Yesterday, as noted in this press release, the SEC proposed pay-for-performance rules as required by Section 953(a) of Dodd-Frank. The vote was 3-2, with Commissioners Gallagher & Piwowar dissenting (Gallagher wrote out his dissent). Here’s statements by Chair White and Commissioner Stein.
– Proposed rules rely on Total Shareholder Return (TSR) as the basis for reporting the relationship between executive compensation and the company’s financial performance.
– Based on the explicit reference to “actually paid” in Section 14(i), the proposed rules exclude unvested stock grants and options, thus continuing the trend to reporting realized pay. Executive compensation professionals will need to sharpen their pencils to explain the relationship between these figures and those shown in the Summary Compensation Table.
– For equity-based compensation, companies would use the fair market value on date of vesting, rather than estimated grant date fair market value, as used in the SCT.
– Proposed rules also would require the reporting and comparison of cumulative TSR for last 5 fiscal years (with a description of the calculations).
– Proposed rules would require a comparison of the company’s TSR against that of a selected peer group.
– Proposed rules would require separate reporting for the CEO and the others NEOs – allowing use of an average figure for the other NEOs.
– Proposed rules would require the use of an interactive data format (ie. XBRL)
– Compensation actually paid would not include the actuarial value of pension benefits not earned during the applicable year.
– Proposed rules would phase-in the number of years covered. For example, in the first year for which the requirements are applicable for larger companies, disclosure would be required for the last 3 years only – with it rising eventually to five years worth of information eventually. For smaller reporting companies, they would start with two years worth of information – eventually moving to three years worth.
– Proposed rules exclude foreign private issuers and emerging growth companies, but not smaller reporting companies. However, the proposed rules would phase in the reporting requirements for smaller companies, require only three years of cumulative reporting, and not require reporting amounts attributable to pensions or a comparison to peer group TSR.
The proposing release will be published in the Federal Register within the next week, followed by a 60-day comment period (here’s our checklist to guide you in drafting comments to the SEC on a rulemaking). Depending on the nature and extent of the comments received, it’s possible that the SEC could adopt final rules sometime in the Fall. Assuming everything goes smoothly, it’s possible that the rules could be in effect next year. As we all know, however, things rarely go as planned…
Here’s a note from Ameriprise Financial’s Thomas Moore in response to my blog last week:
Many thanks for your very helpful thoughts on the pending SEC’s pay-for-performance rule proposal. Ever since Dodd-Frank was proposed, I have been puzzled as to the need for this rule given the SEC’s comprehensive 2006 executive compensation disclosure reform and the advent of the CD&A. In 2006, the SEC tried to eliminate the five-year TSR graph in the belief that it was outdated: “since the disclosure in Compensation Discussion and Analysis regarding the elements of corporate performance that a given company’s policies might reach is intended to allow broader discussion than just that of the relationship of compensation to the performance of the company as reflected by stock price.”
Although the SEC accommodated investors who wanted the graph retained as a ready source of TSR information by requiring that it be presented in the glossy annual report, the SEC continued to believe that presenting the performance graph as compensation disclosure weakened the CD&A’s objective to provide a broad discussion of the various elements of corporate performance that determine executive compensation.
All of this takes us back to 1992, when the SEC first required the stock performance graph in response to the seemingly never ending controversy of pay for performance. Once the graph was adopted, some persons began to express concerns that it over emphasized the relationship between TSR and compensation and possibly encouraged earnings management and fraud. So, in 2006 the SEC rightly recognized the many different measures of financial performance that modern executive comp programs use to determine compensation and divorced the graph from executive compensation – banishing it to the annual report – although companies could also include it in their proxy statements if they wished.
Just four years later in 2010, Congress adopted Dodd-Frank – with Section 953(a), “Disclosure of Pay Versus Performance” – leaving many of us responsible for drafting a CD&A shaking our heads. It’s 23 years back to the future, with TSR once again tied to executive compensation disclosure and our shareholders footing the disclosure costs. Will say on pay become a referendum on TSR performance?
This WSJ article and Bloomberg article previews the SEC’s open Commission meeting today, during which the Dodd-Frank pay-for-performance rules will be proposed. Also weigh in on whether you want us to conduct a webcast on this new proposal:
In this report, Semler Brossy covers equity plan proposal trends for current Russell 3000 companies, finding that companies that do not receive majority support for say-on-pay are 10x more likely to have their equity plan voted against by shareholders.
Thanks to those that participated in this survey – a hot topic! Below are the results from my recent survey on currency fluctuations for incentive comp:
1. Does your company adjust incentive goals/results for currency rate fluctuations?
– Yes, as a policy consistently applied – 24%
– Occasionally, as ad hoc decisions made across years – 15%
– No, we never do – 42%
– Not sure, it hasn’t come up – 20%
2. If your answer to #1 above was “yes,” what is the percent of impact currency rate fluctuations must have for neutralization (i.e. what is the swing/change in the metric due to the currency fluctuation before things get adjusted)?
