– Broc Romanek, CompensationStandards.com

What happens when you pay two monkeys unequally? Here’s an excerpt from the TED Talk with Frans de Waal that reveals this behavior:

– Broc Romanek, CompensationStandards.com

Here’s food for thought in this article – as well as in this article, repeated below:

Just because you run a large and sophisticated public corporation doesn’t mean you can’t be played for a fool when it comes to executive pay. It’s hard not to draw such a conclusion after reading a recently published study of CEO pay which cited extreme naiveté, confusion and knee-jerk decision-making. Academics Kelly Shue and Richard Townsend of the University of Chicago and Dartmouth College, respectively, studied executive pay at corporations in the S&P 500 between 1992 and 2010. What they found is somewhere between jaw dropping and staggering.

The central issue is the way many corporations treat the value of executive stock options. Stock options give the holder the right, but not the obligation, to purchase a predetermined number of shares at a predetermined price for a fixed period. As most people in finance know, the dollar value of an option is determined by a standard formula — the Black Scholes model. The value of an option grant is in large part determined by the price of the company shares. If a stock rises 40% in one year then a similar-sized option grant will be worth 40% more. Authors Shue and Townsend explain all this and more in their April paper “Growth through Rigidity: An Explanation for the Rise in CEO Pay.”

But apparently, the people doling out the options to the executives either didn’t understand or chose to ignore this. Typically that’s the board of directors headed by the chairman who is often also the CEO. The study found that by far the most common outcome was for corporate bigwigs to get exactly the same number of options as they did the previous year regardless of the dollar value, the report states. That meant that in the roaring 1990s as the stock market soared so did the value of the option awards — because the executives and the people governing them most commonly ignored the dollar value of those awards.

To avoid such occurrences, compensation experts (and I know because I was such an expert for years) determine the dollar value of options they want to award first and then derive the number of options from that. If the stock price falls or rises it should mean more or fewer options are awarded each year. Lucy Marcus, CEO of Marcus Venture Consulting, and an expert in corporate governance, puts her finger on it: “My question is why do you [the CEO] use common sense in everything else but throw that out of the window when it comes to your pay?”

The result of this practice was: “Option compensation [in dollars] grew more than sixfold over this period [1992 to 2001],” the authors say, while other executive pay remained “relatively flat.” Total pay jumped threefold in the same period. It’s remained pretty flat since, the authors found — in line with a relatively sideways market.

So how was it that people who generally consider themselves smart (CEOs and their boards) could be so off-target when it comes to compensation? The report’s summary nails it: ”we find suggestive evidence that number-rigidity in executive pay is generated by money illusion and rule-of-thumb decision-making.” Or to rephrase: The corporate staffs and their advisers don’t understand the difference between the number of options and their value, and they are making it up as they go along. “This is not right, the only way around it is to bring real transparency to it so everyone knows what’s going on,” says Marcus.

If you are looking for some Schadenfreude, you are in luck. The report authors also found that when the company had a 2-for-1 stock split, a surprisingly large number (more than 5%) of CEOs got the same number of options. In other words, those unlucky CEOs had their stock option pay cut in two. “These results suggest a rather extreme form of naiveté regarding options,” the authors wrote. Or more simply, naiveté can cost you big time.

– Broc Romanek, CompensationStandards.com

In this 15-second video, Cap’n Cashbags – a CEO – tries to avoid the ALS Ice Bucket Challenge:

– Broc Romanek, CompensationStandards.com

This recent piece from Pearl Meyer & Partners provides insights into shareholder engagement based on a survey of 212 respondents (162 executives and/or human resource professionals and 50 outside Directors; free download of the summary if you input your data). Don’t forget our horde of resources on this topic in our “Shareholder Engagement” Practice Area, including 5 checklists on this topic…

– Broc Romanek, CompensationStandards.com

Here’s a memo from Towers Watson about performance-based LTI. I’ve posted a number of pieces recently in our “LTIPs” Practice Area, including “How Top Companies Are Adapting Their LTI Awards to Say-on-Pay” by Jim Reda of Arthur J. Gallagher…

– Broc Romanek, CompensationStandards.com

We have posted the transcript for the recent webcast: “Executive Pay Basics: The In-House Perspective.” This was a tremendous program – perfect for anyone who needs some comfort if they are relatively new to being in-house or isn’t very well steeped in a wide scope of pay issues…

– Broc Romanek, CompensationStandards.com

Perhaps as a reaction to the SEC’s SLB 20 – or Commissioner Gallagher’s continuing war of words against the current state of proxy advisors – yesterday, ISS announced the upcoming launch of a new “data verification portal” for equity-based compensation plans up for shareholder approval. ISS also released a set of 19 FAQs to help explain this new portal (pet peeve: if you create a set of FAQs, please number them).

Here are 10 things to know:

1. Portal officially launches September 8th
2. Data verification only for equity comp plan approval (in other words, this is different than what S&P 500 companies now enjoy for their entire ballot; see FAQ #14)
3. All US companies can participate
4. Companies have to register for the portal before they can use it (do so soon since it takes 5-7 business days for ISS to process and you might forget if you procrastinate)
5. Only companies can use the portal; not their advisors
6. Can’t verify data until after proxy statement is filed with the SEC
7. After proxy filed, ISS will send an alert saying the data verification window is open (alert will come roughly within 12 business days after the proxy filing)
8. Once alert is sent, companies only have 2 business days to verify the data and request changes. Repeat: just two business days!
9. ISS will send responses to request for changes within 5 business days of the request
10. Review list of 27 questions in Appendix A of the FAQs to comprehend what ISS is looking for in equity comp plans

– Broc Romanek, CompensationStandards.com

Last week, CII sent this letter to Corp Fin Director Keith Higgins providing recommendations on the implementation of Section 953(a) of Dodd Frank. The letter provides these recommendations:

– Do not make changes to the existing Summary Compensation Table.
– Provide a graphic representation of pay for performance for the CEO individually and the named executive officers in the aggregate.
– Provide, at a minimum, a five-year comparison of executive compensation to performance.
– The required disclosure, at a minimum, should compare executive compensation to total shareholder return.
– Disclosure about executive compensation actually paid should not exclude any components of pay.

Also see the new comment letter from the AFL-CIO on this topic. It was the first comment letter posted regarding the 3 rulemakings the executive pay area that have not yet been proposed in 10 months. Here’s all of those comment letters…

– Broc Romanek, CompensationStandards.com

As always happens this time of year, our Conference Hotel – the Las Vegas Mandalay Bay Hotel – is nearly sold out. Our block of rooms is indeed sold out – but there are still rooms outside our block available at essentially the same rate. Reserve a room now by calling 877.632.9001 (so no need to mention our conference at this time). If you have any difficulty securing a room, please contact us at 925.685.9271.

And if you haven’t registered for the conference, register now. If you really want to go, but you’re having budget issues – drop me a line…