– Broc Romanek, CompensationStandards.com

Here’s a new survey from Pearl Meyer & Partners that provides detailed data around multiple aspects of annual incentive plan use across a variety of demographics, including employee vs. outside directors, form of ownership, industry and company.

– Broc Romanek, CompensationStandards.com

As long rumored, the SEC just calendared an open Commission meeting for this Wednesday, September 18th to consider proposing the pay ratio rules as required by Section 953(b) of Dodd-Frank. We will be providing full coverage as always.

– What This Means – There will be a lot of last minute registrations for our upcoming pair of executive pay conferences – which are being held the following week in DC and by video webcast. The keynote on Monday, September 23rd is Keith Higgins, the Director for the Division of Corporation Finance – amid 20 panels on pay disclosures in a single day. And there is a “how to implement pay disparity rules” workshop that is part of the last panel on Tuesday, September 24th. Register now.

Although the conference hotel is sold out, occasionally there will be an opening if someone cancels – so try them first. Otherwise, we have a back-up hotel nearby. Mention the conference if you talk to either to obtain a discount.

– Broc Romanek, CompensationStandards.com

A few days ago, Mike Melbinger blogged about how the Alameda County California Superior Court issued its decision on the merits of the case in Mancuso v. The Clorox Company recently. And that based on the evidence submitted by both parties, the Court entered judgment in favor of Clorox on all causes of action.

Thanks to Mike, I have now posted the decision in that case in our “Executive Compensation Litigation Portal.” Note that the decision is labeled “tentative” – a “final” ruling is not out yet…

– Broc Romanek, CompensationStandards.com

Here is a study from The Conference Board, which conducted two experiments simulating say-on-pay votes. The results suggest that investors value shareholder return over CEO pay. As long as company performance was above average, shareholders supported CEO pay regardless of whether it was high or low.

However, when the company underperformed relative to the market, then shareholders considered CEO pay, voting “no” under circumstances when CEO pay was high and company performance was low. The findings suggest that when the probability of a “no” vote is high (when the recommended CEO pay is high and the firm is underperforming), the board should either reconsider the recommended pay or take steps to mitigate a no vote by educating shareholders on the rationale behind the CEO’s pay.

– Mike Kesner, Deloitte Consulting

I wanted to follow-up on Broc’s recent blog that described a Washington Post article on the ratio of the top 350 CEO’s pay to the average working U.S. employee. The article makes much of the fact that the ratio of CEO compensation has been widening – but does not try to explain the reason this has been happening. Here is a chart that tracks equity gains realized to the performance of the S&P 500.

What is clear from the chart is there is a very high correlation of CEO compensation and the performance of the stock market since 1965. During periods when shareholders are making money, so are CEOs. (That may explain why over 98% of companies Say-on-Pay votes have passed with an average vote of 93% this past year.)

This is not by coincidence. Around 70% of CEO pay is tied to performance, and the majority of their incentive pay is tied to stock price performance in one way or another. The average U.S. employee has very little compensation tied to incentives and virtually none of it is tied to stock price. Thus, stock market gains and losses do not influence their pay.

So, it should not come as a surprise when the S&P 500 increases from 310 in the late 70’s to 1379 at the end of 2012, equity gains realized increased and the pay ratio widened. The pay ratio could have been maintained if the company provided the average employee with a similarly structured pay package as the CEO i.e., 70% of their pay at risk, and high exposure to the stock market.

That pay package, for someone earning base salary of $50,000 today, would look something like this:

– Base salary – $15,000
– Annual Incentive – $15,000
– Equity compensation – $20,000

I would guess very few employees would be willing to take a 70% reduction in base salary so they could preserve the current pay ratio with the CEO. Of course, the other alternative is for CEOs to earn less – but given the structure of their compensation package, that would mean shareholders would have to lose money.

– Broc Romanek, CompensationStandards.com

Recently, I blogged about a WSJ article entitled the “Last Gasp for Stock Options?” The reporter had left me a voicemail asking how many optionees there are today – but I wasn’t able to return the call due to vacation demands. Here is my take on that question if I had been able to return the call:

We don’t know and no one really knows. It’s virtually impossible to figure out, because there aren’t any required disclosures that cover how many employees at a company hold options. And then there are all the private companies that grant options, which are even harder to quantify because they don’t make any public disclosures at all.

