The Council of Institutional Investors is voicing concern to Securities and Exchange Commission officials over comments from some corporations championing the use of “realized pay” in conjunction with disclosures required under Section 953(a) of the Dodd-Frank Act. In an Aug. 16 letter to the SEC, the CII says some issuers “appear to be advocating [for the use of realized pay] as an alternative to total compensation as currently defined” in the summary compensation table.
Decrying such an approach, the CII warns over the potential to include in pending pay-for-performance disclosure rulemaking only pay elements that are performance-based. Potentially excluded were disclosures based on realized pay are: the value of new/unvested restricted shares; the amount of deferred compensation accruals; the amount of changes in pension values/compensation; and other amounts of compensation that will not actually be received in the current year. “In our view, while not all compensation directly relates to performance, investors remain keenly interested in understanding the relationship between all pay and performance,” wrote CII General Counsel Jeff Mahoney. “Regardless of whether a given component of pay is deemed to be directly related, indirectly related or unrelated to performance, investors want to know the connection between the capital they provide and the performance delivered in return. Thus, we do not think it is appropriate to exclude changes in pension values, or the other forms of compensation described above, from a pay-for-performance disclosure.”
Exclusions of some components of compensation from the pay-for-performance disclosure would convey to investors that a bright line exists between performance-based pay and other forms of pay, when in practical terms that line is not always clear, Mahoney added.
The CII also said it was concerned that allowing for such exclusions would “have the unintended consequence” of encouraging companies to game the system by decreasing performance-based pay and increasing non-performance-based pay not subject to pay-for-performance disclosures. “This perverse outcome flies in the face of investors’ decades-long efforts to promote performance-based pay,” Mahoney wrote.
Making my way through my in-box after vacation and here is one of the WSJ articles that came out a few days ago – about how restricted stock awards have been replacing stock options…
A shareholder derivative action has avoided dismissal despite the absence of a presuit demand for board action, because the underlying complaint raised a reasonable doubt that stock awards exceeded a plan’s limits on individual awards, and thereby were not a valid exercise of business judgment. See Halpern v Zhang, D.DE.
It seems that directors continue to be immune from the stats that show the sharp growth of CEO pay compared to everyone else – but the media certainly isn’t (nor the 99% that aren’t CEOs). A recent example is this Washington Post article, which includes some pretty startling charts. The stats are pulled from a new white paper from Lawrence Mishel and Natalie Sabadish of the Economic Policy Institute which tracks the growth of CEO pay over the past 50 years…
Here’s a related article from Josh Bivens and Lawrence Mishel of the Economic Policy Institute: “The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes.”
A while back, Ruth Wimer of McDermott Will taped a podcast with me on personal use of aircraft. Since Ruth wrote out her answers to some of the questions, I thought I would share them since they are so useful. Below is one answer:
The FAA guidance which came in the form of a letter to Mike Nichols, an executive at the National Business Aviation Association was a pleasant surprise. By way of background, the FAA has strict rules regarding chartering aircraft and generally requires the owner to obtain a Part 135 certificate if any payments or reimbursements are made for using piloted air transportation. There are however a few exceptions to this rule which can be used under the general Part 91 form of ownership which is the type of ownership generally used for business or personal aircraft. Part 91 provides for an exception for reimbursement for the use of aircraft “within the scope of the business of the owner” of the aircraft.
So generally speaking, an executive flying for his company’s business may reimburse for that flight, but in the so-called “Schwab” opinion issues several years ago, the FAA said that the personal travel by an executive did not qualify as “within the scope of the business”. Upon looking at the issue further, the FAA in the “Nichols” opinion decided that if certain conditions were met – pre-approval of the executives travel by the board and agreement that the use of the plane was desirable in order to be able to more readily call the executive back from his personal travel for business purposes, then the executive could in fact reimburse for the flight.
Mind you, even without the Nichols opinion, executives could reimburse under a timeshare agreement but only in an amount up to the legal limit for such reimbursements referred to as “double the fuel”, and other out of pockets. We believe that the position in the Nichols opinion has not been frequently used, but for those that have taken advantage of it, it has been greatly appreciated.
Here’s an interesting article from Tower Watson’s Steve Burke about how Australia’s unique “two strikes” say-on-pay regime isn’t getting desired results…
As pay-for-performance alignment takes on growing importance for shareholders and performance plans play a larger role in the typical long-term incentive portfolio today, we’re also seeing more convergence between the views of Finance and Human Resources leaders in many of our client companies. One key area of relative agreement is the need for carefully calibrated performance standards for incentive compensation programs. For example, a recent Towers Watson survey of senior HR and Finance executives found tightening performance criteria for incentive pay programs to be among the most common actions taken in recent years and one of the top five priorities for the years ahead, cited by two-thirds of the HR executives surveyed and 62% of the respondents overall.
