With Congress moving quickly on financial regulatory reform, huge changes are afoot for executive compensation practices and the related disclosures – that will impact every public company. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend our popular conferences – “Tackling Your 2011 Compensation Disclosures: The 5th Annual Proxy Disclosure Conference” & “7th Annual Executive Compensation Conference” – to be held September 20-21st in Chicago and via Live Nationwide Video Webcast (both of the Conferences are bundled together with a single price). 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 Early Bird Rates – Act by April 15th: Register by April 15th to take advantage of this discount.
Recently, we completed our latest performance metrics study, which provides a review of the 2009 proxies regarding choice of performance metrics, weight of long-term incentive vehicles and pay for performance curves for both short- and long-term incentive plans for 200 of the S&P 500 companies. This is a continuation of our study from last March that looked at 2007 proxies.
Not surprisingly, new market based equity such as relative total shareholder return (TSR) plans continue to emerge as the predominate way to promote performance and address shareholder criticism of traditional stock option plans. We expect this trend to continue in 2010.
Just a reminder that some of the press reports of executive pay continues to differ from the total in the Summary Compensation Table from the proxy statement. The Associated Press’ calculation of total pay include salary, bonus, incentives, perks, above-market returns on deferred compensation and the estimated value of stock options and awards granted during the year. They exclude changes in the present value of pension benefits.
The AP stories are picked up by the NYTimes and others (Forbes, Reuters). So what you’ve been reading from various sources on different companies’ pay is most likely the AP calculation. And the WSJ uses the SCT as reported in the proxy statement, indicating that they include changes in pension values.
Following up on my blog this morning about the Dodd bill passing the Senate Banking Committee, I forgot to mention that there were two corporate governance amendments that made it into the Manager’s Amendment on the Dodd bill, both offered by Sen. Menendez (D-NJ):
– Require issuer disclosure of the ratio of average worker pay to CEO compensation
– Prohibit broker discretionary voting in advisory votes on executive compensation
And speaking of pay disparity, as a follow-up to my blog on the recent spate of shareholder proposals on pay disparity, it appears that the SEC Staff is rejecting requests from companies to exclude them under Rule 14a-8, as noted in this Reuters’ article.
Yesterday, the Senate Banking Committee voted along party-lines, 13-10, to send Senator Dodd’s reform bill to the Senate floor. As noted in this NY Times article, the Committee’s Republicans decided not to offer amendments during the bill’s markup, preferring instead to seek changes before the full Senate vote.
After a general industry decline in long-term incentive (LTI) opportunity from 2008 to 2009, we recently analyzed insider filings (Form 4) for the CEOs from Fortune 500 companies to gauge the percent change in LTI opportunity from 2009 to 2010. Overall, our study found that median LTI opportunity increased 8% relative to a 36% stock price increase over the prior year.
This Quick-Take Study presents the key findings from the analysis, including percent change in LTI opportunity relative to three stock price categories (greater than 60% increase, less than 60% increase and greater than 20% increase, and less than 20% increase), percent change in LTI opportunity by industry, and an in-the-money option analysis for 2009 stock option awards.
Just when “bonus” has become the equivalent of a four-letter word in households across the country, the WSJ ran this article noting that at least 50 companies have recently disclosed plans to pay semiannual bonuses, with more than half of them having adopted the plans since 2008 (fyi, the Hay Group did the research for the WSJ on this). This piece ignited a hailstorm in my world as nearly 2 dozen journalists called me yesterday seeking comment.
My immediate take was that there wouldn’t seem to be justification for such a widespread move and that this short-term approach fostered by more frequent bonuses could cause even more managers to manipulate the numbers and all the other perils of short-termism. And for the most part, that is still my position.
However, I checked in with some of the responsible experts that we deal with frequently and got this feedback:
Semi-annual bonuses were adopted by a small fraction of companies due to those companies’ inability (or unwillingness) to set 12 month financial targets due to the uncertainty of the economy. I’ve seen companies adopt the semi-annual approach and they seem to only pay the bonus when the calendar year is over. I imagine the compensation committees made sure the goals were stretch-based on the best available information at the time the goals were set. Some of these same companies retained the discretion to reduce bonuses prior to payment after taking stock of the year as a whole.
I do not disagree with you that using six-month measurement periods is too short-term, but it’s possible that the compensation committees took comfort in the fact that LTI represented the largest component of pay and most executives have substantial ownership, so the risk of maximizing short-term results at the expense of long-term performance was fairly modest.
This too shall pass, as compensation committees hate negotiating bonus targets two times per year (or even four times if you count the end-of-the-period negotiations on what to include – or exclude – in the final performance calculations).
