– Broc Romanek, CompensationStandards.com

Ed Hauder of Exequity recently wrote this in his blog:

A new research report -“Executive Decisions, Making the Most of Compensation Plans To Build and Protect Personal Wealth” – from AllianceBernstein addresses equity compensation from the executive’s perspective.

One of the more interesting things detailed in the report is the finding that the optimal exercise time for stock options is when their time value is in the range of 10%-30% of total value. This could result in option exercises that occur well before the end of the option term. Many advisors had previously advised that executives should hold onto options until they are just about to expire in order to maximize the potential return from the stock options.

Additionally, the report compiles AllianceBernstein’s key findings, which include:

• How to evaluate and compare different types of stock-based compensation
• How to integrate stock-based compensation into lifetime wealth planning, using a “core and excess capital” framework
• A method for determining how much single-stock risk is appropriate in your portfolio, and, if you need to diversify, a framework for choosing which holdings to divest and which to keep
• Strategies for integrating single stock with estate and charitable planning
• Determining when and how to use non-qualified deferred compensation plans
• Best uses of 10b5-1 plans
• How to make well-informed decisions regarding Net Unrealized Appreciation (NUA) elections and 83-b elections

– Broc Romanek, CompensationStandards.com

Yesterday, ISS released its Final 2011 U.S. Postseason Report, which includes vote results for meetings held before September 1st, with findings that include:

– During 1st year of mandatory say-on-pay, investors overwhelmingly endorsed companies’ pay programs, providing 92.1% support on average.

– 38 Russell 3000 companies, or just 1.6% of the total that reported vote results, had their say-on-pay voted down. The primary driver of these failed votes appears to be pay-for-performance concerns, which were identified at 28 companies. Almost half of the failed-vote firms have reported double-digit negative three-year total shareholder returns. Also contributing to investor dissent were issues like tax gross-ups, discretionary bonuses, inappropriate peer benchmarking, excessive pay, and failure to address significant opposition to compensation committee members in the past.

– Investors overwhelmingly supported an annual frequency for SOP, with a majority (or plurality) support at 80.1% of companies in the Russell 3000 index, as compared to triennial votes, which won the greatest support at 18.5% of issuers.

– Management preferences did not appear to have a significant influence on the outcome of this year’s frequency votes. Investors had defied management recommendations for triennial votes at 538 of 892 Russell 3000 companies. Shareholders also were not swayed by biennial recommendations at 34 out of 47 Russell 3000 firms.

– The number of directors at Russell 3000 firms that failed to garner majority support fell by nearly half as say on pay votes presented shareholders with an alternative to votes against compensation committee members. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported shareholder proposals were among the reasons that contributed to majority dissent against board members this year.

Only Two Weeks Until the Big Conference! ISS & Glass Lewis on 4 Different Panels!

As happens so often, there is now a mad rush for folks to register for our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price). Come hear the views of ISS and Glass Lewis, as representatives will sit on a total of 4 panels during the two days of action. See the agendas.

Act Now: Come join 2000 of your colleagues in San Francisco – or thousands more watching live (or by archive) online – to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.

– Broc Romanek, CompensationStandards.com

Recently, Nasdaq, The Conference Board, and Stanford’s Rock Center teamed up to survey companies about their views regarding the role of proxy advisors – ISS and Glass Lewis – in the compensation decision-making process. The survey ends on November 11th and companies that participate will receive a copy of the findings.

– Broc Romanek, CompensationStandards.com

A while back, Wachtell Lipton put out this 87-page Guide on compensation committees that includes a committee charter in the appendix.

– Broc Romanek, CompensationStandards.com

Here is news from Barbara Nims of Davis Polk from this blog:

As revealed in court documents filed last week, a series of lawsuits filed in New York by shareholders who claimed that bonuses paid to Goldman Sachs employees resulted in corporate waste were dismissed on September 21, 2011. Security Police & Fire Professionals of America Retirement Fund and Judith A. Miller sued the investment bank in December 2009, accusing directors and executives of breaching their fiduciary duties by reserving half of the company’s net revenue for employee compensation. Shareholders Ken Brown and Central Laborers Pension Fund filed similar suits the following month, and the two actions were consolidated.

The consolidated case was subsequently dismissed by mutual agreement; however, in connection with dismissal, the plaintiffs requested attorneys’ fees. To determine whether the award of fees was appropriate, the Court focused on whether the lawsuit at the outset was capable of surviving a motion to dismiss.

