Today is the “Say-on-Pay Workshop: 11th Annual Executive Compensation Conference”; yesterday was the “Annual Proxy Disclosure Conference” – and the video archive of that Conference is already posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with talking points and practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list.
Today is the “Tackling Your 2015 Compensation Disclosures: Annual Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 11th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with talking points and practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list.
The 2014 proxy season opened amid substantial investor criticism of one flavor of bylaw amendment that caught both investors and companies, as well as their advisers, flat-footed and led many boards to repeal the amendment prior to their annual meetings. Most states, including Delaware, allow boards to amend company bylaws without obtaining shareholder approval. Boards often exercise this prerogative to approve minor or administrative changes to the bylaws. However, others have used it to approve amendments that diminish shareholder rights, including, for example, those creating staggered boards or weakening of (or altogether eliminating) shareholders’ right to call special meetings.
Beginning in May 2013, a number of companies amended their bylaws to adopt a new director qualification provision. Although several variations were observed, all excluded from board service individuals who agreed to receive compensation from third parties in connection with board service or candidacy. The amendments appeared to be in response to post-candidacy compensation arrangements offered to unaffiliated nominees in the 2013 proxy contests at Hess Corp. and Agrium Inc. Market reaction to the agreements was mixed. Ultimately, dissident nominees at Hess declined to receive such payments and dissident nominees at Agrium were not elected by shareholders, which suggested investors are capable of factoring such arrangements into their consideration of board candidates. The new bylaw provisions, however, would have precluded investors from doing so.
In addition to the substance of the amendments, the ubiquitously unilateral nature of adoption concerned investors. Filed disclosures lacked company-specific rationales and did not indicate whether investor input was sought or obtained prior to the board’s approval of the amendments. Additionally, there was no indication that companies would seek shareholder ratification of the bylaws. Further, a substantial number of the companies in question had supermajority vote thresholds for shareholder initiatives to amend or rescind the bylaws, or precluded shareholders from amending the bylaws altogether.
By the end of 2013, 35 companies had adopted such bylaws. The first to hold an annual meeting following adoption was Provident Financial Holdings, which held its annual meeting on Nov. 26, 2013. Each nominee received “withhold” votes from approximately one-third of votes cast, a stinging rebuke given that the company’s insiders and its ESOP collectively controlled nearly 25 percent of shares outstanding.
Issuers took notice of the vote results. By the end of January 2014, two companies had repealed the bylaw. After board nominees of Rockwell Automation received substantial opposition at the company’s Feb. 4, annual meeting, the floodgates opened, as companies rushed to repeal the bylaw prior to their annual meetings. The number of repeals reached 16 by the end of February and 23 by the end of March. Some companies did not repeal the bylaw in its entirety but made substantial changes. CST Brands and WPX Energy amended the bylaw to require only that such compensatory agreements be disclosed, a far less onerous provision for a potential dissident nominee. Wynn Resorts, Ltd. sponsored an advisory vote on its bylaw provision at its May 16 meeting. After shareholders failed to approve the proposal, the board repealed the bylaw. Another company that chose to hold an advisory proposal on its new bylaw was First Reliance Bancshares, where the proposal was approved.
Just a handful of companies kept the bylaw in place through their annual meetings. At Entropic Communications, the two nominees on the ballot received support of 69.4 percent and 70.4 percent, while the three nominees at Chatham Lodging Trust received support of 49.8 percent, 55.2 percent, and 55.2 percent of votes cast. Directors fared better at companies with high levels of officer and director ownership. At Penn National Gaming, where insiders hold approximately 12 percent of shares outstanding, the two nominees received 74.5 percent support and 78.4 percent. The two nominees of Gaming & Leisure Properties, whose officers and directors hold approximately 24 percent of shares outstanding, received support of 81.4 percent and 84.6 percent.,/
By the end of the 2014 proxy season, 28 companies had repealed or amended the controversial bylaws. This does not include National Fuel Gas Co., which repealed the ban on candidate payments and will hold an advisory vote on director payments in 2015. The number of new adoptions of the exclusionary bylaw has slowed, but has not stopped: a handful of companies adopted such provisions following their respective annual meetings. Additionally, the provision is found in the governing documents of companies that have yet to conduct their initial public offering or have recently gone public but have not yet held an annual meeting.
Shareholders were asked to vote on almost 1,200 equity plan proposals in the first half of 2014, according to the ISS U.S. Proxy Season Review Report, with an average approval rate of 89%. Slightly more than half of the proposals amended existing plans, while 150 proposals were made solely to comply with Section 162(m) tax deductibility and did not ask for any increased shares.
While it appears that ISS did not support at least a quarter of the proposals, only eight failed to pass, including two that ISS recommended that shareholder vote in favor. Two failures were at S&P 500 companies.
High shareholder value transfer was the primary concern for ISS, cited in 237 out of 301 “against” recommendations, although usually more than one issue was cited, including option repricing permissiveness and excessive burn rates. The ability to reprice options without shareholder approval is increasingly rare, present in only 7% of the plans ISS reviewed.
