– Broc Romanek, CompensationStandards.com

Here’s an article from Michael Bowie of Towers Watson:

Pay for non-employee directors at the largest U.S. companies grew modestly over the past year, consistent with the trends over the past several years. However, while last year’s review of the full Fortune 500 showed an emphasis on cash increases for directors, our early look at a subset of the Fortune 500 points to equity increases as the primary vehicle for pay increases in the most recent period. (For our most recent analysis of director pay in the full Fortune 500, see “Fortune 500 Outside Director Pay Shows Modest Growth, Emphasis on Cash,” Executive Compensation Bulletin, September 17, 2013.)

Towers Watson’s Executive Compensation Resources (ECR) unit analyzed director pay data disclosed in the most recent proxy for 260 Fortune 500 companies and compared those results against data for the same companies as reported in 2013 to identify early trends in 2014 director compensation. Here are the highlights:

– Total pay: The median value of total direct compensation for directors in this sample is approximately $246,250, up 3% from the previous year. The pay increase was primarily driven by equity values that increased 5% at the median over 2013 levels; median total cash figures did not change. The increase in equity values caused a slight shift in the overall pay mix for directors, with 56% of compensation delivered in equity and 44% in cash, compared with 55% equity and 45% cash at the same group last year. Thirty-eight percent of these companies made a change to their pay program, which includes their core annual cash (e.g., annual board/committee retainer, meeting fees) or annual equity compensation.

– Cash compensation: Just over a fifth (22%) of the companies in our sample increased their annual cash retainer for board service, with a median increase of $10,000. The median value of the cash per-meeting fee for board and committee meeting attendance did not change over the last year, remaining at $2,000 and $1,750, respectively. However, the prevalence of cash per-meeting fees continued to decline, dropping by 3% for board and 4% for committee meeting attendance.

– Stock compensation: The movement toward issuing stock grants based on a fixed-dollar amount as opposed to a fixed number of shares continues. Eighty-seven percent of all annual equity awards are granted based on a fixed-dollar amount, compared with 85% of grants at the same companies last year. Equity compensation delivered through full-value share grants remained far more prevalent than stock options, as 95% of the companies studied grant one or more forms of full-value shares. The prevalence of annual stock option grants for the same group fell from 12% to 10%. The use of one-time equity grants to new directors has also declined slightly this year. Just 11% of the sample provided a sign-on award upon appointment or election to the board in the most recent period, compared with 12% making these grants in the prior year.

– Board leadership: Twenty-nine percent of companies report having a non-executive chairman as the board leader, up from 26% of the same group in the prior year. Conversely, the prevalence of companies that have an independent lead or presiding director position fell from 77% to 75%. Additional compensation for serving in board leadership positions is primarily delivered in the form of a cash retainer. Incremental pay did not change significantly for either leadership position (chair or lead/presiding director).

– Stock ownership guidelines: Stock ownership and retention guidelines remain a common practice among almost all Fortune 500 companies, as 93% of those in our sample have one or both policies in place. The most common type of stock ownership guideline continues to be a multiple of the annual board retainer. One in ten of these companies either made an adjustment to their existing guidelines or established a new guideline since last year, and 44% of our sample have an ownership guideline of five times the retainer, compared with 38% in the prior year.

We continue to dig deeper into director pay trends as more companies file their 2014 proxies. Watch Executive Pay Matters for ECR’s annual update on the full Fortune 500, providing a comprehensive analysis of pay trends and insights on the landscape of director compensation and board governance.

– Broc Romanek, CompensationStandards.com

A few months ago, I blogged about some remarks from Corp Fin Director Keith Higgins that included a status update on the Four Horsemen rulemakings from Dodd-Frank. Last Friday, the SEC issued its semi-annual Reg Flex Agenda indicating that the pay ratio rules would be adopted by October – and that the three other rulemakings would be proposed by that same month. Does this really mean anything? No, not really – as Reg Flex Agendas tend to be “aspirational” as I’ve blogged about a few times recently.

That doesn’t mean that I don’t believe those actions will be accomplished by that date. In fact, SEC Chair White has continued to express a desire to get all the Dodd-Frank rulemakings behind her – so I would be surprised if we didn’t see final pay ratio rules sooner, as well as proposals on at least some of the other three before then too. But you never know, particularly as the five Commissioners seem to be more polarized than ever…

A potential wild card here is that the House Financial Services Committee recently passed 9 capital formation bills – some with strong bipartisan support and some that would require the SEC to adopt new rules within a short timeframe (eg. 180 days). A new spate of required rulemakings could hinder any plans to act on some or all of the Four Horsemen…

– Broc Romanek, CompensationStandards.com

As the number of annual meetings peaks – and thus so do the failures to obtain majority support on say-on-pay – it’s worth noting a company who just failed say-on-pay with a new CEO (Endurance Specialty Holdings) was the CEO at a different company last year (AXIS Capital Holdings Limited), whose say-on-pay failed in 2013 (but passed this year after he left). Also noteworthy is that the head of HR moved companies with the CEO. I don’t believe there any other cases where the CEO and CHRO were affiliated with two different say-on-pay failed companies in back-to-back years…

– Broc Romanek, CompensationStandards.com

Here’s a 2-minute video about the 19 great ways that Freeport-McMoRan enhances the usability of its 2014 proxy statement:

