company.
While shareholder proposals filed in 2009 calling for advisory pay votes are largely responsible for prompting the 13 Canadian issuers to provide for the right, the CCGG’s policy urges companies to adopt the vote voluntarily. The Shareholder Association for Research & Education (SHARE), which filed “say on pay” proposals on behalf of Meritas Mutual Funds in 2009, continues to engage with companies on the subject of advisory pay votes. SHARE officials tell RiskMetrics they have contacted about 30 companies since 2007 to recommend adopting a say on pay advisory vote. Of the 13 companies that have committed to a say on pay vote in 2010, Canadian Imperial Bank of Commerce has the earliest meeting date of Feb. 25. The CCGG encouraged interested parties to submit comments on its draft Model Say on Pay Policy by Nov. 25.
– Robert Kohl and Jonathan Weiner, Katten Muchin Rosenman
In a November 9th speech at the “4th Annual Proxy Disclosure Conference: Tackling Your 2010 Compensation Disclosure,” Shelley Parratt, Deputy Director of the Securities and Exchange Commission’s Division of Corporation Finance, outlined the SEC staff’s expectations for companies’ executive compensation disclosure for the 2010 proxy season.
Against the backdrop of intense public scrutiny of executive compensation, Deputy Director Parratt urged public companies to enhance their executive compensation disclosure, particularly with respect to their compensation disclosure and analysis (CD&A). She noted that, too often, companies fail to include sufficient analysis of their compensation decisions in their CD&A disclosure. According to Ms. Parratt, a detailed discussion of the process used to determine executive compensation is inadequate to satisfy the requirements of CD&A absent a meaningful analysis of why named executive officers were compensated in a particular manner or amount. Although Ms. Parratt believes process-oriented disclosure of the framework in which compensation decisions are made may provide investors with important context for CD&A, disclosure should focus on how the company applied such framework, including any qualitative factors considered by the company, to determine the amount and structure of executive compensation. However, she added, “If a committee’s pay determinations were simply subjective decisions, the company should say that.”
She also stressed the need to enhance disclosure with respect to performance targets (benchmarks) used to make compensation decisions (i.e., “pay for performance”). According to Ms. Parratt, the staff issues “more comments on performance targets than any other executive compensation disclosure item.”
Applicable rules require companies to disclose performance targets that are material to compensation policies and decisions, unless such information is confidential and disclosure would result in competitive harm to the registrant. As a threshold matter, Ms. Parratt suggested that a company should consider whether performance targets are in fact a material element of compensation policies and decisions, especially where such targets may be disregarded at the company’s discretion or performance-based compensation may otherwise be awarded even if performance targets are not achieved. She said that “when a company states that it determined a material element of compensation [is] based on the achievement of performance targets, [the staff] will ask for specific disclosure of the targets and the actual achievement level against the targets, or for the company to provide [the staff] with an explanation of how such disclosure would cause it competitive harm.” A company claiming that such disclosure would result in competitive harm should nonetheless provide meaningful and specific disclosure regarding how difficult or likely it would be for the undisclosed performance target to be achieved, she said.
Ms. Parratt stressed the need for issuers to be more proactive in updating their CD&A disclosure to reflect staff interpretations expressed in publicly available comment letters and other guidance regarding CD&A. According to Ms. Parratt, “after three years of [staff comments that are applicable only to companies’ future filings, the staff] expects companies and their advisors to understand [the SEC’s] rules and apply them thoroughly. So, any company that waits until it receives staff comments to comply with the disclosure requirements should be prepared to amend its filings if it does not materially comply with the rules.”
Since every company should now consider addressing walkaway numbers in this year’s proxy statements, we have devoted the “Fall ’09 issue of Proxy Disclosure Updates” to analyzing how to draft this type of disclosure. We even provide a model walkaway disclosure in this critical issue.
You will receive this issue, which is posted on CompensationDisclosure.com, by taking advantage of a no-risk trial to Lynn, Borges & Romanek’s “Executive Compensation Service” for 2010 (which includes the 2010 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide” that we mailed last week to those that ordered the Service).
Act Now: As part of the Lynn, Borges & Romanek’s “Executive Compensation Service,” if you try a no-risk trial now, not only will you receive the walkaway issue described above and the 1000-page plus Executive Compensation Disclosure Treatise, you will also receive the Winter issue of Proxy Disclosure Updates – with important new proxy disclosure guidance – soon after the SEC adopts its new executive compensation rules (which could happen as early as the first weeks of December).
