– Broc Romanek, CompensationStandards.com
I’m starting to play around, making short videos on various corporate topics – including some related to executive pay. Here is a 80-second video describing what is happening in Switzerland:
Frequently Asked Questions on the Minder Ordinance
by Matthew Roberts of ISS’ European Research
In March 2013, voters in Switzerland approved a national referendum known as the Popular Initiative “Against Rip-Off Salaries” by a 68-percent majority, with the referendum receiving majority-support in all Swiss cantons. The referendum, also colloquially known as the Minder Initiative after its main proponent, businessman-turned-MP Thomas Minder, took aim at executive and director pay practices at public companies by seeking to transfer certain decision making powers from the board of directors to shareholders. The referendum also called for bans on certain forms of compensation (such as severance and remuneration in advance), a voting requirement for Swiss pension funds, and criminal sanctions for failure to comply with any of the various stipulations contained the initiative.
The Swiss parliament is responsible for transposing the Minder Initiative into law, and this is expected to take several years. However, the terms of the Minder Initiative required the executive branch of the Swiss federal government, the Federal Council, to enact an ordinance within one year of the referendum’s passage for the purpose of transposing the referendum into law on a provisional basis. The final version of the Federal Council’s ordinance (known as the Ordinance Against Excessive Remuneration at Listed Companies, hereafter “the Ordinance”) was published on Nov. 20, 2013, and the new requirements of the ordinance took effect Jan. 1, 2014. The Ordinance contains numerous new requirements and regulations that apply to all listed Swiss companies and Swiss pension funds, including a series of voting items that will need to be included on the agendas of Swiss company AGMs in 2014 and beyond. This document focuses exclusively on these new voting items.
The purpose of this publication is to provide ISS clients with information on the new voting items introduced by the Ordinance Against Excessive Remuneration at Listed Companies, as well as to provide insight, context, and analysis of how these items are likely to be proposed by companies in practice. In addition, this publication describes the analytical approach that ISS will take when evaluating these voting items. This publication is not a policy document and does not replace the ISS policy approach to evaluating Swiss companies; rather, it clarifies how ISS will apply its benchmark voting policy in 2014 in light of the aforementioned changes to Swiss law.
What Are the New Voting Items Shareholders Will See?
The Ordinance creates a series of new voting items that shareholders must resolve on at each ordinary annual shareholders meeting as routine business. All of these voting items have binding effect. They are:
Mandatory from 2014:
– Election of each member of the board of directors on an individual basis.
– Direct election of the chairman of the board of directors.
– Direct election of the members of the compensation committee of the board of directors on an individual basis.
– Election of the independent proxy.
Mandatory from 2015:
– Approval of the aggregate compensation of the board of directors.
– Approval of the aggregate compensation of executive management.
– Approval of the aggregate compensation of the advisory board.
In addition, aspects of compensation policy and other items directly or indirectly related to the compensation of members of the company’s governing bodies, including measures intended to prevent circumventing the rules of the Ordinance, must be established in each company’s articles of association. This will require shareholders to approve various article amendments, which will also therefore appear as voting items in 2014 and 2015.
What Companies Are Impacted, and From When?
The Ordinance affects Swiss law and applies to all listed companies incorporated in Switzerland (including those that may be listed on foreign stock exchanges such as the NYSE or NASDAQ). It does not apply to companies incorporated outside of Switzerland with a listing on a Swiss exchange.
Companies impacted by the law are required to implement most of the new voting items at their first ordinary shareholders meeting following implementation of the Ordinance (i.e. 2014). The first major new voting resolutions that will come into effect for 2014 are the annual individual board elections, direct election of the board chairman, and direct election of the compensation committee members.
Companies will not be required to submit binding votes on compensation and amendments to the articles of association until the second AGM following implementation of the Ordinance, i.e. 2015.
What Will Be the Impact on Shareholders’ Voting Workload in 2014?
As noted above, Swiss companies will not be required to submit resolutions on director or executive compensation or article amendments until 2015. However, in 2014, the number of voting items for Swiss AGMs will increase due to the requirements for annual board elections, direct election of the board chairman and compensation committee members, and election of the independent proxy. In 2013, there was an average of 12 voting items at the ordinary general meetings of companies in the blue chip SMI index. In 2014, this average is expected to increase to somewhere in the neighborhood of 25 voting items.
