– Broc Romanek, CompensationStandards.com
Just in time to be discussed during today’s webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures ” – the SEC’s new compensation committee/advisor release was published yesterday in the Federal Register. This starts the clock ticking as the stock exchanges now have 90 days to propose their own rules (and then a year to finalize the standards with approval from the SEC). I expect the exchange’s proposals will come sooner than the maximum 90 days.
As has been touched on in some firm memos – and as will be discussed during today’s webcast – there are some open interpretive issues in the wake of the SEC’s rulemaking, particularly when dealing with compensation advisors. For example, what it means to “receive counsel” or a possible expansive interpretation of what it means to “select” other advisers. This was an aspect that was not clear in the SEC’s proposal. In the ABA’s comment letter, this point was specifically raised as follows:
“To implement the statutory language, we believe that the final rules should clarify that Proposed Rule 10C-1(b)(4) is intended to apply only to legal counsel and other advisers “selected,” that is, separately and specifically retained by the compensation committee. We believe the statutory language does not support a more expansive approach to this provision, and that the Commission should not seek to expand the scope of the provision in a manner that would interfere with a compensation committee’s routine operation by requiring a committee to consider the specified independence-related factors before consulting with or obtaining advice from in-house counsel or outside counsel retained by the management…. For different reasons, we also believe that the requirement for an independence assessment should not apply to compensation consultants who are retained by management even if that consultant’s advice is presented to and considered by the compensation committee. Performing an independence assessment where compensation consultants, legal counsel or other advisors do not purport to be and are not held out as independent would be a time-consuming and unnecessary exercise.”
Another ambiguous aspect of the rulemaking is that it’s not on its face limited to advisers that deal with executive and director compensation, but to any advisor that the committee has. More to come…
– Broc Romanek, CompensationStandards.com
Recently, I blogged about the UK moving closer to a binding say-on-pay framework – and I have posted memos on this development in our “International” Practice Area. Also note this Reuters article entitled “Long “shareholder spring” seen harming UK firms.”
In response, I got queries from members confused about how the UK framework works now – and in our countries that have say-on-pay. Cristina Ungureanu helps us by noting that this confusion may be caused by two aspects:
– Particularities of the corporate governance / board models in various EU jurisdictions (one-tier, two-tier, mixed models).
– Differentiating between vote on the remuneration report and vote on the remuneration policy
Here are the existing frameworks in other countries:
– United Kingdom: The vote is on the entirety of the remuneration report, covering both retrospective payments and policy, as well as future remuneration policy. The remuneration voted on is therefore applicable to the entire board, which includes executive and non-executive directors (in the UK, the board has a one-tier structure).
– Nordic Countries: The Nordic corporate governance structure lies between the Anglo-Saxon one-tier and the continental European two-tier model. Further, a separation between the board and executive management is required. The same person cannot be CEO and chairman of the board. Hence, the great majority of the Nordic listed companies have entirely or predominantly non-executive boards. The AGM must decide on the fees and other remuneration for each director of the board. The nomination/remuneration committee makes the remuneration recommendations, which are then presented in the notice of the AGM. As to the executive committee members, the Board must present proposed guidelines for their remuneration to the AGM for its approval; therefore the vote on executive pay is on the future remuneration policy.
And here is news about governance developments in Asia, courtesy of Towers Watson.
– Broc Romanek, CompensationStandards.com
I’ve added 5 more companies to our failed say-on-pay list for 2012. We are now at 54 companies in ’12 that have failed to garner major support. Hat tip to Karla Bos of ING Funds for keeping me updated.
For this year’s pre-season poll predicting how many say-on-pay failures there would be, the results were as follows: Less than 10 failures – 5%; 11-20 failures – 13%; 21-30 failures – 24%; 31-40 failures – 20%; 41-50 failures – 17%; 50-99 failures – 24% and more than 100 failures – 24%. So once again, perhaps I predicted too few failures myself in designing the poll. But a hardy 24% predicted correctly…
– Broc Romanek, CompensationStandards.com
Two days ago, the UK took another step closer to mandating binding say-on-pay when Business Secretary Vince Cable presented a bill to Parliament mandating binding say-on-pay for consideration. Here is a page with information on the “Enterprise and Regulatory Reform Bill.”
As I understand it, it looks very likely that the bill will pass and perhaps be law by October of 2013. There would actually be three types of say-on-pay votes:
– Review of past compensation – non-binding and annual
– Prospective review on compensation policy – binding and would happen every three years so long as the company’s pay policy hadn’t changed; if it had changed, would happen annually
– Share plans – binding
The biggest debate is over the annual advisory vote – which is backward looking – and supermajority vote thresholds. This Manifest blog captures some of the debate. I’ll be blogging more on this as I figure it out.