– Broc Romanek, CompensationStandards.com

As a follow-up to yesterday’s blog, Mercer’s Mark Lindemann and Judi Olstein note that there have been 24 companies that have failed to garner a majority vote this year. That’s roughly the same pace of failures as last year. Here is the list of the 24:

Biglari Holdings
BroadSoft, Inc.
CBL & Associates Properties
Cogent Communications
CSP Inc.
Chipotle Mexican Grill, Inc.
Cynosure, Inc.
CYS Investments, Inc.
Expeditors Int’l of Washington
Everest Re Group, Ltd.
FirstMerit Corporation
Forest Oil Corporation
Genpact Limited
Hologic, Inc.
Mack-Cali Realty Corporation
PacWest Bancorp
Patriot Scientific
Rovi Tecgnologies
Sensient Technologies
TCF Financial
VCA Antech
Whiting Petroleum Corporation
Titan International, Inc.
TRW Automotive Holdings

– Broc Romanek, CompensationStandards.com

I’ve slipped a little in keeping up with the say-on-pay failures this year. Here is the latest news, courtesy of Semler Brossy (this info will be posted soon on their Say-on-Pay page):

– 1154 companies have held their annual meetings so far (today is “peak” day as I blogged about)
– 7 additional companies have failed this week, Chipotle Mexican Grill, Cynosure, CYS Investments, Everest Re Group, Mack-Cali Realty, Titan International, and TRW Automotive; 21 companies (1.8%) have failed so far in 2014
– Average vote result for all companies in 2014 is 92%
– ISS has recommended against 12% of companies it has evaluated in 2014
– So far in 2014, 30 companies have filed a response to proxy advisors in a letter filed as additional soliciting material

– Broc Romanek, CompensationStandards.com

This piece from “The Economic Times” written by the Chair and CEO of PepsiCo India is worth reading…

– Broc Romanek, CompensationStandards.com

Here’s news from this blog by McGuireWoods’ William Tysse:

Some companies think a high TSR is a panacea against negative say-on-pay votes, but the Chipotle 2014 say-on-pay vote proves otherwise. Despite 1, 3 and 5-year TSRs in the 83rd, 77th and 95th percentiles as compared to peers, over 75% of Chipotle’s shareholders voted against the say-on-pay proposal.

Although shareholder unrest appears to have existed quite apart from ISS, it’s interesting to think about how ISS arrived at its “no” vote recommendation, given Chipotle’s high TSR. Of the 3 quantitative “gating” factors used by ISS to screen company say-on-pay proposals, the only one that doesn’t take TSR into account is the multiple of CEO pay as compared to peer median. From ISS’s public statements, it appears that Chipotle’s multiple of 3.4 was indeed considered too high by ISS and a main factor in ISS’s “no” vote recommendation for Chipotle. Other, qualitative factors–such as top executives cashing out of their option positions shortly after exercising–are also cited by ISS, but of course ISS is only supposed to consider qualitative factors if one of the quantitative “gating” factors demonstrates a pay misalignment. Behind the scenes, the near 20% drop in Chipotle’s share price in the months leading up to the annual shareholder meeting may have contributed as well.

– Broc Romanek, CompensationStandards.com

As noted in this blog by Pearl Meyer & Partners, WomenCorporateDirectors recently issued this report – “Going Beyond Best Practices: The Role of the Board in Effectively Motivating and Rewarding Executives” – which is intended to move the discussion beyond the theoretical and provide practical, actionable recommendations for directors. The blog includes this 4-minute video about the report:

– Broc Romanek, CompensationStandards.com

Here’s a blog by Davis Polk’s Ning Chiu:

The most common trigger for clawback of compensation is the occurrence of a restatement of financial results, according to a PwC study of 100 large public companies’ proxy disclosure from 2009 to 2012. Evidence that the employee was directly involved in conduct that led to the restatement was required under 73% of those policies, and in many cases, the restatement needed to be material or the amount recouped was limited to the excess of the amount paid due to the restatement.

Personal misconduct, including violation of a company’s ethics policy or code of conduct, may also lead to clawbacks at 84% of companies. Other disclosed triggers include committing fraud, misrepresenting performance results, negligence or lack of oversight over subordinates and violations of non-compete or non-solicitation agreements. Financial firms were most likely to adopt recoupment policies that also focused on excessive risk-taking.

The vast majority (86%) applied possible recovery efforts to both cash and stock awards, while 7% covered only cash and the remaining 7% included only equity awards. 90% of companies disregarded whether or not awards had vested, and 42% discussed look-back periods of one to three years, while 17% expressly indicated no limitation on the length of the look-back.

74% of policies retain the discretion to apply the policies on a case-by-case basis only after a triggering event, rather than permitting boards and compensation committees the flexibility to determine whether such an event occurred in the first instance. 14% appear to be mandatory and the remainder permitted both depending on the basis for the recoupment. The study warned that the accounting impact of providing for discretion is complex, since an ability to exercise any discretion on whether a clawback has been triggered and the amount recouped may result in an assessment that the agreement’s key terms and conditions have not been established, causing an award to be marked-to-market, a result to be avoided.

In addition, while fairly standard clawback features do not impact the accounting of equity awards, as accounting recognition would only be needed at the time of recoupment, new types of clawbacks, for example those that add performance metrics affecting vesting or retention, may inadvertently cause those features to represent performance conditions instead of being considered clawbacks. This would significantly affect the accounting of awards.