Many companies are expected to include resolutions on article amendments in 2014, even though this is not mandatory until 2015. A few companies can also be expected to voluntarily give shareholders binding votes on compensation in 2014, while others are expected to give a non-binding vote on the compensation report as recommended by the Swiss Code of Best Practice. Some companies are also expected to run a “dress rehearsal” for 2015 by submitting non-binding versions of the resolutions on compensation required by the Ordinance.
– Broc Romanek, CompensationStandards.com
With over 120k comments received by the SEC, the pay ratio proposal officially has garnered the 2nd highest number of comments in the SEC’s history. Just throwing that out there. For an example of a company that has used internal pay equity for years in setting its senior manager’s pay, check out this blog by Mark Borges, which summarizes the latest disclosures from Whole Foods.
Also, in the shareholder proposals area, some predicted there might be pay cap proposals that use pay ratios as the formula – particularly in light of what happened in Switzerland. This request for no-action relief by 3M bears that out…
– Broc Romanek, CompensationStandards.com
As noted in this blog by McGuire Woods’ William Tysse, the IRS issued final regulations under Section 83 yesterday, substantially as proposed last year. The regulations are in effect for transfers of property on or after January 1, 2013. Here is an excerpt from William’s blog:
The regulations make some relatively minor adjustments to the definition of “substantial risk of forfeiture,” which is a key concept under Section 83. As long as property (such as stock) that is transferred to an individual in connection with the performance of services is nontransferable and subject to a substantial risk of forfeiture, it is not taxable to the individual unless the individual files a special election (an 83(b) election) at the time of the transfer.
The regulations clarify that lock-up periods, insider trading policies, and potential liability under Rule 10b-5 under the Securities Exchange Act of 1934 (Exchange Act) do not create a substantial risk of forfeiture for purposes of Section 83. Thus, for example, if an employee exercises a stock option during a period when the employer’s insider trading policy prohibits the employee from selling the shares purchased under the option, the fact that the employee cannot sell the shares until the trading window opens does not constitute a substantial risk of forfeiture and therefore does not delay the taxable event for the employee. The employee must recognize taxable income at the time of exercise, even if he or she can not sell the shares at that time.
This is in contrast to how Section 83 works in the context of potential liability under Section 16(b) of the Exchange Act. Under Section 16(b), a non-exempt purchase and sale (or sale and purchase) of stock by an officer, director or 10% shareholder of a public company during a six-month period may result in the insider being liable to the company for disgorgement of any profit realized in the transaction. The Section 83 regulations provide that if an insider may not sell shares of stock previously acquired in a non-exempt transaction within the past six months due to potential liability under Section 16(b), the stock is subject to a substantial risk of forfeiture and (unless the taxpayer makes an 83(b) election) is not taxable until six months after the acquisition has passed.
Importantly, for Section 83 purposes, the six-month period is measured from the original acquisition date of the stock in question, and isn’t tolled if there is a subsequent non-exempt acquisition during this period. Thus, for example, if an insider receives a fully vested option grant on June 1, 2014 in a non-exempt transaction, and exercises the option on September 1, 2014, the shares acquired upon exercise will remain subject to a substantial risk of forfeiture until (about) December 1, 2014. However, if the insider purchases additional shares on the open market on November 1, 2014, the substantial risk of forfeiture on the option shares still lapses, and the option shares are still taxable, on December 1, 2014, even though the insider may have liability under Section 16(b) if he sells any of the shares within 6 months after the subsequent purchase on November 1.
Although most compensatory stock grants are designed to be exempt from Section 16(b), the special forfeiture rule governing sales which involve potential Section 16(b) liability may create some traps for the unwary in unusual circumstances, and should be observed whenever there has been a non-exempt transfer of stock for services.
– Broc Romanek, CompensationStandards.com
Recently, the Huffington Post has embarked on a “Pay Pal” project which lists total director income, average change in CEO pay and average annual CEO pay for specific identified directors – and compares those with stock performance in a series of graphs. Pretty telling stuff.
