I just finished writing a special July-August issue of The Corporate Counsel entitled “Say-on-Pay Solicitation Playbook: Practical Guidance on Strategies and More.” You will need this issue to help you prepare for mandatory say-on-pay. It includes analysis on:
– A Wake-Up Call: The Big Three
– The Drill Down: Why Did Shareholders Reject Motorola, Occidental and KeyCorp?
– The Cry for Shareholder Engagement: What is “Shareholder Engagement”?
– The Roadmap: How (and When) to Engage Effectively
– Overcoming Reg FD Concerns about Engagement
– Peeking Under the ISS Hood
– How Proxy Advisors & Major Institutions (& Employees) Vote on Pay
– The Roadmap: “When” and “How” to Hire a Proxy Solicitor
– The Preliminary Vote Count Looks Close: What Can You Do?
– Confidential Voting Policies: Proper Implementation
– How to Calculate Voting Result Percentages: Read Your Bylaws (and Compare with Your Proxy)
– The Importance of Making Your Compensation Disclosure “Usable”
– How to Gear Up for Mandatory Say-on-Pay
Ahead of our package of two full-day Conferences on the executive pay provisions of the Act – coming up in less than two months, catch tomorrow’s special pre-conference webcast to help you start taking the actions you need to be taking now. Dave Lynn, Mark Borges and Mike Kesner headline this webcast: “The New Pay Legislation: Action Items.”
Last week, AFSCME and Shareowners.org released a report on how 25 large mutual fund families voted on compensation issues during the 2009 proxy season. Notwithstanding the title, “Compensation Complicity: Mutual Fund Proxy Voting and the Overpaid American CEO,” the report found that mutual funds overall have become more supportive of shareholder proposals seeking annual advisory votes and other pay reforms.
The average level of support for compensation-related proposals–which also included resolutions seeking compensation consultant reforms, votes on “golden coffin” benefits, equity retention periods, and performance-based equity and severance–was 56 percent in 2009, up from 45 percent in 2008. The report was based on 2009 Form N-PX filings by mutual funds that included their votes from July 1, 2008, through June 30, 2009. According to the report, “the increase in aggregate support appears to have been driven by a substantial increase in support of [“say on pay”] shareholder proposals–from 45 percent in 2008 to 60 percent in 2009.”
The report, which was co-sponsored by the Corporate Library, also reviewed voting on management-sponsored equity plans, management “say on pay” votes, and the election of certain compensation committee members at S&P 500 firms.
Overall, the 25 mutual fund families were slightly less willing to vote against directors over compensation issues. The average support for selected S&P 500 directors (those who received more than 30 percent opposition overall based on pay concerns) was 50 percent in 2009, as compared with 48 percent in 2008.
The average level of support for management proposals on compensation issues was unchanged in 2009 at 84 percent, the report found. However, the mutual funds were less likely to back management during advisory votes on compensation; the average support was 77 percent last year, according to the report. That was below the 89 percent approval rate by all investors, according to ISS data.
The report observed that fund families have different approaches to executive pay issues. “Some emphasize strict limits applicable to management-proposed pay plans; others favor more specific measures suggested in shareholder proposals; and others express discontent primarily through withholding support for the reelection of certain directors deemed responsible for pay decisions. Indeed, only two fund families ranked in the top 10 for all three types of voting (management, shareholder proposal, and director), and only seven fund families ranked in the top 10 for two or more types of voting,” the report said.
Everybody is kung fu fighting. Quirky I know, but I couldn’t shake that song in my head as I read this NY Times’ front-page article on Friday about Special Master Ken Feinberg’s report about how 17 financial companies paid a total of $1.58 billion in executive compensation during the heart of the economic crisis. I probably should have been singing “Rich Girl” instead. Looking at the Special Master’s web page, I guess this is all there is – a 3-page report.
For the most part, Feinberg didn’t “name names” and his power is fairly limited since 11 of the 17 companies have repaid their TARP funds. Feinberg had conference calls with each of the companies over the past few weeks to lay out his proposals about how their compensation structures could be “fixed” – but as this WSJ article notes: “None of the firms contacted Friday said they would adopt the proposal on its face, with most saying they needed to study it, receive more detail or declining to comment. Others pointed out that they have already instituted similar procedures designed to claw back undue compensation.”
This post is copied from what Lucian Bebchuk recently blogged on the “Harvard Corporate Governance Blog,” and is based on his, Martijn Cremers and Urs Peyer’s recent op-ed article for the international association of newspapers Project Syndicate. The op-ed article discusses the findings of Bebchuk, Cremers, and Peyer’s recent empirical study:
There is now intense debate about how the pay levels of top executives compare with the compensation given to rank-and-file employees. But, while such comparisons are important, the distribution of pay among top executives also deserves close attention.
In our recent research, we studied the distribution of pay among top executives in publicly traded companies in the United States. Such firms must disclose publicly the compensation packages of their five highest-paid executives. Our analysis focused on the CEO “pay slice” – that is, the CEO’s share of the aggregate compensation such firms award to their top five executives.