On this issue, the Court found that the case was not “meritorious when filed” because the plaintiffs failed to make a pre-suit demand. Demand was not excused because the plaintiffs’ complaints failed to create a reasonable doubt that: (1) the directors were disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Plaintiffs’ request for attorney fees and expenses, therefore, was denied. The court’s decision is available here.

Another similar case against Goldman Sachs alleging breach of fiduciary duty and unjust enrichment of management is currently pending in the Delaware Chancery Court, and it will be interesting to see if it results in a similar outcome. Here is the Amended Shareholder Derivative Complaint.

Comparing this case with the Cincinnati Bell say-on-pay lawsuit recently surviving a motion to dismiss, it is difficult to generalize about the factors leading to, or correlated with, the differing outcomes, or to predict how easy (or difficult) it will be to get these types of actions dismissed.

– Broc Romanek, CompensationStandards.com

This piece from “The Onion” entitled “Layoffs Are Necessary If We Want To Keep The Lights On,’ Says CEO Halfway Through Tasting Menu” is so funny that it was screaming to be shared…

– Broc Romanek, CompensationStandards.com

A new study by BDO USA surveyed directors on a variety of topics, including these related to pay practices:

– Say-on-Pay Not Helpful to Managing Pay – More than three-quarters (78%) of board members do not believe Dodd-Frank’s “Say-on-Pay” disclosure rules will help them better manage the compensation of their key executives. In fact, just one-fifth (22%) describe the rules as helpful. Directors who serve as members of their board’s compensation committee were even more likely (91%) to say the new rules will not help manage executive pay. Moreover, an overwhelming majority (81%) of board members believe shareholder criticism of executive compensation frequently suffers from 20/20 hindsight.

– Compensation Weary – Dodd-Frank’s executive compensation mandates seem to have taken a toll on corporate directors. When asked a variety of topics they would like their board to spend more or less time on, 71 percent say they do not want to spend more time on executive compensation – no other topic elicited such a negative response.

– Non-Binding Votes are Non-Issue – Although most board members do not find Dodd-Frank helpful, they do not see the non-binding nature of the Say-on-Pay votes as a problem. When asked if the non-binding nature of the Dodd-Frank Say-on-Pay votes diminished their effectiveness, only a quarter (24%) of the directors agreed. Three-quarters (76%) feel the non-binding nature of the votes do not limit their effectiveness, and directors serving on their board’s audit (85%) and compensation (79%) committees were even more likely to feel this way.

– Change of Control Provisions – Less than a fifth (19%) of directors perceive the disclosure of change-of-control provisions in executive compensation packages, mandated by Dodd-Frank, as having a negative impact on M&A activity. In fact, three-quarters (81%) indicate this provision will have no impact on merger activity. Members of compensation (91%) committees are even more confident that these disclosures will not adversely affect M&A activity.

– Board Compensation – When asked about their own compensation as board members, more than two-thirds (69%) believe their compensation is commensurate with their responsibilities. Yet, almost one-third (31%) feel their compensation is lacking, given the increased responsibilities and workload brought about by recent regulatory changes. Board members serving on the compensation committee (39%) were more likely to feel their compensation needs to be enhanced.

– Broc Romanek, CompensationStandards.com

Yesterday, the Washington Post ran this lengthy article criticizing peer group benchmarking on the front page, in the upper left corner. The piece is way too long to repeat here – but it’s well worth a read.

With an election year upon us and the unemployed becoming more willing to be vocal about perceived inequalities, I imagine we are going to see much more media attention to the processes by which CEO pay is set. Although much progress have been made over the past decade in corporate governance generally – and CEO pay specifically – I believe we are still in the infancy of the governance reforms that ultimately need to be made. There still are way too many stories of excesses – and not just by “outliers.” And as we’ve been saying all along, the overreliance on peer group surveys is one of the biggest adjustments that boards need to make…

– Broc Romanek, CompensationStandards.com

Jill Radloff of Leonard, Street and Deinard blogged this yesterday in her “Dodd-Frank Blog”:

A handful of companies have received SEC comments on their say-on-pay proposals in their proxy statements. The comments we found are outlined below. In general, they can be summarized as follows:

– Issuers can be sloppy by not following the technical wording of the rule (or worse yet, in ignoring it altogether), and the SEC is capable of making silly comments.
– Issuers depart from having the advisory vote cover anything other than “compensation of its named executive officers, as disclosed pursuant to Item 402 of Regulation S-K” at their own risk.
– Most of the comments were on preliminary proxy statements so the SEC policy on correcting in future proxies is unclear.
– The SEC will look closely at the language in the proxy card as well.