This article – entitled “Exclusive Data Paints Troubling Picture Of Skyrocketing CEO Pay” – explains more…
– Broc Romanek, CompensationStandards.com
Over the weekend, the NY Times ran this column about a trend of CEOs declining bonuses due to poor performance. Here’s an excerpt:
Of course, the fact that the chief executives at IBM and Barclays turned down large bonuses — not to mention all the chief executives at underperforming companies who took them — raises the question of why they were getting bonuses in the first place. As Allan McCall, a founder of the consulting firm Compensia and a researcher on executive compensation at Stanford Business School, put it, “If a company had a bad year, then what are the metrics that would lead a company to pay a bonus?”
– Broc Romanek, CompensationStandards.com
Recently, Equilar released its “2013 Consultant League Report,” which is the result of a review of proxy filings. Although many of the large consulting firms consistently stand atop the rankings, categorical breakdowns reveal some of the smaller shops’ unique market niches.
Below is a sample table from the report, detailing the market share of firms engaged by the Russell 3000 (in comparison, here are last year’s numbers):
1. Frederic W. Cook & Co. – 15.3%
2. Pearl Meyer & Partners – 11.7%
3. Towers Watson – 9.8%
4. Compensia – 6.8%
5. Meridian Compensation – 6.7%
6. Pay Governance – 6.5%
7. Radford – 5.5%
8. Mercer – 6.2%
9. Exequity – 3.3%
10. Hay Group – 2.9%
– Broc Romanek, CompensationStandards.com
In response to my recent blogs parsing comments received by the SEC in response to its pay ratio disclosure proposal, a member wrote in this:
In reading the comments to the SEC, there seem to be quite a few from investors, which might somewhat counter the arguments made by some that that investors have no interest in this rulemaking. My reading of the investor comments is that most discuss the cost/benefit tradeoff of the CEO pay ratios. Here is one that I found interesting from Railpen Investments which noted:
The calculation of the ratio could lead to identification of internal control weaknesses. We note that the Human Resources Policy Association has provided a response to the SEC which sets out the challenge for companies to produce the information; a survey of their members indicates that 84% of those surveyed are not able to provide the information to compute ‘cash compensation’.3 We question what other information is not available if the basic information is not available to compute the ratio.
And the Network for Sustainable Financial Markets wrote:
From the perspective of long-horizon investors (such as pension funds, sovereign wealth funds, endowments and foundations), these deficiencies are very likely to be seen as material “managerial control risks and weaknesses” that should be known to the company’s chief risk officer and accurately reported to the board. Where these material control weaknesses exist, we believe they should also be disclosed to investors along with a plan to remedy, in the same way that material weaknesses in internal
control over financial reporting are reported to audit committees and disclosed in periodic SEC filings. The Dodd-Frank pay ratio disclosure process could provide the vehicle for identifying and addressing these shortcomings.
We recognize that it might take a transitional period before most companies could develop robust information systems to solve for these material managerial control weaknesses. However, once developed and implemented by registrants, their C-Suites and boards will be able to use the process and analytics to more effectively manage these key organizational assets and minimize associated risks.
Since the Human Resource Policy Association noted in its comment letter: “To identify the median employee, registrants will need to determine all employees at all locations as of the end of the fiscal year. Obtaining a global employee headcount is time consuming and complex” and “The HRPA survey asked whether total annual cash compensation of all employees globally on an individualized basis was easily obtainable by the U.S. compensation staff, and 84% of respondents indicated that the information was not easily obtainable. Of that 84%, over 70% indicated that gathering that information would be very difficult,” maybe this is an opportunity for some CHRO’s to finally put in place the strategies, process and HR technologies needed to provide strategic insight about structural, human capital and compensation investments?
By the way, here’s a memo from Towers Watson handicapping the pay ratio comments…
– Broc Romanek, CompensationStandards.com
This Bloomberg article starts off with:
Ten years ago, Congress passed a law intended to penalize chief executive officers whose companies shift their legal addresses to tax havens.
It hasn’t worked out as planned. Companies have found ways around the law that create new rewards for executives. When Actavis Inc. (ACT) changed its incorporation to Ireland in October, the New Jersey-based drugmaker helped CEO Paul Bisaro avoid the law’s bite by handing him more than $40 million of stock as much as three years ahead of its schedule, then promising him an additional $5 million to remain with the company.
The payouts to executives highlight the ineffectiveness of the 2004 law, which contained a series of provisions aimed at reducing the tax benefits of reincorporating overseas. In the past two years, a fresh wave of companies has fled the U.S. system to avoid hundreds of millions of dollars in taxes.