As of 2009, the NCEO estimates that 10 million individuals participate in broad-based equity plans. Here is an article on their website. This is the closest I’ve ever seen to an estimate – but I am not sure how they arrived at that estimate so perhaps we should be a little skeptical of it. Also, a few other things to note about it:

1. It still doesn’t answer the question because it presumably doesn’t include executives and other high-level employees that participate in equity plans that aren’t broad-based.

2. Presumably broad-based equity plans includes RS/RSU award programs as well as options, so it also isn’t an estimate of how many people hold options.

3. The data is from 2009. Since then, we’ve seen a pretty distinct decline in the use of stock option plans. 92% of respondents to the NASPP’s 2010 survey (co-sponsored by Deloitte) reported that they had an option plan in 2010; this year’s survey will show only 68% reporting having an option plan (I’ve seen the preliminary numbers). On the other hand, 91% of respondents have RS/RSU award plans, which is up slightly from 89% in 2010.

Which means that RS/RSUs now outpace stock options in prevalence, so however many employees that held options back in 2009 when the NCEO came up with these estimates, I’m pretty sure it’s fewer now (although not as sharp a drop as in the prevalence of option plans because options are outstanding for ten years, so some of the employees that held options in 2009 still hold them now, some of them just aren’t getting any more and fewer newly hired employees are receiving options).

If all stock option grants that have been eliminated since 2009 have been replaced with RS/RSUs, then the NCEO’s estimate of 10 million participants in broad-based plans will have held steady. But I’m not sure that’s the case. I suspect that as companies switch over to RS/RSUs, they also tighten up their eligibility restrictions.

4. This year’s NASPP/Deloitte survey will show a distinct increase in the use of performance awards and an increase in the use of TSR as a performance target. So I think that some of the stock options for executives have been replaced with performance awards, including relative TSR awards.

Towards the end of the WSJ article, Emily Chassen quotes the CFO of Pandora, who apparently asked to be paid entirely in stock options because that would push him to stay ahead of the competition. But, of course, one of the chief criticisms of stock options is that they really don’t do that. If the market’s up, it’s often up for everyone.

One reason companies are switching from options to relative TSR awards for execs (and shareholders are pressuring them to do so) is because relative TSR awards pay out only if you beat your peers (well, there’s a spectrum of payouts and they usually payout something if you are at least in the 25th percentile, but you don’t get the maximum payout unless you are above the median, usually in the 75th percentile). Stock options pay out when your stock price is up – regardless of why it’s up and even if your peer’s stock prices are up more than yours.

Frankly, the CEO of Apple asking for his existing awards to be modified so that a portion vest only if Apple’s TSR exceeds that of his peers is more impressive than the CFO of Pandora’s request to be paid only in stock. (Although perhaps Tim Cook was just trying to get out ahead of possible shareholder pressure to convert all of those RSUs to vest based on performance at Apple’s next say-on-pay vote. There have been several notable examples of ISS forcing companies to retroactively modify awards to execs to vest entirely on performance. If Cook’s move works and shareholders are placated, at least some of his RSUs still vest based only on the passage of time.)

Come to the NASPP Conference in DC – just two weeks away! – during which the 2013 survey results will be unveiled during the keynote “State of the Union: Leveraging Stock Based-Pay in Comp & Benefits” and in more detail in the session “The Hard Data: Top Trends in Equity Plan Design.”

– Broc Romanek, CompensationStandards.com

Here’s a pretty cool infographic about say-on-pay in 2013 from Towers Watson…

– Broc Romanek, CompensationStandards.com

We just wrapped up the Lynn, Borges & Romanek’s “2014 Executive Compensation Disclosure Treatise & Reporting Guide.” For those that want to access it online, it’s now posted on this site. For those that want a hard copy, it was just finished being printed yesterday.

How to Order a Hard-Copy: Remember that a hard copy of the 2014 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately – however, CompensationStandards.com members can obtain a 40% discount by trying a no-risk trial now. This will ensure delivery of this 1350 page comprehensive Treatise soon after you order.

– Broc Romanek, CompensationStandards.com

Last week, Helen of Troy became the 59th company to fail its say-on-pay in ’13 – see the Form 8-K – with only 12% support, the 2nd lowest level this year. Thanks to Karla Bos of ING for the heads up on this!

– Broc Romanek, CompensationStandards.com

Here’s an interesting Washington Post article about the gender gap in CEO pay. Wonder if the sample size – there are so few female CEOs – is too small for the gap to be statistically accurate…