Conducted earlier this year with Forbes Insights, the survey focused on the degree of alignment and collaboration between senior Finance and HR executives on a broad range of talent and reward issues, including executive compensation. The survey elicited responses from 218 Finance executives and 122 HR executives, primarily in large, global organizations. Slightly over half the respondents work in financial services, health care or manufacturing.
Among the key findings, both HR and Finance agree that the top risks posed by their companies’ reward programs are all talent-related, ranging from insufficient leadership development to retention concerns and the appropriate level of investment in talent. The survey also revealed some interesting disconnects between HR and Finance. For example, Finance executives are less likely than HR execs to view executive incentive programs as appropriately structured to discourage excessive risk-taking. Almost three-quarters (74%) of the HR executives believe their executive incentives effectively discourage excessive risk-taking, compared to only 58% of the Finance executives surveyed, possibly reflecting HR leaders’ deeper appreciation for the behavioral implications of incentives or maybe Finance leaders’ greater sensitivity to the risk implications.
There have been several more failures during the past few weeks, including:
– McKesson – Form 8-K (22%)
– Freeport-McMoRan – Form 8-K (29%)(failed in ’11 – passed in ’12 – failed in ’13)
– Spectrum Pharmaceuticals – Form 8-K (31%)
Last week, McKesson saw fireworks with a pretty low vote on its say-on-pay (22%), along with its comp committee also receiving significant opposition (support of 60-71%), and a shareholder proposal seeking stronger clawback policies passed (53%) – for only the 4th time since 2006.
Freeport-McMoRan also had fireworks as two of the four shareholder proposals on its ballot also received majority support – independent chair (56%) and “call special meeting at 15% threshold” (70%). I believe Freeport-McMoRan is only the second company, after Cogent Communications, to fail in 2011, pass in 2012, only to fail again this year.
Thanks to Karla Bos of ING for the heads up on these!
In addition to tracking failed say-on-pay votes through this blog, there are free Equilar alerts that you can sign up for when a failed vote is reported. It appears Equilar excludes abstentions, so the alerts might not pick up some very close votes and/or cases where there’s a huge number of abstentions, but a handy dandy tool nonetheless…
A shareholder of Symantec had filed a putative class action on behalf of Symantec shareholders alleging that the compensation-related disclosures in the company’s proxy statement were inadequate to permit the shareholders to cast their advisory “say on pay” vote at the company’s 2012 shareholders’ meeting. The shareholder plaintiff had sought a preliminary injunction to require further disclosure. The court denied the motion for a preliminary injunction. The vote took place in October 2012.
After further proceedings, the Court allowed the plaintiff leave to file her complaint. In her amended complaint, the plaintiff continued to seek supplemental disclosure and also sought to have the court require the company to have another say on pay vote following the supplemental disclosure, asserting that that would allow the “informed shareholders to voice their opinions on Symantec’s executive compensation.”
The defendants filed a demurrer to the plaintiff’s amended complaint. The defendants argued that the plaintiffs amended allegations should be dismissed, among other reasons because the claims plaintiff asserted represented derivative claims, not direct claims.
In an August 2, 2013 ruling (here, refer to “Line 3”) California (Santa Clara County) Superior Court Judge James P. Kleinberg sustained the defendants’ demurrer with prejudice. Judge Kleinberg found that the alleged harm that the plaintiff claimed had occurred or that would occur all represented an alleged injury to Symantec, not to the shareholders, and that any benefit that would be produced by the relief the plaintiff sought would inure to the benefits of Symantec. Judge Kleinberg noted that the plaintiff “does not allege how any of the purported omissions caused injury to the Symantec shareholders, and only alleges possible harm to Symantec.” He concluded that the plaintiff’s action therefore was a derivative suit, not a direct action.
However, Judge Kleinberg went on to say that even if the plaintiff has adequately alleged a direct disclosure claim, the plaintiff has failed to sufficiently allege the materiality of the allegedly omitted information. Both with respect to supposedly omitted performance metrics comparing the Symantec executives’ compensation scheme to the peer group and with respect to the summary of peer benchmarking analyses the board’s compensation committee used, Judge Kleinberg concluded, after a detailed review of the allegedly omitted information, that “none of the compensation related information [in the Proxy statement] is rendered misleading by omission of information.” He held that it is “not substantially likely” that the addition of the allegedly omitted information would have “altered the total mix of information available.”
It should be noted that Judge Kleinberg’s decision is in the form of a “tentative ruling.” Under the California procedural practice that I have always found a little puzzling, the parties have the option of contacting the court to “contest” the tentative ruling, which potentially could lead to further proceedings with respect to the demurrer, including among other things, oral argument or further briefing. I note the following assuming that the demurrer in the Symantec case will stand.