– by Randi Val Morrison

This new Equilar article identifies key compensation trends for CEO-to-executive chair transitions based on a sample of 18 S&P 500 CEOs who made this transition within the past five years.

Here are the key findings:

– Cash remained relatively stable – Cash constituted only 35.7% of the median CEO’s total compensation. The median former CEO could reasonably expect a 30.6% decrease in cash compensation as a result of their transition.
– Equity represented the majority of this decline – Stocks, units, options and stock appreciation rights (SARs) collectively represented 64.3% of the median CEO’s pay. This portion was subject to a median decrease of 72.5%, perhaps due to the waning importance of retention and incentives
– Overall compensation fell as a result of these transitions – A majority (72.2%) of CEOs experienced reductions in overall pay as they made the transition to executive chairman.

Though limited by the sample, the information is helpful, as virtually all benchmarking information publicly available addresses compensation for incoming CEOs rather than newly transitioning executive chairs.

– Broc Romanek, CompensationStandards.com

Here’s news from this Towers Watson blog; here’s the intro:

As part of a series of hearings on tax reform, the Senate Finance Committee recently held a hearing on the issue of fairness in the tax code. In connection with the hearing, the committee’s ranking Democrat, Sen. Ron Wyden (D-OR), released a report on tax avoidance strategies that outlines possible recommendations for reforming nonqualified deferred compensation (NQDC) as part of an expected tax reform proposal. In his opening statement, Sen. Wyden noted that the report is intended to “shed some light on some of the most egregious tax loopholes around.”

– Broc Romanek, CompensationStandards.com

We have posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.”

– Broc Romanek, CompensationStandards.com

Ed Hauder of Exequity has posted his 2015 ISS Burn Rate Calculator (and here is Ed’s six-year comparison of the burn rate caps).

– Broc Romanek, CompensationStandards.com

Hat tip to Jim Hamilton’s blog & the Society of Corporate Secretaries for pointing out that 58 Democratic members of Congress sent this letter last week to SEC Chair White urging the agency to finalize the CEO/employee pay ratio rules in early 2015. As noted on this press release, the letter cites research that purportedly correlates higher pay ratios with CEO risk-taking, and suggests that lower ratios equate to long-term investment:

Research shows the higher the CEO to median worker pay ratio, the more likely that CEO is to pursue the kind of risky investments that brought on the global financial crisis. The Institute for Policy Studies found that nearly 40 percent of the highest-paid CEOs were fired, sought a bailout, or forced to pay fraud-related fines. Furthermore, a lower ratio of CFO to median worker pay implies more investment in human capital and a longer-term outlook. According to the Center for Audit Quality’s annual investor survey, 46 percent of investors say they consider CEO compensation in their decision making.

– Broc Romanek, CompensationStandards.com

As noted in this Semler Brossy report, to date, 134 Russell 3000 companies have had their say-on-pay votes – and 92% are passing with above 70% support. Two companies (1.5%) have failed say-on-pay thus far: Nuance Communications and Schnitzer Steel Industries. Of companies with five years of say-on-pay votes, 104 (94%) have passed all five years, six companies (5%) have passed in three years and failed in one year, and one company (1%) has passed in three years and failed in two years. Proxy advisory firm ISS is recommending ‘against’ say-on-pay proposals at 11% of companies thus far in 2015.

– Broc Romanek, CompensationStandards.com

Here’s the teaser for this longer Towers Watson article:

Much has been written about the scale of pay awards to CEOs at FTSE-listed companies over the last decade — and the potential consequences for pay inequality. Towers Watson’s research shows that total pay for CEOs of FTSE 350 firms increased by around 75% over the last decade and now stands at about 70 times median full-time earnings for the U.K. As a response to the public’s increasing sense of inequality and perceived lack of fairness in the area of pay, new U.K. regulations that came into force in 2013 specifically require more transparency about the relative rate of pay increases between senior executives and the wider workforce, along with increased disclosure regarding how pay and workforce conditions are taken into account when setting executive pay.