– Less than 5% – 62%
– 5% to 9% – 10%
– 10% to 14% – 14%
– 15% to 19% – 0%
– 20% to 24% – 14%
– 25% or more – 0%
3. If your answer to #1 was “occasionally” or “never,” are your incentive compensation performance measures predominantly return measures?
– Yes – 32%
– No – 66%
– Not applicable (we don’t use performance measures for our incentive compensation) – 2%
4. If your company makes ad hoc decisions, is the issue decided on whether management raises the issue & how large the impact is?
– Yes – 42%
– No – 8%
– Not sure, it hasn’t come up – 50%
5. If you do adjust your incentive goals/results for currency rate fluctuations, to which type of incentive programs are these adjustments made?
– Short-Term – 61%
– Long-Term – 6%
– Both Short-Term & Long-Term – 33%
As I blogged yesterday, the SEC has calendared an open Commission meeting for Wednesday, April 29th to finally propose the pay-for-performance rules as required by Dodd-Frank. This rulemaking is important as it could become the new standard for measuring pay and performance.
We’ll have to see what exactly the SEC proposes when the proposing release is out – but if it comes out in a form as expected, here are my 8 points of analysis:
1. Companies can get the data and crunch the numbers. I don’t think that the actual implementation itself will be difficult.
2. But I think what could be particularly worrisome is having yet another metric to figure out what the CEO got paid and trying to explain all of it.
3. You know how companies have different schemes for granting equity, including type and timing. If the rules tend to try to fit everyone into a narrow bucket in order to try to line everyone up for comparability, and a company’s program doesn’t quite fit neatly into it, then the disclosure can get even more complicated.
4. There are two elements: compensation and financial performance. What is meant by “financial performance” for example? Maybe the SEC will just ask for stock price, maybe they’ll go broader.
5. A tricky part likely will be the explanation of what it all means – and how it works with the Summary Compensation Table.
6. I don’t think it will be difficult to produce the “math” showing the relationship of realized/realizable pay relative to TSR and other financial metrics, so long as:
– There’s a tight definition of realized pay
– We know what period to measure TSR (and if multiple periods can be used)
– We know what other performance measures can be included (if any) and if they can be as prominent in the disclosure as TSR
7. Another area of potential difficulty is explaining why there is not a tight or tighter correlation with TSR (“we use metrics other than TSR to drive our compensation; thus, the correlation is not very strong; on the other hand, our compensation is based on Revenue Growth and EBITDA Margin, and as Exhibit II demonstrates, the correlation is very significant”).
In addition, Dodd-Frank has no requirement for a relative ranking, and companies will need to decide if TSR and Pay should be put in some type of relative context (“relative to our peers, our realizable pay was well below the peers; so even though compensation is not tightly aligned with stock price performance the last 3 years, we did not pay our bums very much).
8. I think what may be the most difficult to address is a requirement to discuss what the Compensation Committee plans to change – and why is it now that it has performed the analysis?
– Keith Higgins Speaks: The Latest from the SEC
– The SEC’s New Pay-for-Performance Proposal
– Proxy Access: Tackling the Challenges
– Disclosure Effectiveness: What Investors Really Want to See
– Pay Ratio: What Now
– Peer Group Disclosures: The In-House Perspective
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Communication
– Dave & Marty: Smashmouth
– Dealing with the Complexities of Perks
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Investors Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 75 Minutes
Early Bird Rates – Act by the end of Friday, April 24th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by the end of Friday, April 24th to take advantage of the 33% discount.
– Keith Higgins Speaks: The Latest from the SEC
– Proxy Access: Tackling the Challenges
– Disclosure Effectiveness: What Investors Really Want to See
– Pay Ratio: What Now
– Peer Group Disclosures: The In-House Perspective
– How to Improve Pay-for-Performance Disclosure
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Communication
– Dave & Marty: Smashmouth
– Dealing with the Complexities of Perks
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Investors Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 75 Minutes
Early Bird Rates – Act by April 24th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 24th to take advantage of the 33% discount.
Last October, I blogged it was coming – and now it’s here (albeit a bit late for this proxy season). The CFA Institute has updated its CD&A Template, last issued in 2011. Here’s a blog from Matt Orsagh explaining the changes – particularly focusing on how the updated Template supports better pay-for-performance storytelling…
As noted in this Morris Nichols memo, in an order issued on March 6, 2015 in Friedman v. Khosrowshahi, the Delaware Supreme Court affirmed the Court of Chancery’s dismissal of a breach of fiduciary claim relating to an alleged violation of Expedia’s stock incentive plan. The Supreme Court upheld the Court of Chancery’s finding that the complaint failed to allege any violation of the Plan because (1) the board acted on a reasonable interpretation of the Plan’s terms and (2) to the extent the terms of the Plan were ambiguous, the Plan expressly gave the board authority to resolve any ambiguity.
