– Broc Romanek, CompensationStandards.com

We have posted the transcript for our recent webcast:”The Litigation Explosion in Executive Compensation.”

– Mark Poerio, Paul Hastings

This posting on Harvard Law’s “Corporate Governance Blog” describes a new “Say Before Pay” law that took effect in Israel about a month ago. The authors advised the Justice Department’s committee that formulated Israel’s executive compensation reform. Although not going so far as to require binding say on pay, Israel has injected a twist in that the shareholder advisory vote on executive compensation – and CEO employment agreements – must occur before they become final. As described in the blog, Israel’s law reflects US and UK rules relating to compensation committee independence, as well as policies favoring clawbacks and long-term performance-based compensation that takes risk into consideration. These practices are consistently being endorsed as executive compensation controls continue to go global . . . with all trending toward more and more shareholder empowerment.

– Broc Romanek, CompensationStandards.com

We are excited to announce that we have just posted the registration information for our popular conferences – “Tackling Your 2014 Compensation Disclosures: The Proxy Disclosure Conference” & “Say-on-Pay Workshop: 10th Annual Executive Compensation Conference” – to be held September 23-24th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas for the Conferences.

Early Bird Rates – Act by March 8th: Huge changes are afoot for executive compensation practices and the related disclosures – that will impact every public company. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by March 8th to take advantage of the 33% discount.

– Brink Dickerson, Troutman Sanders

I recommend that when companies revise their compensation committee charters to reflect the new NYSE and Nasdaq rules that they also consider updating their charters in other regards as well. Troutman recently reviewed the compensation committee charters for the S&P 100 and was surprised at how many of them were out of date. The focus of the review was to assess how deep within an organization compensation committees approve compensation levels.

A large plurality, but not a majority, provide for committee approval of the compensation of “executive officers.” A surprisingly large number tie approval to Section 16 “officers,” which is not a definition generally used in the compensation context, or various ill-defined groups such as “executive management” or “senior executives.” A significant number require full board approval of compensation, which also is surprising given board fatigue at many companies that large.

The important takeaway, however, is that the discussions of the roles of compensation committees in many companies’ CD&As do not reflect the authority that they have and supposedly are to exercise under their charters. Some over-state it; others under-state it; some do so significantly. Also, a solid majority of the charters do not reflect some of the responsibilities that the compensation committees have been charged with post-SOX, including administering stock ownership guidelines, making claw-back decisions, and assessing the risk aspects of compensation programs.

As a litigation risk minimizer, I recommend that compensation committee charters should clearly delineate which officers must have their compensation approved by the compensation committee – and I suggest “executive officers” as defined in Rule 3b-7, other officers that report directly to the CEO, and such other employees as are identified by the compensation committee in a resolution – and otherwise delegate to management the establishment of compensation to the extent delegable under the applicable plans. I also recommend that compensation committee charters be updated to otherwise reflect current practices and responsibilities.

– Subodh Mishra, ISS Governance Exchange

Britain’s High Pay Centre is warning companies against the failure to link “at least half the performance pay of top executives to broad measures of success,” suggesting British businesses risk losing out to foreign rivals using such incentive models. The center, a non-partisan think tank established in the wake of the financial crisis to “monitor pay at the top of the income distribution,” said in a Jan. 14 report that executive pay packages across the largest 100 U.K. companies are “overwhelmingly” linked to short-term financial measures of corporate performance such as earnings and share price movement. As a result, the center argues, executives are “encouraged to focus on short-termism, cost cutting and the need for quick returns.”

The group notes that CEO pay has tripled to 4.8 million pounds in 10 years “without any accompanying long-term increase in share values.” “British business will erode its competitive edge even further if it doesn’t start looking beyond share prices and reward executives for their success in fundamental areas of non-financial performance,” said High Pay Centre Director Deborah Hargreaves in a Jan. 14 statement. “We’ve got to start taking a longer term view and that means persuading business that performance in areas like corporate social responsibility, employee engagement and customer satisfaction rates are the key to lasting business success.”

The report finds that total shareholder return (TSR) is used to calculate at least one element of performance-related pay at 74 of the largest 100 U.K. companies, with 96 companies using either TSR or earnings per-share (EPS), or a combination of both to determine performance for their chief executives’ long-term incentive plan. Most companies, the center argues, pay little or no regard to the long-term benefits of non-financial performance across areas like employee engagement, corporate social responsibility and customer satisfaction.

In addition to calling on businesses to link at least half of chief executives’ performance related pay to non-financial yardsticks, the High Pay Centre said it is seeking the introduction of mandatory reporting on social and environmental performance and a new tax and procurement incentives “to encourage companies to focus on wider measures of performance.”