Other, less common, causes of negative recommendations include liberal change-in-control vesting provisions and pay for performance or poor pay practice related to equity-based compensation. A pay-for-performance disconnect was listed as the reason ISS recommended against the equity plan at Chipotle Mexican Grill, where both the say-on-pay vote and the plan proposal did not pass.
We again remind companies with equity plan proposals up for vote at the next annual meeting about ISS’ new data verification site, which we previously discussed here. Given that ISS cannot input the information into its database until after proxy statements are filed, but also faces the challenge of needing to release voting reports a few weeks before the meeting, there is only the briefest window of time for companies to verify the information in that database. The binding nature of the vote makes it crucial that plans pass and companies have the opportunity to help ISS ensure that its analysis is based on accurate materials.
Here’s an article from The Motley Fool’s Paul Hodgson:
2014’s shareholder spring turned into a shareholder summer. Was it all given carte blanche by business secretary Vince Cable? In a speech in March, he announced that he would introduce tougher measures unless remuneration committee behaviour improved. Then, in a letter in April sent to the remuneration chairmen of the 100 biggest UK-listed companies, he warned about the damage big pay deals can have on their image. “At a time when every part of the economy is striving to get more from less, I hope you find yourselves animated by the same spirit…. Unless business is seen to act responsibly, pressure for further action will inevitably result,” Cable wrote.
It started with Barclays, whose CEO later admitted that “a lot more needs to be done” to rein in bankers’ bonuses. The bank withstood four hours of criticism of its bonuses at its AGM, culminating in a rare institutional shareholder rebuke when a representative of Standard Life stood up to announce that it was voting against the remuneration report because “(w)e are unconvinced that the amount of the 2013 bonus pool was in the best interests of shareholders”. Barclays’ pay plans were eventually approved with a small margin.
Shareholder rebellions over directors’ pay continued at Pearson, AstraZeneca, National Express, Standard Chartered, Reckitt Benckiser and online grocer Ocado. Nearly one-third of Reckitt’s shareholders opposed its annual pay report. A fifth rejected the separate pay policy vote; a new, second opportunity to vote on pay policy for the next three years. A fifth of Ocado shareholders also voted against the online grocer’s pay report, objecting to a matching share plan that was due to award chief executive Tim Steiner shares worth more than £12m.
Opposition was often due to criticism by the shareholder body the Association of British Insurers, but most often shareholder advisor PIRC was behind the protests. PIRC encouraged protest against M&S, Sainsbury’s and Sports Direct bonuses and pay plans, as well as at oil firm Afren, G4S, WPP and HSBC. Investec’s pay plan was also opposed, by 44% of shareholders, amid criticism that awards were “excessive”. In the end, most of these plans passed. For example, HSBC had only around 20% of investors voting against the directors’ pay report. But it is widely recognised that even if you have a fifth of shareholders disapproving of pay, you had better start talking to them about it. FirstGroup’s pay approval actually went up this year, from 71% to 80%, but the chief executive still promised a “deep review” of pay.
On the other hand, Kentz was the first company to have its pay plan rejected under the revised rules this year. Luckily, the company has since been acquired by SNC-Lavalin, so it doesn’t have to worry about it anymore. Then in August, another company, Burberry, saw 52% vote against its pay report.
As I said here, the key to most of these votes is performance. Shareholders don’t like high pay and low performance. On the other hand, they will accept low pay and low performance, as at Marks & Spencer, where CEO Marc Bolland declined a pay increase for a fourth year running after the company missed sales and profitability targets. No shareholder revolt there.
So, did Vince Cable sanction these revolts? He certainly was responsible for putting the mechanisms in place for protest to happen. But by lining companies up for a warning at the beginning of the AGM season, he gave shareholders a mandate to object if they felt that companies were not heeding prior warnings.
As High Pay Centre director Deborah Hargreaves has said, the new regulations are not enough to bring top pay down. The Centre’s figures show that pay for a FTSE 100 CEO has gone from being 60 times the average UK worker to 160 times over the last 15 years. Where this level of increase is justified, shareholders are quiet; where it is not, they will protest.
Wonder what NFL’s Roger Goodell’s severance package will look like? Me too. Anyways, here’s a Bloomberg article entitled “Does Roger Goodell Truly Deserve $74 Million?”…
Yesterday, Rep. Chris Van Hollen – the ranking democrat on the House Budget Committee – introduced “The CEO-Employee Pay Fairness Act.” The bill would prevent companies from obtaining Section 162(m) tax deductions for CEO bonuses unless certain employee salaries were raised. The bill’s goal is for companies to reward all workers — not just top executives and major shareholders — for the company’s gains in productivity. Here’s a Washington Post article – and here’s an article from The Hill…
When Oxford University economics professor Simon Wren-Lewis recently mused about introducing a maximum wage, I cringed. While minimum wages are widely accepted, the idea of a maximum wage is hard for many people, me included, to swallow. Prof. Wren-Lewis said it’s high time for a real debate on introducing a maximum wage to tackle growing inequality.