We found that the pay slice of CEOs has been increasing over time. Not only has compensation of the top five executives been increasing, but CEOs have been capturing an increasing proportion of it. The average CEO’s pay slice is about 35%, so that the CEO typically earns more than twice the average pay received by the other top four executives. Moreover, we found that the CEO’s pay slice is related to many aspects of firms’ performance and behavior.
To begin, firms with a higher CEO pay slice generate lower value for their investors. Relative to their industry peers, such firms have lower market capitalization for a given book value. The ratio of market value to book value, termed “Tobin’s Q” by financial economists, is a standard measure for evaluating how effectively firms use the capital they have.
Moreover, firms with a high CEO pay slice are associated with lower profitability. The operating income that such firms generate, relative to the value of their assets, tends to be lower.
What makes firms with a higher CEO pay slice generate lower value for investors? We found that the CEO pay slice is associated with several dimensions of company behavior and performance that are commonly viewed as reflecting governance problems.
First, firms with a high CEO pay slice tend to make worse acquisition decisions. When such firms make acquisition announcements, the stock-market returns accompanying the announcement, which reflect the market’s judgment of the acquisition, tend to be lower and are more likely to be negative.
Second, such firms are more likely to reward their CEOs for “luck.” They are more likely to increase CEO compensation when the industry’s prospects improve for reasons unrelated to the CEO’s own performance (for example, when oil companies benefit from a steep rise in world oil prices). Financial economists view such luck-based compensation as a sign of governance problems.
Third, a higher CEO pay slice is associated with weaker accountability for poor performance. In firms with a high CEO pay slice, the probability of a CEO turnover after bad performance (controlling for the CEO’s length of service) is lower. Lower sensitivity of turnover to performance reflects less willingness on the part of directors to discipline the CEO.
Finally, firms with a higher CEO pay slice are more likely to provide their CEO with option grants that turn out to be opportunistically timed. A high CEO pay slice is associated with an increased likelihood of the CEO receiving a “lucky” option grant with an exercise price equal to the lowest price in the month in which it was granted. Such “lucky” timing is likely to reflect the use of insider information or the backdating of option grants.
What explains this emerging pattern? Some CEOs take an especially large slice of the top five executives’ compensation because of their special abilities and opportunities relative to the other four. But the ability of some CEOs to capture an especially high slice might reflect undue power and influence over the company’s decision-making. As long as the latter factor plays a significant role, the CEO pay slice partly reflects governance problems.
We should stress that a positive correlation between a CEO’s pay slice and governance problems does not imply that every firm with a high CEO pay slice has governance problems, much less that such firms would necessarily be made better off by lowering it. In some such firms, the large pay slice captured by the CEO may be optimal, given the CEO’s talents and the firm’s environment, and reducing the CEO pay slice might thus make the firm and its shareholders worse off.
Still, our evidence indicates that, on average, a high CEO pay slice may signal governance problems that might not otherwise be readily visible. Investors and corporate boards would thus do well to pay close attention not only to the compensation captured by the firms’ top executives, but also to how this compensation is divided among them.
We recently wrapped up our latest report – “PM&P On Point: 2010 Executive Pay-for-Performance Survey” – which is a comprehensive survey that provides a wealth of detailed, actionable data about the selection and setting of long- and short-term performance standards among 630 employees and outside directors across a wide range of company sizes and industries. Benchmarking data provides the perspective needed to adapt your organization’s executive incentive programs to meet changing governance and regulatory standards. Here is the 22-page Executive Summary of the report.
Anticipating the passage of the Dodd-Frank Act, Dave Lynn just put the finishing touches on a special “Summer 2010″ Issue of the Compensation Standards print newsletter that lays out a number of action items that you should be considering now to comply with the new executive compensation provisions in the Act. This print newsletter is a part of your CompensationStandards.com membership.
What to Do Now: Ahead of our package of two full-day Conferences on the executive pay provisions of the Act – coming up in just two months – we have just announced a special July 29th pre-conference webcast to help you start taking the actions you need to be taking now. Dave Lynn, Mark Borges and Mike Kesner headline this webcast: “The New Pay Legislation: Action Items.”
Below is something I recently blogged on “The Race to the Bottom” Blog:
With say on pay for top executives about to become law (something we will examine, along with the other corporate governance provisions in Dodd-Frank, over the next series of posts), we note some growing sentiment for say on pay director pay.
As we have noted time and time again, directors in many companies are well paid, sometimes receiving in the vicinity of $700,000 in total compensation. These amounts have become clearer with the compensation reforms in 2006 that now require companies to disclose “total compensation” paid to directors. The amount of compensation can be large enough to create an economic incentive to support the policies of the CEO (particularly the ones governing his/her compensation) and avoid risking the lucrative sinecure on the board.
Ted Allen at RiskMetrics has reported on the latest batch of companies where shareholders have voted in favor of a say on pay proposal. It has happened at Target (52%) and TJX (53.9%) and, most recently, at Chesapeake Energy (56%), the 12th company so far this year to see majority support for such a proposal. It is evidence of the growing desire by shareholders to have a greater voice in the compensation process. Of course, these votes are advisory and the board can ignore them. That will change when the financial reform bill passes. After that, it will be mandatory say on pay.