The group also wants requirements for pension fund trustees, investment managers and commercial pension providers to take into account the social/environmental impact of their investments on beneficiaries and for employee representation on company boards “to challenge decisions based on short-term financial considerations that may jeopardise the company in the long-term.”

The High Pay Centre says longer-term institutional shareholders like the Association of British Insurers “support broader measures” of executive performance and says leading businesses like BP, Barclays and HSBC, who have suffered reputational damage, “have gone further than others to link top pay to non-financial measures of success.”

– Broc Romanek, CompensationStandards.com

Towers Watson has updated its “CD&A Scorecard” for this year…

– Broc Romanek, CompensationStandards.com

Hat tip to Ed Hauder of Exequity for notifying us of this development:

– ISS recently posted its whitepaper detailing its pay for performance (P4P) methodology:

The Evaluating Pay for Performance white paper provides an overview of ISS’ approach in evaluating Pay for Performance alignment. Originally published prior to the 2012 proxy season [Note: a revised version of the whitepaper was published in February 2012], the document incorporates further updates for 2013 that describe ISS’ new peer selection methodology and approach to measuring realizable pay.

– Broc Romanek, CompensationStandards.com

Here’s news from this memo by Wachtell Lipton’s Paul Rowe & Jeremy Goldstein:

Recently, the Delaware Supreme Court upheld a Chancery Court determination that a board did not commit waste by consciously deciding to pay bonuses that were non-deductible under Section 162(m) of the Internal Revenue Code (Freedman v. Adams, Del. Supr., __ A.2d __, No. 230, 2012, Berger J. (Jan 14, 2013)). Unlike claims of gross negligence, claims of waste are not subject to exculpation or indemnification by the company and therefore have the potential for personal liability of directors.

The original suit was brought in 2008 by a shareholder of XTO Energy (later acquired by ExxonMobil) as a derivative claim. The suit alleged that XTO’s board committed waste by failing to adopt a plan that could have made $130 million in bonus payments to senior executives tax deductible. The board was aware that, under a plan that qualifies for the “performance based compensation” exception of Section 162(m), the company could have deducted its bonus payments, but, as the company disclosed in its annual proxy statement, the board did not believe that its compensation decisions should be constrained by such a plan. The Chancery Court held that the shareholder failed to state a claim. The Supreme Court agreed, holding that the decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment.

Like other recent Section 162(m) suits about which we have written, this suit serves as a reminder that careful attention must be paid to the design and administration of plans intended to comply with Section 162(m) and that disclosure relating to tax deductibility must be carefully drafted. Helpful in this case was the fact that the board was aware of Section 162(m), made a conscious decision not to avail itself of Section 162(m) and disclosed its reasons for so deciding. Moreover, this case serves as a reminder that aspirational “best practices” are not synonymous with legal requirements that may result in liability. Indeed, the Supreme Court expressly stated that “even if the decision was a poor one for the reasons alleged by Freedman, it was not unconscionable or irrational.”

Thus once again, the Delaware courts have demonstrated that directors need not be deterred from paying executives in amounts and forms that they deem necessary or advisable to attract, retain and incentivize executives. Indeed, doing this effectively is one of the highest priorities for any board of directors.

– Broc Romanek, CompensationStandards.com

Yesterday, the SEC finalized the NYSE & Nasdaq listing standards related to compensation committees and their advisors (here’s the NYSE order & Nasdaq order). Last Friday, both exchanges amended their listing standards, as noted in this blog. Here are the effectiveness timetables, as noted in this Cooley news brief:

– NYSE companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee director independence. All other provisions will become effective on July 1, 2013 for NYSE companies (e.g., provisions relating to the authority of a compensation committee to retain and fund compensation consultants, legal counsel and other compensation advisers and the responsibility of the committee to consider independence factors before selecting or receiving advice from these advisers).

– Nasdaq companies will be required to establish the committee’s authority and responsibility under Rule 5605(d)(3) in the committee charter, resolutions or other board action by July 1, 2013. Nasdaq companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the remaining provisions (including a mandatory charter amendment to establish the authority noted above).

Tune in today for our webcast – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” – to hear what you should be doing now in the face of these new rules…

– Broc Romanek, CompensationStandards.com

Tune in tomorrow for the webcast – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Robbi Fox of Exequity, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures including these topics:

– Overview of key lessons from the 2012 proxy season
– The rise of the proxy summary
– Developments with CD&A and executive summaries – including realized/realizable pay
– The impact of the compensation committee and advisor independence rules in 2013
– Hedging and pledging policies in the wake of the 2013 ISS policy change
– Engagement strategies for 2013
– Compensation and governance shareholder proposals