Last year, I was shocked to read Mike Melbinger’s blog that a major insurance broker plans to begin offering “policies that would cover financial firms against both their legal costs in the event that they underwent investigation by the FDIC and any compensation that their executives had to hand back as a result of action by the agency.” Yesterday, as noted in this article, Rep. Barney Frank introduced a bill that would bar executives at financial firms from being able to buy insurance to protect themselves against compensation clawbacks or civil penalties. Here’s analysis of the bill from the D&O Diary Blog.
We are very excited to announce that Corp Fin Director Meredith Cross will be part of our “7th Annual Proxy Disclosure Conference” on October 8th in New Orleans (and by video webcast). Just look at this beautiful baker’s dozen of panels for this Conference:
1. An Interview with Meredith Cross, Director of the SEC’s Division of Corporation Finance
2. Say-on-Pay Disclosures: The Proxy Advisors Speak
3. The Executive Summary & Other Ways for Disclosure to Facilitate Solicitation
4. The Latest SEC Actions & CD&A Developments: Compensation Advisors, Clawbacks, Pay Disparity & More
5. Refining Your Pay-for-Performance Message & Addressing the Impact of Your Vote
6. Getting the Vote In: The Proxy Solicitors Speak
7. Dealing with the Complexities of Perks
8. Conducting – and Disclosing – Pay Risk Assessments
9. Overcoming Form 8-K Challenges
10 Handling the Golden Parachute Requirement
11. Challenges for Smaller Companies: Their First Year
12. How to Handle Preliminary Proxy Statements
13. How to Handle the ‘Non-Compensation’ Proxy Disclosure Items
Register Now for Early Bird Rates – Act by May 31st: For the early bird discount rate, register by May 31st. This Conference is paired with “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” and they will be held October 8-9th in New Orleans and via Live Nationwide Video Webcast.
I’ve added 14 more companies to our failed say-on-pay list for 2012! We are now at 32 companies that have failed to garner major support – with Chiquita Brands garnering support only in the teens (19.8%; see Mark Borges’ analysis of this failure)! Hat tip to Karla Bos of ING Funds for keeping me updated!
And Hercules Offshore became the first (41% support in ’11 and 48% in ’12) – and Kilroy Realty became the second (49% support in ’11 and 30% in ’12) – company to fail two years running…
And this list doesn’t include the recent voting results from Cablevision Systems – a company which did not have say-on-pay on its ballot this year because the frequency is triennial (per page 26 of their proxy statement; triennial was the choice of shareholders last year) – whose members of the compensation committee received less than majority support presumably due to pay issues. The company has a plurality vote standard so there is no direct impact of this vote. So this result doesn’t get picked up in the “failed SOP” count even though I would consider it to be a more serious failure than a nonbinding SOP vote…
Key findings from the study include the following:
– For the first time in the history of this report, the use of long-term performance shares now is more prevalent than the use of stock options, while the prevalence of time-vesting restricted stock awards appears to have stabilized.
– Stock options continue to decrease in prevalence, but are not expected to go away, as they are by nature a performance based long-term incentive vehicle and a common complement to full-value share awards.
– Variations of basic grant types (like “premium” or “performance accelerated” stock options), common in years gone by, have dwindled and are on the brink of extinction, perhaps casualties of greater transparency and simplicity in a say on pay environment.
– Vesting periods of awards, and performance periods for performance awards, remain stable at 3 years.
– The use of profit measures and total shareholder return in long-term performance plans continues to be the most widely used performance categories, and the prevalence of types of measures used for performance awards has stabilized.
Here is a 20-minute video podcast, featuring Daniel Abrams of FAS123 Solutions and Arthur Kohn of Cleary Gottlieb. The presentation covers:
1. The use, in connection with 2011 equity awards, of routine option valuation methods and historical measurements of volatility will, for many companies, overstate the value of option awards for compensation and disclosure purposes.
2. Volatility and other factors, including in particular the degree of difficulty of vesting conditions, affect the value of equity compensation awards other than options in ways that should be considered in the design of executive compensation programs that use a “portfolio approach” to long-term incentive grants.
3. Decomposing the value of equity compensation awards in a way that gives insight into the amount of value delivered in different factual scenarios will help to properly design such awards from an incentive and value perspective.
Ning Chiu of Davis Polk bring us this news from her blog:
This proxy season there has been a lot of focus on companies filing additional soliciting materials to supplement proxy disclosure, with a particular focus on executive compensation in light of the say-on-pay vote. Exxon Mobil has taken a particularly interesting approach turning a two-dimensional paper communication into something more dynamic by inviting interested persons to a company-sponsored webcast on executive compensation.
