Here’s a blog from Michael Levin of “The Activist Investor”:
Everyone goes after share repurchases lately, as depriving companies and even the US economy of needed investment funds. We investors know better. The latest in the long series of criticisms, in Bloomberg Business this week, asserts that buybacks serve mostly to increase CEO pay unfairly. At several big companies (IBM, Cisco) they reviewed, exec comp depends in large part on EPS or share prices. So, share repurchases increase EPS or share prices by removing shares from the float.
This thinking leads corporate defenders, big conservative institutional investors, and even some pension funds that typically advocate for corp gov reforms to urge companies to curtail repurchases. Alas, this thinking responds to the wrong problem. Instead, structure CEO pay properly. Why link it to EPS, which companies can influence through creative accounting, or to share price, which varies with factors far beyond the control of executives? Pay executives based on the value they create relative to the capital needed to create it. Let’s use return on investment, return on equity, economic value added, or other similar measures, ok?
As noted in this 20-second video, Cap’n Cashbags is keeping a close eye on the pay levels of the other CEOs in his industry (stay til the end for the blooper!):
Check out this blog discussing a recent Towers Watson report – which you can find in our “Severance Arrangements” Practice Area – about the changing features of severance payments over the past several years. Among the most interesting changes are those related to the use of “single triggers” & “double triggers.” According to the report, there is only one Fortune 500 company continuing to use a “single trigger” that provides a severance payout upon a change-in-control – without requiring termination of employment. Here’s an excerpt about the findings:
According to the consulting firm, some 95% of the 340 Fortune 500 companies that offer severance upon a change in control now also require a corresponding involuntary termination of employment before they make a golden parachute payment. The prevalence of these “double-trigger” requirements has risen 10 percentage points for CEOs and 11 points for other named executive officers since 2010.
Also see this Washington Post blog about a movement to link severance packages to tenure & performance. And see this report from Semler Brossy about say-on-parachute trends…
Here’s a blog by Allen Matkins’ Keith Bishop: In derivative suits, cases are essentially lost and won at the motion to dismiss stage. Unless the defendants succeed in winning dismissal, they must confront an unhappy choice between continued litigation with all of its costs and risks or a settlement that “feeds the bulldog”. Thus, the Delaware Court of Chancery’s rulings in Calma v. Templeton, 114 A.3d 563 (Del. Ch. 2015) and Seinfeld v. Slager, 2012 Del. Ch. LEXIS 139 (June 29, 2012) should be particularly unnerving to those concerned about excessive litigation.
Both cases involved challenges to equity awards made to non-employee directors under stockholder approved plans. Although directors are interested in their own compensation, Delaware has historically not subjected these decisions to the burdensome entire fairness standard. As former Delaware Supreme Court Justice Jack Jacobs recently explained:
Since the 1950s, it had been black-letter law that where boards of Delaware corporations, pursuant to authority conferred by executive compensation plans approved by the shareholders, grant compensation awards, those awards, if challenged in court, are reviewed under the business judgment rule.
– Jack B. Jacobs, “Delaware Tightens Scrutiny of Director Compensation”, Law360 (June 22, 2015).
That has changed with the Court of Chancery’s rulings in Calma and Seinfeld. In both cases, the defendant directors moved to dismiss based on the defense of shareholder ratification. If successful in that defense, the awards would be evaluated under the business judgment rule. The Court in each case, however, ruled that because the plans included no “meaningful limit” on the number of awards that could be made to a single director, stockholder approval of the plan did not amount to ratification. Therefore, the awards must be evaluated under the entire fairness standard.
Former Justice Jacobs described these rulings as a “seismic change” in the Court of Chancery’s approach to director compensation. He’s right. It is also likely to foster still more litigation. In response, many companies will amend their equity award plans to include specific limits on awards to directors. However, the Court of Chancery’s rulings provide virtually no guidance on what constitutes a “meaningful” limitation. The stockholder approved plans in both cases included limitations but apparently these were too large in the eyes of the Court. When does a limitation change from being meaningful to meaningless? Companies will have to guess. In the meantime, the vagueness of the standard practically invites plaintiffs’ lawyers to challenge the determination.
This ruling is exemplifies a problem with Delaware law, the courts will announce a broad standard and then refine it through a long line of cases. While this has the virtue of flexibility, it fosters litigation as both plaintiffs and defendants struggle to find exactly where the lines are. How many battles, for example, have been fought over whether the business judgment rule or entire fairness standard applies in acquisition transactions? The rulings in Calma and Seinfeld are likely to have the same effect.
Nevada takes a much more straightforward approach. NRS 78.140(5) provides:
Unless otherwise provided in the articles of incorporation or the bylaws, the board of directors, without regard to personal interest, may establish the compensation of directors for services in any capacity. If the board of directors establishes the compensation of directors pursuant to this subsection, such compensation is presumed to be fair to the corporation unless proven unfair by a preponderance of the evidence.
Nevada’s rule is clear whereas the Court of Chancery’s is not. Nevada’s rule allows stockholders to challenge director compensation but does not invite it. Nevada’s approach to director compensation makes sense. Delaware’s approach does not.
