Yesterday, ISS published its promised white paper that describes the pay-for-performance methodology under which it will implement its 2012 policy updates. ISS will begin to apply this new methodology on February 1st. Here’s an excerpt from a Wachtell Lipton memo by Michael Segal, Jeannemarie O’Brien, Jeremy Goldstein and Timothy Moore (that will be posted later today):
The test is one of the primary methods by which ISS determines whether to recommend for or against a company’s management say-on-pay vote, with companies failing the test being deemed to have a “pay for performance disconnect.” In determining whether there is a “pay for performance disconnect” this proxy season, ISS will measure the degree of alignment between CEO pay and total shareholder return within the subject company’s peer group for a one- and three-year period, as well as the absolute alignment between CEO pay and the company’s TSR over a five-year period.
The white paper specifies that ISS will select 14 to 24 peer companies against which the subject company’s TSR performance and CEO pay will be measured for the one- and three-year periods ending on the last day of the month closest to the subject company’s fiscal-year end. Peer companies will be limited to those in the same two-digit GICS category as the subject company, each with annual revenues (or assets for financial companies) between 0.45x and 2.1x the subject company’s revenues (or assets) and a market capitalization between 0.2x and 5x the subject company’s market capitalization. This list of companies will then be filtered to 14 to 24 companies in the subject company’s six-digit GICS category (or four- or two-digit category if fewer than 14 companies exist in the six-digit category), with companies “closest in size” (presumably based on market capitalization or assets) selected first and larger and smaller companies added to maintain the subject company at or near the median size of the list of peer companies.
“Super-mega” non-financial companies (approximately 25 Russell 3000 companies each with greater than $50 billion in annual revenues and at least $30 billion in market capitalization) will collectively comprise a stand-alone peer group, and ISS will compare their respective one- and three-year TSR performance and CEO pay against the members of that group. In each case, annual revenues, assets and market capitalizations will be determined as of June 1 or December 1 (presumably the relevant year is the year prior to the year in which the proxy is definitively filed).
Now that the white paper has been released, companies can assess how their TSR performance and CEO pay will compare to that of their peers under ISS’ test. Companies should use the criteria set forth in the white paper to determine whether they are likely to have a “pay for performance disconnect” based on these criteria, and, if so, what actions, if any, are advisable to take in light of this analysis.
Yesterday, ISS also announced a new version of its Governance Risk Indicators (GRId 2.0), and issued information about the changes that will become effective in February.
A long while back, Frederic W. Cook & Co. issued this report that examines change-in-control trends over the three year period, 2007-2010. It shows that practices are evolving as multiples come down and double-triggers become more popular, as well as gross-ups going the way of the Dodo…
In this podcast, Larry Cagney of Debevoise & Plimpton explains a new idea for an executive compensation program – Debevoise & Plimpton Retention Incentive Bonus (the “DEEP RIB”) – that takes a slice of an executive’s future short-term incentive compensation and converts it into a long-term investment in the company’s stock (essentially, it is a mandatory executive stock purchase program that pre-funds an executive’s purchase out of future bonuses, but in a way that does not implicate the personal loan provisions of SOX), including:
– What is the “DEEP RIB”?
– How does it stack up to long-term incentives in place today?
– What types of companies should consider this?
– What are the reactions from clients so far?
Here’s a query recently posted in our “Q&A Forum” (#893):
Does anyone have a sense of what market practice will be with respect to say-on-pay frequency votes this year for companies whose shareholders voted in favor of annual say-on-pay votes last year? I wonder whether companies that recommended in their 2011 proxy statements that shareholders approve say-on-pay votes every three years, but whose shareholders voted for annual say-on-pay votes, might take another shot at getting approval for a vote every three years? Probably only makes sense to do so for certain companies (i.e., close vote last year, or perhaps a significant change in institutional ownership), but there’s nothing prohibiting a company from putting a say-on-pay frequency proposal up for a vote again this year, right?
And here’s how Dave Lynn answered the question:
You are correct, the Say-on-Frequency proposal could be put up for a vote again this coming year if a company elected to do so, as the Dodd-Frank and SEC rule requirement is that the vote be taken at least every six years, but doesn’t prohibit an earlier advisory vote. I would be very surprised to see many company’s trying again on the Say-on-Frequency vote unless, as you say, there was some compelling change in circumstances that would indicate the vote will go the other way.