Switzerland took up the charge last year, holding a referendum on the idea of capping salaries for top executives at 12 times the company’s lowest salary, something the good professor cited. The measure was defeated by slightly less than two-thirds of voters. It’s a bad idea, full stop. For one thing, it would give companies an incentive to outsource their lowest-paid jobs, so they wouldn’t count in any wage comparison. And it’s too rigid.
There are other ways to ensure that executive compensation doesn’t get out of hand when compared with average pay packages, and Canadian companies would be wise to take some pro-active measures because Canada won’t be immune to the growing pressure to cap wages. Wall Street occupiers are long gone and the financial crisis is fading into the recesses of our minds, but the spotlight on pay packages is only beginning. Regulators and policy makers in the U.S. and U.K. have gone furthest to rein in swollen salaries. That’s fitting, because they have bigger problems with inequality and outlandish pay. But Canada is far from perfect.
This summer, the Organization for Economic Co-operation and Development noted that disposable income inequality has increased by considerably more in Canada since 1995 than in other OECD countries, and is now the 12th highest. The financial crisis barely put a dent in that. The total compensation of Canada’s top 100 CEOs has risen for four years in a row now, and is approaching the level it was at before the crisis hit, according to consulting firm Global Governance Advisors. A study by Dr. Michael Wolfson of the University of Ottawa and professors Mike Veall of McMaster University and Neil Brooks of York University found that the top one per cent of Canadian income earners accounted for 13.3 per cent of all reported individual income in 2011, up from 12 per cent a decade earlier. “There is growing evidence that relative equality is good for growth,” Bank of England governor Mark Carney said recently. In the U.S., the Securities and Exchange Commission has proposed a rule that would require public companies to disclose the ratio of CEO compensation to the median employee pay.
Expect more noise in Canada, where shareholders are becoming increasingly vocal about compensation. “We actually right now are trying to design a proxy voting guideline that is a maximum pay guideline,” says Michelle de Cordova, director of corporate engagement at Toronto-based NEI Ethical Funds. “It’s something that a couple of our colleagues in the U.S. in the socially responsible space have got, but I’m not sure it’s something that anyone’s been doing in the fund space in Canada yet.”
There have been some Canadian executive pay packages in recent years where shareholders “looked at the number and said ‘no,’” she says, adding that NEI is looking for a quantitative way to back up that instinct.That would be in addition to guidelines it has linking pay to performance. Already some of Canada’s biggest banks have been looking at vertical pay ratios. That means instead of comparing compensation of executives at similar companies, they consider how much people lower down their own firm are earning. Ms. de Cordova suggests that that’s just a drop in the bucket. “We’re going to see more changes on this,” she says. “As things that people never would have imagined would be implemented in the past gradually do get implemented in various jurisdictions, I think we will see change in Canada.”
There are lots of possibilities. A number of British companies publish a metric comparing the rise in executive pay to the rise in pay for general employees. Other possibilities include comparing the top compensation within a company to an archetypal position, such as a teller at a bank, or creating a pay band that defines how much more a CEO should be paid than the next senior executive and carrying that down, Ms. de Cordova says. She prefers comparing executive pay to median household income, and setting a cap that would be a multiple of that. “If the situation of the median household in Canada is deteriorating, that kind of suggests that the situation as a whole is probably deteriorating, and maybe the titans of corporate Canada are not somehow driving benefit in the economy as a whole,” she says.
Whatever the case, change is coming. And the more steps that Canadian companies voluntarily take down this path now, the less chance of calls for a rigid cap.
Here’s an excerpt from the latest by Semler Brossy:
We have collected Say on Pay vote results for 125 additional Russell 3000 companies, bringing our total to 2,332. The average vote result for all companies in 2014 is 91%. Two additional companies failed since last week’s report; 55 companies (2.4%) have failed so far this year. Of companies with four years of Say on Pay votes, 1,601 (92.2%) have passed all four years, 113 (6.5%) have passed in three years and failed in one year, 18 companies (1.0%) have passed in two years and failed in two years, three companies (0.2%) have passed in one year and failed in three years, and two companies (0.1%) have failed all four years. Proxy advisory firm ISS is recommending ‘against’ Say on Pay proposals at 13% of companies in 2014.
Meanwhile, check out this infographic from Towers Watson about say-on-pay in ’14…
A suggestion from John Kelsh at Sidley Austin which makes a lot of sense: “For many years, a stand-alone section on “Tax Considerations” has been a standard feature of the CD&A. These sections typically focus on Section 162(m) considerations and contain generic statements regarding the desire to maximize tax efficiency while also retaining the need for flexibility. In 2014, some companies omitted these sections. Deletion seems advisable in many instances, particularly given that these sections (i) have sometimes been targeted by plaintiff’s firms, (ii) are generally little more than boilerplate and (iii) rarely contain any material information (and thus are not required to be disclosed under Item 402(b)(2)). Companies wishing to streamline and focus their CD&A on meaningful disclosures may wish to consider doing the same.”