What will happen now is that amendments to the Enterprise Bill are introduced in the House of Commons for debate. It then goes to committee and then to the upper chamber, the House of Lords, which then has their debate and committee and then if all is well, it is passed into law (unlike Congress, no riders or changes can be snuck in – only the bill that has been debated can pass). The Financial Reporting Council – which is a separate body and which looks after the UK Governance Code – will then do its own consultation regarding amendments to the UK Governance Code to ensure that the Law, as it applies to UK incorporated companies, will apply to listed companies. Thanks to Sarah Wilson of Manifest for helping to explain the UK process!
– Broc Romanek, CompensationStandards.com
Yesterday, the SEC finally adopted rules that direct the stock exchanges to adopt listing standards for compensation committees and compensation advisers under Section 952 of Dodd-Frank (Section 952 added Section 10C to the ’34 Act). The Commission adopted the rules by seriatim.
The stock exchanges have 90 days from when the SEC’s rules are published in the Federal Register to propose listing standards (and they have one year to finalize them). As noted in Mark Borges’ blog, if the exchanges and the SEC move quickly, it’s possible that the listing standards could be in place in time for the 2013 proxy season. In any event, there will be at least one new disclosure requirement in place for the 2013 proxy season – the adopting release provides that companies must comply with the disclosure changes in Item 407 of Regulation S-K in any proxy statement for a regular annual meeting occurring on or after January 1, 2013. This Item 407 change requires disclosure of an assessment of whether any work performed by a compensation consultant raises any conflict of interest (and if so to disclose the nature of the conflict and how it was addressed).
As Mike Melbinger’s blog notes, the SEC’s rules confirm that Section 10C does not require compensation committees to retain – or obtain advice – only from independent advisers. A listed issuer’s compensation committee may receive advice from non-independent counsel, such as in-house counsel or outside counsel retained by management, or from a non-independent compensation consultant or other adviser, including those engaged by management.
Here is the adopting release – and the press release. We will be posting memos in our “Compensation Committee” Practice Area. There are none out yet, but yet all three of our CompensationStandards.com blogs have spoken on this development…
Tune in next Thursday, June 28th, for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges, Dave Lynn and Ron Mueller analyze what was (and what was not) disclosed this proxy season as well as discuss these new rules.
– Broc Romanek, CompensationStandards.com
On Monday, Monolithic Power Systems announced the dismissal of its say-on-pay lawsuit. We haven’t heard much about this year’s crop of say-on-pay lawsuits, probably because it’s a little early and the plaintiffs haven’t fared too well so far in last year’s suits. Mark Poerio of Paul Hastings has maintained this chart of suits (and we have our own list) – here is something that Mark blogged about a Texas lawsuit:
Copycat “Failed” Say on Pay Class Action – Helix Energy Hit
Will Texas provide a friendlier forum than Delaware for the latest complaint that second-guesses executive compensation decisions by reference to a later say on pay vote? The complaint against Helix Energy begins with the usual refrain: “This is a ‘failed’ say on pay shareholder derivative action, arising from the Board’s unwarranted and excessive spending … on executive compensation.” Within the same paragraph, the complaint contorts applicable corporate law by intimating that the business judgment rule is violated where a majority of shareholders disagree with a board decision (see complaint ΒΆ3: “A majority of the Company’s stockholders agree; they rejected the Board’s business judgement by voting …”).
– Stephen O’Byrne, Shareholder Value Advisors
I’ve done a revision of my paper on the ISS pay for performance model. Here is one aspect of it that you might find very interesting: I argue that ISS should give examples of pay programs that provide perfect pay for performance and then I show that a simple pay program with annual grants of performance stock will provide perfect pay for performance over a multi-year period if it has two critical features: (1) the target opportunity (or grant date stock value) is based on market pay adjusted for relative performance since the start of the multi-year period and (2) the stock vesting multiple is tied inversely to peer group performance since the date of grant. By modifying this perfect pay for performance program, companies can quantify the impact of program features that reduce pay for performance, e.g., paying market without regard to prior performance, having non-performance pay, using other vesting measures, etc.
–Subodh Mishra, ISS’s Governance Exchange
This article is drawn from a recent ISS paper exploring trends in CEO compensation at smaller U.S. firms relative to shareholder voting on “say-on-pay” resolutions:
As management “say-on-pay” (MSOP) voting takes hold in the U.S., shareholder concerns over executive pay levels and practices have principally focused on large capital companies where dissent on such resolutions is often disproportionately high compared with smaller peers. Investors’ attention may be shifting down their portfolios, however, as smaller firms come under greater scrutiny and investors appear more willing to challenge pay at such firms, according to an ISS analysis of voting for the 2012 annual meeting season.