After significant increases in outside director pay in the years following Sarbanes-Oxley, last year’s study saw compensation levels stabilizing. This year’s study finds that companies’ approach to delivering compensation to outside directors has remained consistent.
While competitive cash compensation levels are largely unchanged in the past year, sharp declines in the equities markets impacted the value of outside director compensation programs, particularly at the NASDAQ companies where fixed-share equity grants are more prevalent. Median annual compensation for basic board service increased modestly at the NYSE companies, but declined at the NASDAQ companies. For the first time in the seven years that Frederic W Cook & Co. has conducted its annual study of outside director compensation, median compensation for directors at the 100 largest NYSE companies exceeded that provided by the 100 largest NASDAQ companies.
New to this year’s report is an analysis on the prevalence of mandatory retirement policies for outside directors. Additional details on annualized equity award values are also provided. Some notable findings and trends are:
– The median total value of director compensation for all companies in the study declined by 3% from 2008 levels. A slight increase in median value for the NYSE companies (+4%) was offset by a substantial decline in the median value for the NASDAQ companies (-14%). Year-over-year comparisons of the total value of director compensation programs reflect changes in cash compensation, equity grant levels, stock prices, binomial ratios (for companies granting options) and pay mix (as well as changes in the study sample).
– Overall, Board member cash compensation increased slightly at the median since last year’s study ($75,000 versus $70,000), driven by a slight increase at the NASDAQ companies. The prevalence and median values of board member cash retainers and board meeting fees did not change meaningfully. Overall, median Board member cash compensation is significantly higher at the NYSE companies ($80,000) than at the NASDAQ companies ($57,000).
– Following the trend from recent years, companies continued to move director equity awards out of stock options and into stock awards. Stock awards are used exclusively by 77% of the NYSE companies and by 37% of the NASDAQ companies (compared to 65% and 31%, respectively, last year). Options are used exclusively by only 5% of the NYSE companies and only 23% of the NASDAQ companies (compared to 8% and 32%, respectively, last year).
– The sharp decline in the equities markets in the 12 months ending March 31, 2009 had a significant impact on equity award values at those companies denominating awards on a fixed-share basis. At the NASDAQ companies, where fixed-share awards are more prevalent, median annualized equity value declined by 28%. At the NYSE companies, where equity awards are usually expressed as a dollar value, median annual equity value increased by 4%. Overall, annualized equity compensation values at the NASDAQ and NYSE companies are essentially equal ($126,685 at the NASDAQ companies versus $125,000 at the NYSE companies). This is a dramatic change from last year’s study when the NASDAQ companies granted 46% more in annualized equity value at the median than the NYSE companies.
– Adam Shapiro and David Kahan, Wachtell Lipton Rosen & Katz
The Swiss Financial Market Supervisory Authority (FINMA) recently issued regulations addressing executive compensation at Swiss financial institutions. Notably, the regulations provide significant guidance on appropriate compensation incentives and structures, but emphatically decline to regulate pay directly.
The FINMA regulations will apply on a mandatory basis to the largest Swiss banks and insurance companies and will serve as a guideline for all other firms that FINMA supervises. Most significantly, the regulations require (1) alignment of compensation structures with risk management and promotion of long-term sustainable business objectives, (2) imposition of stock holding periods and compensation deferral arrangements under certain circumstances, (3) integration of compensation decisions with capital and liquidity planning, (4) company-established limits on sign-on bonuses and severance payments that a company may exceed only by obtaining approval from the board of directors, and (5) increased disclosure and transparency, including a comprehensive annual remuneration report from the board of directors.
FINMA rejected calls for a total ban on variable compensation, and the regulations avoid provisions that would directly regulate pay levels or that would mandate or prohibit particular compensation design structures. FINMA notes that it does not regard “a total ban or severe restrictions on variable pay” as a “useful approach” and that direct restrictions on compensation do not represent a “sensible option.” Rejecting a one-size-fits-all framework, FINMA further notes the impracticability of determining a “single appropriate arrangement” for all regulated firms within the Swiss financial sector.