The most interesting thing about this spate of approvals, however, concerns the one at Chesapeake. In addition to the usual say on pay proposal, a second one called for annual shareholder approval of the compensation paid to directors. As the proposal provided:
Resolved: That the shareholders of CHESAPEAKE ENERGY CORPORATION request its Board of Directors to adopt a policy that provides shareholders the opportunity, at each annual meeting, to vote on an advisory resolution, prepared by management, to ratify the compensation of named-executive officers listed in the proxy statements Summary Compensation Table and compensation awarded to members of the Board of Directors as disclosed in the proxy statement.
It passed. The vote totals for Chesapeake can be found in the Company’s current report. Why? Chesapeake has a well paid CEO (total compensation in 2008 of around $112 million, a more modest $18.5 million in 2009). See Summary Compensation Table of 2009. They also have well paid directors, with total compensation somewhere around $530,000 in 2009 and somewhere in the vicinity of $700,000 for 2008.
How many times did the board meet in 2009? Four in person and six by telephone. To the extent that this looks meager, the proxy statement did point out that “management frequently discusses matters with the directors on an informal basis.”
Moreover, that is not all. As the proxy statement discloses:
In assessing director independence, the Committee considered the business the Company conducted in 2007, 2008 and 2009, including payments made by the Company to National Oilwell Varco, Inc. (NOV), for which Mr. Miller serves as Chairman, President and Chief Executive Officer, and payments made by the Company to BOK Financial Corporation (BOK), for which Mr. Hargis served as Vice Chairman until March 2008 and since then has served as a director. The Companys business transactions with NOV and BOK were all conducted in the ordinary course of business.
Payments made to NOV represented approximately 1% of NOVs gross revenues during each of the last three years, well below the NYSEs 2% of gross revenues threshold, and the Companys payments to BOK were nominal during the review period. The Committee also considered transactions and relationships with Oklahoma State University, for which Mr. Hargis has served as President since March 2008, including contributions and support for scholarships and faculty chair endowment, university athletics and various sponsorships and training programs. The Committee specifically considered the employment by the Company of Governor Keatings son and daughter-in-law during 2009 in non-executive positions. The Committee determined that all transactions and relationships it considered during its review were not material transactions or relationships with the Company and did not impair the independence of any of the affected directors.
This is a well paid board that does not meet in person very often. How does it respond to shareholder initiatives? In 2009, shareholders voted to recommend majority voting for directors and the elimination of the staggered board. How did the directors respond?
The Company and our Board take seriously shareholder proposals, especially proposals that receive majority votes from our shareholders. As a result, over the past year our independent Nominating and Corporate Governance Committee and the Board have consulted with outside experts and actively considered the proposals. The Board believes strongly that it is not advisable, in light of the unique circumstances of our industry, to adopt majority voting or to declassify our Board. The oil and natural gas industry is highly cyclical due to short term volatility in commodity prices, which are outside our control.
For a number of reasons (some apparent and some not apparent) the volatility in energy prices is magnified in the stock price for independent exploration and production companies, such as us. The Board believes that the resulting cyclical nature of our business exposes independent exploration and production companies, more so than companies not operating in extractive industries, to short-term opportunism that arises from the divergence between the shorter term focus of the stock market and the longer term focus of industry participants. The Board believes the risks from implementing these proposals far outweigh any benefits and that implementing these proposals would be detrimental to the long-term interests of the Company and its constituencies. For these reasons, the Board has decided to implement neither annual elections nor a majority voting standard.
As say on executive pay becomes more common, pressure for the right to have a say on director pay will likely grow. If past patterns are any evidence, widespread adoption will have to wait for the next instance when Congress dips into the corporate governance area.
Yesterday, as noted in this NY Times article, the US Senate voted 60-39 passing the conference report version of the Dodd-Frank Act. Three Republicans voted for the legislation, which was supported by all but one of the Senate Democrats. In our “Dodd-Frank Act” Practice Area, we continue to post numerous memos on the executive pay provisions of the Act – including this condensed 605-page version of the Act itself (no easy feat given that it’s a 75% reduction – can’t help but think of George’s “shrinkage” episode from Seinfeld).
What to Do Now: Ahead of our package of two full-day Conferences on the executive pay provisions of the Act – coming up in just two months – we have just announced a special July 29th pre-conference webcast to help you start taking the actions you need to be taking now. Dave Lynn, Mark Borges and Mike Kesner headline this webcast: “The New Pay Legislation: Action Items.”
I read about this new study in this NY Daily News article of all places, which pulled it from the Huffington Post. I’m not sure how these Professors evaluated what seems like such a subjective topic, but there you have it. Here is an excerpt from the article:
The study, conducted by professors at Rice University, Harvard University and the University of Utah, found that “increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy.”
The authors believe that this increase in meanness is due to an increase in power: As executives get paid more, they get a heightened sense of power, and “more power leads managers to mistreat subordinates more and evaluate them more unfavorably,” the findings suggest. This meanness gets worse as the gap between CEO compensation and the pay of lower-level employees widens, according to the study, called “When Executives Rake in Millions: Meanness in Organizations.”