As I’ve blogged before, it used to be rare that a SEC Commissioner put a dissent to a rulemaking in writing. Now in this age of partisan politics, that is fairly common. But in a new “first,” SEC Commissioner Piwowar has penned a second dissent to the pay ratio rulemaking! Here’s his first dissent.
The second dissent could be a blueprint for how a complaint would look if this rulemaking is challenged in court. It claims the SEC violated the Administrative Procedure Act in adopting the rule and similar legal mumbo jumbo (eg. the SEC acted in an “arbitrary & capricious” manner, a phrase that describes a standard of review used when a government agency’s actions are challenged under administrative law). This is interesting because Piwowar is not a lawyer, he’s an economist…
Pay Ratio Workshop: Discounted Rate Extended to August 21st! – We received so many requests to extend the deadline for our discounted rate that we have done so for our upcoming “Pay Ratio Workshop” that will be held on Tuesday, August 25th. This event will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new “audio-webcast only” event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available now through August 21st!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
ISS has opened its annual survey ahead of updating its policies. The survey closes on September 4th – and then the results are released a few weeks later. Then there’s an open 30-day comment period in October – with the final policy updates arriving sometime in November typically. The entire policy process is described on ISS’ website. ISS also has posted its preliminary ’15 proxy season review…
Pay Ratio Workshop: Discounted Rates Expire at End of Today, August 7th! – We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new “Top 10” Lists in a couple years. Highest and lowest pay ratios. Although the rules aren’t effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules don’t require companies to make pay ratio disclosures until fiscal years beginning after January 1, 2017.
2. You Don’t Need to Identify a New Median Employee Every Year! – This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there’s a change in employee population or employee compensation arrangements). You still need to disclose a pay ratio every year – but you don’t have to go through the hassle of figuring out who your median employee is each year. During those two years when you rely on a particular median employee, your median employee’s – and CEO’s – pay are the variables.
3. Pick Your Employee Base Within 3 Months of FYE – The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don’t count folks not yet employed by that date – but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).
4. Independent Contractors Aren’t Employees – Duh. Except there are nuances – so unfortunately it’s not a “duh”!
5. Part-Time Employees Can’t Be Equivalized – The rules prohibit companies from full-time equivalent adjustments for part-time workers – or annualizing adjustments for temporary and seasonal workers – when calculating pay ratios.
6. Non-US Employees & The Whole 5% Thing – For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:
– Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules require a company to obtain a legal opinion on this issue – can you say “cottage industry”!
– Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.
7. Don’t Count New Employees From Deals (This Year) – The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)
8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay – The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).
9. Alternative Ratios & Supplemental Disclosure Permitted – Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they’re clearly identified, not misleading nor presented with greater prominence than the required ratio).
10. Register NOW for Our August 25th “Pay Ratio Workshop” – You need to register now because the discount ends at the end of this Friday, August 7th. Registration also includes access to our two October conferences “Proxy Disclosure/Say-on-Pay” (for those, it’s either in person in San Diego or by video webcast – for the “Pay Ratio Workshop,” it’s an audio-webcast only event). The Course Materials will include model disclosures and more. Here’s the agendas for all three conferences. Act by Friday, August 7th to save!
According to my poll yesterday, pay ratios remind the most folks of Pink Floyd’s “Another Brick in the Wall”…and see Mark Borges’ blog on the rules…
Today’s the day that the SEC votes on adopting its pay ratio rules – it’s top of the front page news for the Washington Post! Take a moment to participate in this anonymous poll:
free polls
Pay Ratio Workshop: Discounted Rates End at End of This Friday, August 7th! – We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
With the SEC Commissioners gathering for an open Commission meeting at 10 am tomorrow morning to consider adopting final pay ratio rules, you may ask yourself: “Might the Commissioners actually not vote in favor of adoption?” Based on historical evidence, the answer is simply “no.”
Over three decades of observing the SEC, I can’t recall a rule not being adopted when brought to a vote at an open Commission meeting. Any SEC Chair worth her salt would save herself the embarrassment of not getting a desired rule over the finish line by not bringing it up for a vote at a public meeting. Bear in mind that there are plenty of proposed rules that never get adopted – but none of those were brought up for a final vote at an open Commission meeting.
And even proposals don’t get shot down at open Commission meetings. At least not since the ’80s. Former SEC Secretary Jack Katz notes a few instances way back when proposals were shot down in a public forum. One was when the SEC’s Chief Accountant proposed new accounting treatment for oil production that was rejected unanimously by all the Commissioners in the early ’80s. And another one followed the ’87 market break, when Market Reg proposed a series of legislative changes to be forwarded Congress – some of which were blessed by the Commissioners and some were not.
Note that there are rules that die during the seriatim process – not because they got explicitly rejected, but because a Commissioner’s office “sits” on it (often for years) and refuses to advance the seriatim to the next Commissioner’s office. The Chair then has to decide whether it’s worth it to take the languishing rule to an open meeting – and typically will not do so for fear of a public rejection. So the seriatim just withers on the vine. So we don’t even know that a final rule has essentially been rejected because all of this plays out behind closed doors (see this blog about whether an open Commission meeting is necessary). Thanks to Hunton & Williams’ Scott Kimpel for his help!
Also note that enforcement matters get voted down at closed Commission meetings periodically…
Pay Ratio Workshop: Discounted Rates End at End of This Friday, August 7th! – We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