In the “Davis Polk Governance Blog” yesterday, Ning Chiu gave us this recap: During its 2012 North American Proxy Season review, proxy advisory services firm Glass Lewis looked back to the 2011 proxy season and also gave insights as to what we can expect from them in 2012. Highlights included:
Say-on-Pay. Glass Lewis recommended against 17.5% of say-on-pay proposals in 2011. They use a proprietary model to evaluate companies and come up with “A” to “F” grades. 10% of companies that they reviewed received “F”s in 2011, with the average say-on-pay results at those companies at 73%. While, like ISS, they cite pay for performance issues as the primary reasons for causing negative recommendations, Glass Lewis also tends to cast an unusual focus on CD&A disclosure that sometimes surprises companies. According to Glass Lewis, they find it problematic when companies disclose performance measures but not the rationale for the selection or the weighting of the measures, or when they perceive inadequate discussion of a compensation committee’s exercise of discretion. Glass Lewis grades CD&A disclosure as “poor, fair and good,” and 5% of companies received “poor” citations in 2011. They mentioned Amazon as an example of a company that, in their view, both performs and has appropriate executive compensation, but has poor CD&A disclosure. In terms of evaluating company responses to prior year say-on-pay votes, Glass Lewis will examine those companies that received at least 75% negative votes for whether to recommend against either the chairman of the compensation committee or the entire committee, depending on companies’ engagement efforts with shareholders and then the level of responses.
Shareholder Proposals, Including Proxy Access. Glass Lewis data shows that there were 443 shareholder proposals in 2011, a decrease from 591 in 2012, mainly attributable to the absence of compensation proposals in light of mandatory say-on-pay. This year’s most popular proposal, given the election year, will likely be on political contributions and related topics. As for proxy access shareholder proposals, similar to ISS, Glass Lewis will review those on a case-by-case basis before making recommendations, including the percentage ownership requested and holding period requirement. Their list of factors that they will consider is much longer than the ISS policy, including an analysis of the company’s shareholder base in both percentage of ownership and type of shareholders, responsiveness of board and management to shareholders as evidenced by “progressive shareholder rights policies” such as annual elections and majority voting, and company performance and steps taken to improve bad performance.
Exclusive Forum Provisions. Glass Lewis discussed the selection of Delaware as an exclusive forum for shareholder derivative suits by 80 companies as of November, adopted either after seeking shareholder approval or by board action alone. We recently blogged about ISS policies on this matter. Like ISS, Glass Lewis generally recommends against an exclusive forum provision and a company will need to demonstrate that it has a long history of suffering from frivolous lawsuits to justify the proposal. But Glass Lewis also takes it a step further and will recommend against the chairman of the governance committee if the company adopts exclusive forum provisions either without shareholder approval or pursuant to a bundled bylaw or charter amendment (where exclusive forum is coupled with other changes). If a company adopts an exclusive forum provision before a company’s IPO, Glass Lewis will recommend against the chairman of the governance committee or the board chairman if there is not a governance committee chairman.
Talk to Us Now. Glass Lewis reiterated that they do not engage with companies during the proxy season, long a frustrating policy for companies after they receive negative Glass Lewis reports, but they are available for discussions during the off-season. At times during the proxy season, they will sponsor “proxy talks” involving a specific company and invited clients.
Here is a recent question posed in our “Q&A Forum” (#892):
I’m considering the “how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation required by section 14A of the Exchange Act (15 U.S.C. 78n-1) or Rule 240.14a-20 of this chapter in determining compensation policies and decisions” language and wondering if this consideration covers just the results of the most recent say on pay advisory vote or the results of the most recent frequency vote as well (I’m not sure if the “most recent shareholder advisory vote on executive compensation required by Section 14A” language refers to just the advisory vote (Rule 14a-21(a)) or the frequency vote (Rule 14a-21(b) as well).
Here is a response from Dave Lynn:
I had a similar reaction, as the rule text may be a little ambiguous because the frequency vote is arguably a vote “on executive compensation,” I think Section II.A.3(c)of the adopting release makes it pretty clear that the CD&A requirement covers only the say-on-pay vote:
“After considering the comments, we are adopting amendments to the disclosure requirements of Item 402(b)(1) substantially as proposed, with a modification to clarify that this mandatory topic relates to the issuer’s consideration of the most recent say-on-pay vote. As discussed below, issuers should address their consideration of the results of earlier say-on-pay votes, to the extent material.”
All of that said, I have found that it is sometimes useful to mention the frequency of future say-on-pay votes when describing the consideration of and actions taken with respect to the prior say-on-pay vote or votes.
I haven’t seen anything on this – so I guess we all missed this OECD report on board practices in setting executive compensation that was published back in August. Among the many interesting parts of this report is the UK section, particularly Section 7.1.6 regarding shareholder engagement. The UK has had say-on-pay for a decade – so the US can look to the Brits to see what might lie ahead here perhaps. Observations about the undue influence by a couple of groups and feelings of distrust and hostility do not bode well. Of course, maybe we can do better here. Hope springs eternal.
Thanks to Valerie Diamond and her global equity services team at Baker McKenzie, here is a chart with a matrix that parses the enforceability and other legal issues related to clawback provisions in equity award agreements in 40 key countries including Dodd-Frank clawbacks, non-compete related clawbacks and financial firm clawbacks.