The webcast represents an additional proactive step Exxon has taken. On the same day it filed its proxy statement, Exxon took the unusual step of also filing a colorful presentation filled with data, graphs and photos to explain how its pay-for-performance approach focuses on the long-term nature of its capital-intensive business. In supplemental information filed more recently, Exxon took issue with specific aspects of the ISS analysis, including the peer group selected, which Exxon asserted failed to adjust for its size and complexity, since the company’s revenue is more than 4X larger by revenue and 3.5X larger by market capitalization than the median of the peer group.
On the webcast, which included a presentation, Exxon representatives discussed the company’s business environment, the scale and scope of the company and its focus on the long-term nature of its business strategy. The company explained that together, these form the basis for customized compensation decisions, including a lengthy “hold-to-retirement” policy and a unique approach on the deferral of 50% of annual bonuses, a measure rarely seen outside of financial institutions. The company’s focus on executive training, retention and succession was emphasized, including the fact that the company achieves its retention goals without change in control or severance agreements with senior executives. The company also discussed the shareholder engagement it undertook as a result of last year’s say-on-pay vote. In response to questions during the webcast, the company noted how its programs focus on performance assessments that take a more holistic approach rather than concentrating on formulas that inspire executives to reach for only certain specific goals. The company received several questions about specific aspects of its pay decisions, the reasons for the webcast and the proxy advisory firms’ recommendations.
In his blog, Mark Borges recently provided this analysis of ExxonMobil’s executive pay disclosure and more…
In reading this blog, I came across this interesting paper – entitled “Executive Compensation: A New View from a Long-Term Perspective, 1936-2005” – by Prof. Carola Frydman and Raven Saks of the Fed Reserve. I’m always curious about papers that attempt to estimate what executives were paid before the SEC began requiring detailed pay disclosures in the early ’90s…
Towers Watson’s Steve Seeling recently blogged about this restatement study that I blogged about last month:
As we wait for the SEC to propose regulations (still on the SEC agenda for the first half of this year), there’s been a lot of discussion about how the SEC might answer many of the open questions about Dodd-Frank clawbacks. But relatively few compensation professionals have yet focused on the reality of how often financial restatements triggering clawbacks might actually arise. Two recent reports from Audit Analytics found there are more restatements taking place each year than you may have thought.
In a report entitled A Restatement Analysis of the Russell 1000 Companies, Audit Analytics found that from 2006 to 2011, 291 of the 1,355 companies that were part of the Russell 1000 during those years disclosed an annual restatement, defined as a restatement with a restated period of greater than 368 days.That would mean that for each year, an average of almost 4% of companies in the Russell 1000 (48.5 per year) decided a restatement of financials was in order. The data does not mention the percentage of companies that had restatements in different years or those that had to revisit the same issue in a later year, but the sobering possibility is that over the six years of analysis, the percentage of companies with restatements was somewhere in the teens.
In a separate report entitled 2010 Financial Restatements: A Ten Year Comparison, Audit Analytics found that for over 7,000 SEC public registrants, the trend has been for a decline in the number of restatements, from 1,566 in 2006 down to 699 in 2010 (almost 10% of companies). Of course, the salient issue for companies faced with a Dodd-Frank clawback will be how often these restatements rise to the level of meeting the statutory requirement: “an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws.”
Taken at face value, this could encompass all of those restatements detailed in the Audit Analytics research, or some higher threshold to be determined by the SEC. For example, it might be possible that the SEC could define a “material misstatement” to include only those that had an impact on earnings. The Audit Analytics report on 2010 restatements found that, for companies trading on Amex, NASDAQ or NYSE, approximately 40% of the restatements disclosed had no impact on earnings, so this higher threshold would reduce the number of companies potentially subject to clawbacks.
On the other hand, the SEC might decide to leave the question of “material noncompliance” to companies and their audit firms. If the SEC takes this path, the number of companies subject to clawbacks might be larger than if the SEC chooses the standard. The theory would be that if “material noncompliance” was determined to be the same standard as used by auditors when requiring an annual restatement, this standard would mean more restatements would prompt a clawback.
While the issue of when companies must restate financials is one that will be out of the hands of those who design corporate executive compensation programs, this does not mean that a restatement’s impact on the financials themselves can be ignored. Continuing the above example, if only restatements that impact earnings are deemed material, would this mean companies would turn away from earnings metrics in their annual and long-term incentive plans on the theory that non-earnings-based metrics might not trigger clawbacks? Similarly, if the data suggest that most restatements take place within, say, two years of the original financials, will this make companies more likely to hold back bonus payments until that period has passed?
Whichever direction the SEC takes, the wager here is that the forthcoming Dodd-Frank clawback rules will factor into ongoing discussions about whether incentive compensation program metrics are appropriate to support company business strategies, balanced against the risk that clawbacks may be invoked.