As of May 30, Russell 3000 companies falling below the S&P 1500 index (referred to herein as “small” or “smaller” companies) saw average MSOP support decline across eight of 10 2-digit GICS sectors over 2011, while the percentage of ISS recommendations against such proposals has increased two and one-half percentage points to 16 percent overall. A likely driver of the trend is an increase in concerns over pay for performance, with nearly 40 percent of smaller companies exhibiting a “medium” or “high” concern thus far in 2012, compared with just over 25 percent during same period last year.
Trends in Pay
Median CEO pay for smaller companies grew by 10 percent in fiscal 2011 (as filed in 2012) with the typical chief executive taking home just under $2 million. Examined by sector, year-over-year changes in median CEO total compensation varied markedly, declining by 2.7 percent for Consumer Discretionary companies, and spiking by nearly 43 percent for Telecommunication Services firms. Overall, seven of 10 sectors showed growth above the percentage increase in median pay as well as the fiscal 2011 median value.
Telecommunication Services firms saw the greatest proportional growth in pay between fiscal 2010 and 2011, though the jump is largely due to a pay rebound after a 17.3 percent decline evidenced between fiscal 2009 and 2010. Eliminating this anomaly, factors accounting for year-over-year growth in median CEO pay vary by sector, though are driven largely by spikes in bonus awards, as well as the projected value of shares tied to option and stock grants.
Energy company CEOs saw the greatest year-over-year gain behind counterparts in Telecommunication Services, largely on the back of a 52.7 percent surge in the value of bonus awards and 31 percent gain in the value of stock option grants.
With regard to bonuses overall, six of 10 sectors saw bonuses exceed the overall small company median increase of 4.6 percent, including gains among Consumer Staples CEOs of 21 percent and Health Care company chiefs of 17 percent.
Notably, the rise in bonuses belies company performance as measured by 1-year total shareholder return (TSR). Just two of 10 sectors studied had positive median 1-year TSR as of Dec. 31, 2011, with four sectors showing both negative TSR and bonus increases.
Elsewhere, smaller companies overall saw modest year-over-year gains in the median value of stock-based awards with options pushing up by 2 percent and stock awards gaining nearly 7 percent in value over fiscal 2010.
Energy firms stand out for the aforementioned 31 percent increase in the value of option grants to a median value of $1.13 million (by comparison, the figure stood at just $462,000 as recently as fiscal 2009). Similarly, stock grant values for Energy firm CEOs stood at $1.1. million for fiscal 2011, which was tops by value, while firms in the Materials sector saw the greatest percentage gain at 56.5 percent, to a median value of $994,000.
Pay trends over the most recent fiscal year tell some but not the full story. Over a two-year period, the change in median CEO pay at smaller companies is brought into sharp relief as is a potential disconnect with performance when compared with 3-year TSR as of Dec. 31, 2011.
Energy firms’ CEOs saw two-year gains of more than 81 percent in total direct compensation against three-year TSR of 24 percent, while CEOs in the Consumer Staples sector saw gains of 46.1 percent against TSR growth of 10.5 percent. Just three sectors–Telecommunication Services, Consumer Discretionary, and Materials, saw greater gains in 3-year TSR than in median CEO pay, while, overall, smaller companies showed a spread of -22.8 percent between TSR growth and median CEO pay increases.
Mind the Gap
Smaller firms show increases in CEO total direct compensation (TDC) outpacing that for larger peers, potentially suggesting a gap in responses to “say-on-pay” voting, based on company size. S&P 500 firm CEOs saw median CEO TDC increase by 9 percent in fiscal 2011, or one percentage point less than that for smaller firms. Over the two-year period ending Dec. 31, 2011, however, TDC for smaller company CEOs grew by 40 percent, well in excess of the 23.5 percent for larger company counterparts.
While pay gains are ostensibly justifiable against commensurate performance, measures of both 1- and 3-year median TSR suggest gaps between larger, S&P 500 firms and smaller companies’ respective CEO pay increases, which may prove of concern to investors. Over the one-year period ending Dec. 31, 2011, median TSR for larger firms stood at 0.3 percent compared with -7 percent for smaller peers, according to ISS data. By a measure of 3-year TSR, performance is at par, with larger firms seeing gains of 17.3 percent, or 0.1 percent higher than that for smaller firms. Still, the figures would suggest investors may be more receptive to pay increases evidenced this year occurring at larger, rather than smaller, portfolio companies, given performance.
Another potential reason for growing shareholder dissent over smaller companies’ pay practices concerns the breakdown in CEO pay. As noted above, just over one-half (53 percent) of small company CEO total compensation is tied to stock and thereby putatively aligned with shareholders’ interest. By comparison, the figure stands at 64 percent for large capital firms as of Dec. 31, 2011, while, concurrently, the average slice of the CEO pay pie comprised of bonuses and fixed-salary is less than that of smaller peers.