Another expert noted that the two industries highlighted – tech and retail – are long-time users of semi-annual and quarterly bonuses. Take those out of the data and this is only a handful of companies. See Fred Whittlesey’s blog about “when is a trend not a trend”…
Given the heft of the 1300-plus pages of Sen. Dodd’s reform bill that was released earlier today, I was inclined to first read the 11-page summary. Unfortunately, the summary is a pretty high-level document and I was forced into the abyss. Today’s draft bill differs quite a bit from Dodd’s bill released in November – and substantially different from legislation passed by the House in December (and the exec comp provisions differ from Sen. Menendez’s bill that I blogged about on Friday). [We’ll be posting the inevitable onslaught of memos in our “Regulatory Reform” Practice Area.]
As could be expected from such a comprehensive bill, there is a lot of ground covered. Here are the executive compensation highlights:
– The Table of Contents omits Title IX, Subtitle E “Accountability and Executive Compensation” and Subtitle F “Improvements to SEC’s Management” (ie. Sections 951-966 on pages 868-895) for some reason. Wishful thinking?
– Compensation Committee independence and consultant/lawyers independence (including authority to hire and “reasonable” of their compensation)(Section 952, pages 869-876)
– Disclosure of executive pay vs. performance (Section 953, pages 876-877)
– Clawbacks (Section 954, pages 877-878)
– Disclosure of executive and director hedging (Section 955, page 879)
And here’s what to expect going forward from Sonnenschein: Chairman Dodd plans to have the Committee begin its markup of his revised bill on Monday, March 22 at 4:00 p.m., and to continue as necessary with the goal of completing the markup by the end of the week. Emphasizing that he wants the Senate to “move quickly” to pass financial regulatory reform, Senate Majority Leader Harry Reid (D-NV) indicated that he wants to bring the bill to a vote on the Senate floor before the Memorial Day recess at the end of May.
If this goal is met, the hope is that a conference committee will reconcile the House and Senate bills by the July 4 recess. Because the House and Senate bills are expected to be considerably different, a difficult conference is anticipated. Signaling his intention to protect the House bill, House Financial Services Committee Chairman Barney Frank (D-MA) stated that he wants all conference committee deliberations to be televised on C-SPAN.
Tune in tomorrow for the webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Ira Kay of Ira T. Kay & Company, Mike Kesner of Deloitte Consulting and James Kim of Frederic W. Cook & Co. analyze what types of risk assessments companies are putting into place as well as what are companies doing in the areas of equity grants pay-for-performance and 280G gross-ups.
The SEC’s New Rules: Corp Fin Issues Three More CDIs
Even though calendar-year fiscal companies are pretty close to finalizing their proxy materials, Corp Fin continues to issue interpretations on the SEC’s new rules. On Friday, these three new CDIs were issued:
As Senator Dodd races to release his comprehensive financial regulatory reform bill on Monday in the Senate (without Republican support according to this announcement), it is believed that the say-on-pay part of that package has already been unveiled – courtesy of Sen. Robert Menendez, D-NJ – in the form of S. 3049, “The Corporate Executive Accountability Act of 2010.” Senator Menendez, a member of the U.S. Senate Banking Committee, introduced his bill a few weeks ago – and I’ve seen reports that it’s expected to be part of the Democrat’s larger reform package (but it’s possible it could be changed before then of course).
Under the Menendez bill:
– Shareholders at public companies would have a nonbinding vote on the proxy disclosure of compensation packages for the company’s named executive executives
– Shareholders would have a nonbinding vote on the merger proxy disclosure of golden parachute arrangements for the company’s named executive executives
– Investment managers would annually have to disclose how they voted on the two items above
– SEC required to adopt rules eliciting internal pay ratio disclosure from publicly traded companies (ie. disclose the ratio of pay for CEOs compared to the median of all employee’s pay)
– Stock exchanges would required to adopt listing standards giving regulators and investors authority to clawback incentive-based compensation from executives if the company has a restatement due to material noncompliance of the company (the “misconduct” standard would be struck from Sarbanes-Oxley)
– A “senior” executive officer “terminated for cause” (which is defined in this Act) would be barred from receiving a severance package as determined by the company’s board
– Section 16 would be amended to limit executive officers from selling more than certain amounts of vested equity compensation; the bill has a 4-year formula where only 20% could be sold after the first year of vesting, 40% after the second year; 60% after the third and 80% after the fourth)
As noted in this article, one sticking point for the Republicans in a reform bill is proxy access. The prospects for Sen. Dodd’s bill being passed is mixed right now…