Jarden Corp.’s Executive Chairman Martin Franklin is poised to become one of the highest-paid U.S. executives for 2014 thanks to a $74 million performance award that the consumer-brands company granted him last year and recorded as having no value. The grant includes 1.8 million restricted shares that are deemed “improbable” to vest in full because the underlying performance criteria — annual net sales of $10.5 billion and adjusted earnings-per-share of $4 by Dec. 31, 2018 — are unlikely to be achieved, the board’s compensation committee wrote in a March 30 preliminary proxy filing.
The shares, worth $73.9 million on the day they were granted, are listed with Franklin’s other equity awards in the summary compensation table with no value. In a footnote, Jarden cites a Financial Accounting Standards Board rule that advises companies to value performance-based equity grants based on the probability that the targets will be met. “This grant-approach appears to allow a company to skirt the summary compensation table disclosure,” Ron Bottano, a vice president at compensation consultant Farient Advisors LLC, said in an e-mail. “It does not strike me as best practice.” Jarden, based in Boca Raton, Florida, declined to comment on specific questions about its treatment of the grant.
The company, which owns a collection of brands including Yankee Candle, Rawlings baseball gear and Bicycle playing cards, granted Franklin a similar award in 2010 that it also deemed improbable to vest due to its performance criteria, according to filings. It vested in full when the target was met in 2013.
‘Aspirational Targets’
The award was paid out last year and allowed Franklin to take home 2.25 million shares valued at $120 million as of Monday’s close in New York. The company recorded a $33.6 million expense for the 2010 grant, which also included shares for Vice Chairman Ian Ashken and Chief Executive Officer James Lillie, in its 2012 annual report. That’s because the likelihood of achieving the performance goals “was deemed probable” in the fourth quarter of that year, according to a footnote in Jarden’s April 15, 2013 proxy filing. The grant never appeared in any summary compensation tables with a value larger than zero. “Jarden has consistently set long-term aspirational targets to drive performance,” the company said in an e-mailed statement. “The compensation that Mr. Franklin, Mr. Ashken and Mr. Lillie received in 2014 reflects the achievement of this long-term goal.”
‘Relatively Uncommon’
Jarden posted revenue of $8.29 billion and adjusted earnings-per-share of $2.70 last year, according to a regulatory filing. For the new grant to vest in full, the company must meet the revenue and EPS goals detailed in the preliminary proxy. Achieving those goals was considered “improbable” for reporting purposes, according to the March 30 preliminary proxy filing, enabling the company to assign no fair value to the 1.8 million shares in the summary compensation table. “This is relatively uncommon,” Ken Shaw, a professor of accounting at the University of Missouri’s Robert J. Trulaske Sr. College of Business, said by phone. “I would think that a CEO or CFO, all else equal, prefers targets that may be challenging but achievable.” Per-share earnings excluding some items are projected to be $4.14 in fiscal year 2018, according to the average estimate of four analysts surveyed by Bloomberg. Jarden’s brands also include Coleman camping gear, Breville kitchen appliances and Crock-Pot slow cookers.
‘Very Reasonable’
The company’s history of buying well-known consumer brands and quickly improving their profitability makes the revenue and earnings targets seem “very reasonable,” Stephanie Wissink, senior analyst at Piper Jaffray & Co. in Minneapolis, said in a telephone interview. “The interest rate favorability allows them to stretch up into bigger acquisitions,” Wissink said. “They’re actually probably pacing ahead of 2018.”
Jarden is on track to meet both targets even without making any additional deals, Charles Strauzer, senior managing director at White Plains, New York-based CJS Securities Inc., said by phone. CJS has received banking fees from Jarden. “If this kind of growth rate continues, you could easily get there,” Strauzer, who owns shares in the company, said. “If they can find an acquisition or two along the way, you could see that accelerate.” The $73.9 million grant would put Franklin’s total reported pay for 2014 at about $96 million, according to the proxy.
Yankee Candle
Between 2010 and 2014, Jarden’s annual revenue grew by 37 percent, or $2.26 billion, as the company spent more than $3.39 billion of its cash on at least one dozen acquisitions including Rexair Holdings Inc., which makes Rainbow vacuum cleaners, and Yankee Candle Investments LLC. The company has struggled in the past to persuade investors about its executive pay practices. More than 40 percent of voting shareholders have rejected its executive compensation program in two out of its three most recent Say-on-Pay votes held at annual meetings. Approval rates below 70 percent are generally considered “problematic” and should prompt directors to talk with shareholders to understand their concerns with the company’s pay program, said Ann Yerger, executive director at the Council of Institutional Investors.
Here’s the intro to this NY Times article that everyone is talking about:
The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.
His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000. “Is anyone else freaking out right now?” Mr. Price asked after the clapping and whooping died down into a few moments of stunned silence. “I’m kind of freaking out.”
If it’s a publicity stunt, it’s a costly one. Mr. Price, who started the Seattle-based credit-card payment processing firm in 2004 at the age of 19, said he would pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit this year. The paychecks of about 70 employees will grow, with 30 ultimately doubling their salaries, according to Ryan Pirkle, a company spokesman. The average salary at Gravity is $48,000 a year.