Issuer A

Comment:

Please include separate resolutions providing shareholders with an advisory vote to approve the compensation of your named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, and whether the shareholder vote should be held every 1, 2, or 3 years. Alternatively, tell us why you are not required to comply with Exchange Act Rule 14a-21 at this time. Refer to Item 24 of Schedule 14A, Exchange Act Rule 14a-21(a)-(b). For additional guidance, see Securities Act Release 33-9178.

Response:

The Company inadvertently omitted the proposals from its preliminary proxy statement and the proposals are now included as Proposal Number Five and Proposal Number Six.

Issuer B

Comment:

Rule 14a-21(a) of the Exchange Act of 1934 requires that you provide shareholders with an advisory vote to approve the compensation of your named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including related narrative disclosure. It does not appear that the resolution on page 48 meets the requirements of Rule 14a-21(a), given that it seeks approval only for your “overall executive compensation policies and procedures” (emphasis added). Please tell us how you intend to address this apparent noncompliance or tell us why you believe that your present disclosure is in compliance with Rule 14a-21(a).

Response:

The Company recognizes that the wording of the Resolution which is presented to the stockholders in the Proxy Statement filed April 21, 2011 did not satisfy the requirements in Rule 14a-21(a) of the Exchange Act of 1934. In light of this, the Company has filed and mailed to its stockholders an Amendment to its Proxy Statement amending Proposal 3 to specifically ask the stockholders to vote, on an advisory basis, on the Company’s executive compensation, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission.

Issuer C

Comment:

Please revise your proxy statement to include the proposals required by Item 24 of Schedule 14A or provide us with an analysis as to why you are not required to include these proposals.

Response:

The Company advises the Staff that it is a “smaller reporting company” as such term is defined in Rule 12b-2 (“Rule 12b-2”) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), because the Company had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter (i.e., June 30, 2010). On such date, the Company’s public float, computed in accordance with the definition of “smaller reporting company” set forth in Rule 12b-2, was $28,046,748. Pursuant to Securities Act Release No. 9178/Exchange Act Release No. 63768 (Jan. 25, 2011), companies that qualify as “smaller reporting companies” as of January 21, 2011, are not subject to Exchange Act Section 14A(a) and Rule 14a-21(a) and (b) until the first annual or other meeting of shareholders at which directors will be elected and for which the rules of the Commission require executive compensation disclosure pursuant to Item 402 of Regulation S-K occurring on or after January 21, 2013. Accordingly, the Company is not required to include such proposals in its proxy statement for its 2011 annual meeting.

Issuer D

Comment:

Please include a separate resolution subject to shareholder advisory vote to approve the compensation of your named executive officers, as disclosed pursuant to Item 402 of Regulation S-K. See Rule 14a-21(a) of the Exchange Act and Instruction to Rule 14a-21(a) of the Exchange Act.

Response:

During our telephonic conversation on April 25, 2011, we indicated that we will file an amended preliminary proxy statement to include a separate resolution to approve the compensation of our named executive officers. The resolution we will include is as follows:

RESOLVED, that the shareholders of this corporation approve, on an advisory basis, the compensation of the named executive officers for the fiscal year ended February 26, 2011, as described in the “Compensation Discussion and Analysis” section of and the compensation tables and related material disclosed in the corporation’s proxy statement for its 2011 Regular Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission.

Issuer E

[T]his letter is in response to your telephone call on Friday, April 22, 2011 relating to our proxy statement for the 2011 Annual Meeting of Stockholders. In such call you stated that the resolution of the stockholders contained in the Advisory Vote on Executive Compensation (Proposal 10) on page 54 of the proxy statement did not adequately comply with the requirements of Rule 14a-21(a) adopted last February by Securities and Exchange Commission Release No. 33-9178 (the “Release”), Shareholder Approval of Executive Compensation and Golden Parachute Compensation, because it did not directly approve the actual compensation of our named executive officers as disclosed in the proxy statement.