It seems likely that increased regulatory and public focus on pay differentials will drive companies to look again at the integration and alignment of senior executive pay strategy and arrangements with those for employees in other parts of the organization. As part of the process, companies will need to review the way in which pay for the broad executive cadre fits with arrangements for the most senior executives.

– Broc Romanek, CompensationStandards.com

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

Several shareholder proposals this season ask boards to adopt clawback policies that would be triggered by any misconduct resulting in a violation of law or policy that causes significant financial or reputational harm, where a senior executive either committed the misconduct or failed to supervise subordinates. The proposals also ask those companies to disclose to shareholders the circumstances of any recoupment and any board decision not to pursue recoupment.

This type of clawback policy, particularly the disclosure component, is unusual. PwC’s study on clawbacks as disclosed in proxy statements found that 90% of clawback policies are triggered by a financial restatement. 73% of those require evidence that the employee caused or contributed to the false reporting. The clawback amount is usually the excess that was paid compared to the compensation if no restatement had occurred.

The study analyzes the clawback policies of 100 large public companies as disclosed between 2009 and 2013. Many companies had clawback policies that contained more than one trigger event. 83% included both financial and other misconduct as a reason to clawback. Other types of clawback triggers included any form of fraud, violation of non-compete or non-solicitation agreements, breach of corporate confidentiality or failure to supervise subordinates. In addition, financial services firms often addressed inappropriate risk-taking by executives, implicated when employees violate risk policies or risk thresholds.

In terms of individuals covered, 62% applied clawbacks only to senior executives, while 28% covered all employees or participants and 9% limited it to NEOs. 86% allowed companies to recover both cash and stock. Generally, there is no blanket discretion for determining whether an event triggers a clawback. However, 76% permitted discretion in determining the consequences, such as the extent of the recoupment.

As the terms of clawback provisions evolve, companies need to be aware of the possible accounting implications. PwC’s study noted that under existing accounting rules, a traditional clawback feature does not impact the equity award’s value and expense pattern, so that if the clawback were ever invoked, accounting recognition would only be needed at that time to reflect the recoupment.

However, if performance metrics that affect vesting or retention of the award are added, then those features could be considered performance conditions of the award and possibly complicate the accounting. In addition, having the flexibility or discretion to determine when or if a clawback has been triggered and the amount to be recouped may impair the need to meet the criteria for a grant date, if there is an assessment that the key terms and conditions of the grant are not established and understood.

– Broc Romanek, CompensationStandards.com

Check out this Cooley blog on an important topic that I have covered before as it relates to clawbacks…

– Broc Romanek, CompensationStandards.com

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

A derivative suit filed in the United States District Court for the Western District of Washington alleges that Nordstrom violated securities laws in not fully disclosing aircraft-related costs in its proxy statements and that the board breached its fiduciary duties in approving the related party transactions without analyzing the actual expenses.

Nordstrom maintained an aviation department for its two company planes and eight personal planes owned by members of the Nordstrom family. According to the complaint, for many years the proxy statements have disclosed that the company charged the Nordstrom family market prices for these related party services, and that the payments received from the Nordstrom family exceed the estimated cost to the company of providing these services.

Plaintiff and counsel sought and obtained the company’s books and records, and now alleges that the board “has never conducted any analysis of the costs of providing the services to the Nordstrom family.” Specific costs figures that the plaintiff cites are redacted in the complaint, but it appears that there were perhaps 12 pilots and a team of maintenance, office and administrative staff to manage planes, schedule flights, and keep detailed records for tax reporting and other purposes.

The complaint alleges that the Governance Committee did not seek a full accounting of the costs prior to approving the transactions, and the Nordstrom family did not properly pay the proportion of the costs related to the time that the pilots and ground maintenance crew spent attending to the Nordstrom family and their personal planes, in addition to the administrative assistance. The 2014 proxy statement stated that the cost estimates were based on a survey conducted by a “leading independent aircraft research company of competitive market rates.”