FINMA’s new rules represent a sound approach from a regulator in a jurisdiction that houses a significant number of global financial institutions. The regulations establish core principles designed to ensure that compensation does not create incentives to take inappropriate risks, and impose on boards key oversight and disclosure responsibilities. At the same time, the rules recognize that long-term economic growth requires that individual institutions have the flexibility to implement programs specific to their needs and the ability to attract and retain management talent. A universal principles-based approach would place all financial institutions on a level playing field.
Recently, we wrapped up our new “2009 Say on Pay Survey,” which offers an in-depth look at how 231 respondents across a range of industries are approaching this major new governance initiative. While an advisory proxy vote on executive pay seems increasingly to be mandated for all public companies, the survey revealed that most companies are postponing taking many important steps to make programs more shareholder-friendly, such as:
– Focusing on market benchmarking practices and the link between executive pay and
performance
– Anticipating the attitudes and policies of institutional shareholders and proxy advisory firms
– Enhancing shareholder communications around pay
– Identifying any perceived poor pay practices
Recently, Equilar released a “Fortune 500 Peer Group Report” (you can request a copy). As noted in this press release, the findings include:
– Among the Fortune 500, 27.2% of peer groups have between 16 and 20 companies listed
– The average peer group size is 24 while the median size of peer groups is 19 companies
– Most companies benchmark to peers one-half to two times their size
– 24% of companies named as peers also show up as peers of peers (2nd-degree peers)
– Most companies are used in a peer group at least 10 times
– The industries with the largest average number of stated peers in a group were Industrials with 35, Utilities with 28 and Services along with Technology both having 26
In this article, Bud Crystal gives his thoughts on Equilar’s new study…
I loved Michelle Leder’s title of her footnoted.org blog recently entitled “On Black and Decker’s CEO and unicorns…“. Michelle was referring to the Form 8-K filed by Black & Decker which reveals that its CEO would forego $20 million in severance, a sum he would be entitled to under his arrangements with the company as triggered by this week’s announced merger with Stanley Tools. The Washington Post ran this article last week noting how this move is perhaps not as generous as it seems.
And here is a response from a member:
I don’t mean to throw stones, but Mr. Archibald is 66 years old. Why is he entitled to three years severance in the first place?
Based on my review of his new three year Executive Chairman Agreement, he is entitled to a base salary of $1.5 million per year, a target bonus of $1.875 million per year and long-term incentives of $6.65 million per year, (of which 50% is in stock options and 50% in restricted stock). Add to that, a 1 million share “sign-on” stock option grant (estimated value $15 million) and a Synergy Bonus Amount of as much as $45 million. All in, he could earn $90 million over the next three years, which would easily make up for his contract waiver if the company performs.
It is also worth noting that his current SERP is worth $35 million as of December 31, 2008, and he retained the right to an enhanced SERP if he is terminated before the end of the new contract term (i.e., he gets additional years of service and his foregone severance is included in the benefit calculation).
While I am glad to see a CEO waiving severance, it looks to me like he is getting it back, and then some.
Today is the “6th Annual Executive Compensation Conference”; yesterday was the “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference,” whose archives are already posted. 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). Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive. A prominent link called “Enter the Conference Here” 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 are the Conference Agendas; times are Pacific.
– 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 for a few (but hours for each state vary; see the CLE 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 only 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.
Late yesterday, I uploaded a rare afternoon blog to note Corp Fin Shelley Parratt’s important keynote speech regarding what the SEC Staff expects from 2010 executive compensation disclosures, as well as observations from the ’09 proxy season (eg. still not enough “analysis” in the CD&A). Read that blog for more information.
Today, Corp Fin Shelley Parratt delivered this important keynote speech regarding what the SEC Staff expects from 2010 executive compensation disclosures, as well as observations from the ’09 proxy season (eg. still not enough “analysis” in the CD&A). Among other important points that I will cover in this blog later this week, Shelley raised this point regarding how the Staff will administer the comment process in the near future:
It means that after three years of futures comments, we expect companies and their advisors to understand our rules and apply them thoroughly. So, any company that waits until it receives staff comments to comply with the disclosure requirements should be prepared to amend its filings if it does not materially comply with the rules.
Shelley addressed several other crucial points during a Q&A period not covered in her posted speech. The archive of her keynote should be available in our archived Conference sometime tomorrow for those that want to see that…