As noted in a recent study we conducted, the most recent three-year performance of virtually any broad-based stock index will bear a strong resemblance to the Mariana Trench, charting how stock prices tumbled in late 2008 and spent the next two years recovering. During this period, many Fortune 500 companies granted their executives a larger number of shares to partially make up for the depressed values of the company’s stock. An early review of 2010 grant levels shows reductions in the number of shares granted compared to 2009, as stock values have recovered to near pre-recession levels.
Our firm monitors equity incentive practices and trends by conducting an annual review of run rate, long-term incentive (LTI) fair value and overhang at Fortune 500 companies. Run rate is the number of shares awarded during a company’s fiscal year as a percentage of the average outstanding common shares during the same year. LTI fair value is the reported fair value of annual equity awards at the time of grant as a percentage of the average market capitalization over the same year. Overhang is the aggregate number of shares granted and reserved for outstanding awards and future grants, calculated as a percentage of the total outstanding common shares.
Our latest review focused on full-year data disclosed by Fortune 500 companies for the years between 2005 and 2009, the most recent full year available. We also reviewed the Fortune 500’s quarterly filings to get an early preview of fiscal 2010 grant levels. The Fortune 500 sample used for this 2010 analysis includes 156 companies that meet a set of common criteria. Taken holistically, these data can provide the information necessary to compare an individual company’s stock compensation practices with those of the broader market.
The study’s key findings include:
– The median grant date fair value of equity awards as a percentage of market capitalization has increased steadily between 2006 and 2009. The total increase over this period was approximately 30%, although the latest year-to-year change was only 2%. The median dollar value of aggregate equity awards increased between 2006 and 2008, but dropped by 23% between 2008 and 2009, reflecting the sharp decline in the equity markets in late 2008.
– In contrast to falling LTI fair values, the median run rate increased by approximately 9% in 2008 and 21% in 2009 as companies increased the number of shares granted to make up some – but not all – of the value lost due to declining share prices.
– Overhang held steady in 2009 at approximately 10% at the median. The mix of overhang was also consistent with the prior year, as approximately 51% was made up of outstanding awards and 49% was made up of reserved shares.
– Based on our review of quarterly filings for a sample of Fortune 500 companies, it appears that fiscal 2010 run rates fell by approximately 23% at the median. Almost half (46%) of companies in our 2010 sample decreased the number of shares granted in 2010 by more than 25%, offsetting the 51% of companies that increased the number of shares granted in 2009 by more than 25%. (Complete fiscal 2010 figures will not be available until early 2011 for most companies.)
We’ve now had three more companies file Form 8-Ks reporting failed say-on-pay votes: Tutor Perini (49%); Cadiz (38%); and BioMed Realty Trust (46%) . I keep maintaining our list of Form 8-Ks for failed SOPs in our “Say-on-Pay” Practice Area.
Sometimes it’s interesting to read commentary about CEO pay from someone not involved in the executive compensation industry. I thought this BNET blog featuring an interview with Roger Martin, Dean of the Rotman School of Business at the University of Toronto, entitled “Why CEOs Are Overpaid, and NFL Stars Aren’t” provided good food for thought. Here’s a few words about Roger’s book from Paul Hodgson.
Recently, Mike Kesner and I weighed in on a question posed on our “Q&A Forum” (#867) regarding “Why is it that so many of the companies failing to win their say on pay votes are smaller companies, while most of the largest ones are passing muster?”
My answer is up on the “Q&A Forum” – but I repeat Mike’s here for you to consider:
I agree with Broc that it is tough to generalize, but smaller companies probably do not have the resources to track what all the different proxy advisory firms think about their compensation program and what changes they need to make to fall within these firms’ guidelines. Smaller firms probably do not have the resources to do an in-depth analysis of their shareholder base to understand who is aligned with the different proxy advisory firms and what, if any specific policies, their major shareholders have regarding pay policies.
Smaller firms probably do not hire proxy solictors to set up individual calls with the governance people at their major institutional shareholders to determine if there are specific concerns regarding pay, nor do they have the proxy solicitor monitor voting results on a daily basis to make sure they know about a no vote from a major shareholder in a timely fashion and can take action to try and move the vote to the FOR column prior to the annual meeting.
It is also possible that the number of smaller companies getting a no vote appears high, but is in fact proportionate to their percentage of all publically traded firms. The S&P 500 only represents a small percentage of the 10,000-11,000 publically traded firms, and if 2% of companies fail, on average, there will be a lot more smaller companies failing ( 200 or so) than large companies (20 or so).
A shareholder proposal seeking an investor vote on future “golden parachute” arrangements earned 57.8 percent support (based on votes cast “for” and “against”) at the May 27th annual meeting of Lowe’s Companies.The proposal was filed by t e Trowel Trades S&P 500 Index Fund, which is seeking a vote on future severance arrangements that would provide benefits that exceed 2.99 times the sum of an executive’s base salary plus bonus. The North Carolina-based home improvement retailer previously adopted a policy that provides for shareholder ratification of any new agreement that provides for a total cash value severance payment exceeding 2.99 times the sum of the salary plus bonus, but this policy excludes tax gross-ups, which can be significant.
Overall, 80 U.S. shareholder proposals have received majority support this proxy season. Other recent votes include 84.5 percent support for declassification at Neurocrine BioSciences, a 86.9 percent vote for declassification at Thermo Fisher Scientific, and 78.3 percent approval for majority voting at Tessera Technologies.
Meanwhile, more issuers are filing proxy materials that include stand-alone golden parachute votes, as required by the Dodd-Frank Act for companies that seek shareholder approval for mergers and other transactions. Among those companies are: Lawson Software (June 29), K Sea Transportation (July 1), GS Financial (July 7), and Digital Angel (July 14). In addition, the agenda for the June 14 meeting of BioMimetic Therapeutics includes a bundled “say on pay”/golden parachute vote, one of the first ballot items of its kind this year.
Recently, Equilar released this report on CFO pay strategies in the S&P 500 finding that:
– Median total compensation for S&P 500 CFOs grew by 26.1% from 2009 to 2010. In 2010, median total compensation for S&P 500 CFOs was approximately $3.0 million, up from approximately $2.4 million in 2009.
– Median total bonus payouts for S&P 500 CFOs increased to $710,864 in 2010, up 32.7% from the 2009 median of $535,625.
– Healthcare CFOs received the most compensation, having a median total pay of $3.5 million in 2010.
As I recently blogged, there has been a trend of companies that fail to garner majority support for their say-on-pay getting sued – a trend that started last year. In his “D&O Diary Blog,” Kevin LaCroix provides details about a fifth say-on-pay related lawsuit – this one filed against Umpqua in a federal district court in Portland. We continue to post pleadings from these cases in our “Say-on-Pay” Practice Area.
We are excited to announce that SEC Chair Mary Schapiro will open the second day of our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: “Tackling Your 2012 Compensation Disclosures: 6th Annual Proxy Disclosure Conference” and “The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference.” Save by registering by June 24th at our early-bird discount rates. Note this early-bird discount will not be extended.
For those attending, take a moment to RSVP on this LinkedIn Event – in the upper right corner – so your friends can know you are going…