In drafting the resolution, the Company intended to clearly and broadly seek stockholder approval, on an advisory basis, of the actual compensation of our named executive officers as disclosed in the proxy statement. The first sentence of the third paragraph of the proposal makes the scope of the vote explicit:

We are asking for stockholder approval of the compensation of our named executive officers as disclosed in this proxy statement in accordance with SEC rules, which disclosures include the disclosures under “Executive Compensation–Compensation Discussion and Analysis,” the compensation tables and the narrative discussion following the compensation tables.

The fifth paragraph of the proposal similarly refers to the vote as addressing “named executive officer compensation as disclosed in this proxy.”

The language of the formal resolution included in the proposal is not limited to an approval of executive officer compensation policies and procedures as prohibited by the Release. By including the language “practices of the Company as disclosed in this proxy statement” in the resolution we intended to cover the actual compensation of our named executive officers, rather than the Company’s general approach to compensation.

Finally, our proxy card say-on-pay item seeks approval for the “Advisory Vote on Executive Compensation.” The resolution language is not repeated on the proxy card. This further illustrates our intent to obtain stockholder approval of the compensation of our named executive officers and not solely to approve our policies and philosophy.

Notwithstanding the above, we acknowledge your comment. We note that Rule 14a-21(a) does not require any specific form of resolution, and indeed, per Compliance & Disclosure Interpretation Q&A 169.04, a formal resolution is not even required under Rule 14a-21(a). We believe the current disclosure in the proxy statement is not materially inconsistent with the intention of the Release and Rule 14a-21(a), that shareholders are likely to understand the scope of the proposed vote to include a vote on the compensation of the named executive officers as disclosed in the proxy statement, and therefore, we cordially request that no changes be required for this year’s proxy statement. We do, however, undertake that any formal resolution included as part of our Rule 14a-21(a) advisory vote in our future proxy statements shall clearly state that the Company is seeking approval of our stockholders, on an advisory basis of “compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion” when obtaining future advisory votes as required by the Release.

Issuer F

Comment

We note that Proposal 3 on the proxy card is described as a vote to “[p]rovide an advisory vote on executive compensation.” Using the word “provide” to describe the proposal implies that shareholders are voting on whether they should be provided an advisory vote on executive compensation in the future. But the discussion of the proposal starting on page 5 indicates that you are providing a shareholder advisory vote on the compensation of your named executive officers. Revise your proxy card to more clearly describe the effect of Proposal 3 as required by Rule 14a-4(a)(3). Refer to the example in the instruction to Rule 14a-21(a).

Response

The Company has revised the preliminary proxy card to delete the reference to “provide”.

– Aaron Boyd, Equilar

In our “2011 Consultant League Report,” we took a look at annual reports and proxy filings of public companies to determine which consulting firms had the largest, most profitable clients, and which had the best market share in various indices, sectors, and geographic locations. Although many of the large consulting firms consistently stand atop the rankings, categorical breakdowns reveal some of the smaller shops’ unique market niches. Some of our findings:

– Frederic W. Cook and Co. led the rankings for engagement in the Russell 3000 (14.2% market share), the Fortune 1000 (20.9% market share), and the S&P 1500 (16.2% market share).
– Pearl Meyer & Partners had the highest percentage of new engagements, with 15.3% market share. Towers Watson was second, with 12.7%.
– Total Rewards Strategies had the highest average percentage of votes in favor of clients’ pay packages, with 95.7%, while Radford has the highest median percentage of those votes, with 97.2%.

Below is a sample table from the report, detailing the market share of firms engaged by the Russell 3000 (in comparison, here are last year’s numbers):

1. Frederic W. Cook & Co. – 14.2%
2. Towers Watson – 12.7%
3. Pearl Meyer & Partners – 10.8%
4. Mercer – 6.9%
5. Compensia – 5.8%
6. Pay Governance – 5.3%
6. Meridian Compensation – 5.3%
8. Radford – 4.2%
9. Hewitt Associates – 3.4%
10. Hay Group – 3.1%

Other charts in the 2011 Consultant League Report include:

– Financial Data: Firms’ client base ranked by revenue, net income, year-end market capitalization, total assets, and one- and three-year total shareholder return
– Indices: The firms with the most market share in the Fortune 1000, S&P 1500, and more
– Sectors: Eight different industry categories, from Healthcare to Financial Services
– Geography: The firms with the most market share in each of four U.S. regions
– Engagement: The market share of firms engaged by management

The complete report is provided to all Equilar Knowledge Center subscribers. Non-subscribers can request a copy of the report.