A few days ago, ISS released their 2016 policy changes for review (drawn partially from these survey results issued last month). The three US topics are: Unilateral Board Actions; Director Overboarding; and Compensation at Externally-Managed Issuers. Comments on the proposed policy changes are due by November 9th, with the final policy changes expected to be released a few weeks later on November 18th…
At our Conference here in beautiful San Diego, Bob McCormick of Glass Lewis indicated their draft policies would be out in a few weeks…
Today is the “Say-on-Pay Workshop: 12th 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 2016 Compensation Disclosures: Annual Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 12th 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.
Over on TheCorporateCounsel.net on Friday, I blogged about Corp Fin’s first Staff Legal Bulletin on shareholder proposals in three years – Staff Legal Bulletin No. 14H. The heart of this SLB wraps up Corp Fin’s review of Rule 14a-8(i)(9) due to a flap over proxy access proposals. But the SLB’s new “direct conflicts” standard applies to compensation proposals as well.
Under the SLB’s new “direct conflicts” standard for counterproposals, Corp Fin will only allow exclusion “if a reasonable shareholder could not logically vote in favor of both proposals.” In other words, proposals won’t be found conflicting unless they “directly conflict.” The SLB provides four examples about how a shareholder proposal & management proposal may be found to directly conflict – or not. In fact, one of the Staff’s examples deals with compensation proposals as follows:
Similarly, a shareholder proposal asking the compensation committee to implement a policy that equity awards would have no less than four-year annual vesting would not directly conflict with a management proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards. This is because a reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan.
The U.S. Chamber of Commerce isn’t planning to mount a legal challenge to the Securities and Exchange Commission’s pay ratio rule. The rule, required by the Dodd-Frank Act of 2010, will force companies to disclose the gap between their chief executive’s pay and that of their median employee by 2017. It formally took effect on Monday, after the Securities and Exchange Commission approved it by a 3-2 vote in August. “We decided not to move forward on [the legal challenge],” said Tom Quaadman, senior vice president for Capital Markets Competitiveness at the U.S. Chamber of commerce. The pay ratio rule won’t affect most companies until 2018, Mr. Quaadman said. The political landscape around the rule could also change in Congress and the White House following the 2016 election, he added. Last month, the House Financial Services Committee sent a bill to overturn the rule to the floor. A vote is still pending.
For now, the Chamber said it is more important to move forward with litigation surrounding its challenge of another Dodd-Frank disclosure rule, the one on conflict minerals, he said. The conflict minerals case “has implications for the pay ratio,” Mr. Quaadman said. The conflict minerals litigation focuses on whether it violates corporate free speech rights by forcing companies to declare their supply chains contain minerals blamed for fueling violence in the Democratic Republic of the Congo. A U.S. Appeals Court reaffirmed a ruling in August that struck down conflict minerals disclosure requirements. But the U.S. Securities and Exchange Commission and Amnesty International filed another challenge against the rule this month. Mr. Quaadman said other groups could still move forward.
Since the pay-ratio rule just took effect, that “opens the door” for a legal challenge from someone, said James Barrall, a compensation attorney at law firm Latham & Watkins LLP. Companies are concerned about the rule because finding their median employee will force them to navigate different payroll systems and wage and benefits rules across disparate countries. They also worry that the disclosure will be hard to compare between companies and industries and will be difficult to explain to their workforce. “This is a complex process that will require significant time and resources, particularly as companies work to report this information for the first time,” said Mike Stevens, a partner in law firm Alston & Bird’s employee benefits and executive compensation group.
Also check out this Towers Watson memo entitled “Flexibility at a Price: A Look at the Additional Disclosures Required to Take Advantage of Optional Provisions in the CEO Pay Ratio Rule”. And speaking of the rulemaking process, the SEC’s Chief Economist delivered this speech yesterday about economic analysis for rules…
For the many of you that have registered for our Conferences coming up next Tuesday, October 27th, we have posted the “Course Materials” (attendees received a special ID/PW this week via email that will enable you to access them; note that copies will be available in San Diego). The Course Materials are better than ever before – with numerous sets of talking points comprising 130 pages of practical guidance (not counting the 130 pages of guidance from the related “Pay Ratio Workshop“). We don’t serve typical conference fare (ie. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets and examples. Our expert speakers certainly have gone the extra mile this year! Here is some other info:
– 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).
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 are the conference agendas; 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.
– Register Now:– There is still time to register for our upcoming pair of executive pay conferences – which starts on Tuesday, October 27th – to hear Keith Higgins, etc. If you can’t make it to San Diego to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now.
– Registration for Attendance in San Diego – Walk-Ups Only: Going forward, you will no longer be able to register to attend in San Diego through this site (however, you still will be capable of registering online to watch by video at any time). You can still register to attend when you arrive in San Diego – you just need to bring payment with you to the conference and register in-person.
Don’t forget to check out our “Family Feud” Keynote Session as two families of top lawyers & consultants – “50 Shades of Clawbacks” v. “D’lectible” vie for the prize! Check out our realistic set!
Some consultants say yes. In this article, posted on CFO.com, two consultants argue that the use of the three-year time horizon frequently associated with performance-based restricted stock grants may not really be long enough, especially where the performance measure is relative total shareholder return (TSR). In fact, they contend, perhaps with a touch of hyperbole, it has the “potential to be dangerous” because the “payouts to executives may reward short- to mid-term stock price volatility rather than sustained long-term TSR performance.”
To assess this concern, the authors structured a study based on the 449 firms in the S&P 500 between 2004 and 2014, looking at TSR performance over four rolling 10-year periods. Using a standard performance-based plan, they compared the distribution of payouts of restricted stock for overlapping three-year performance periods and for five-year performance periods over the same time period. They also compared those payouts with 10-year TSR.
The authors explain that, optimally, relative performance and payout level should be closely aligned; i.e., “low performers” should receive small payouts while “high performers” should receive payouts that are “well above target or close to maximum.” In their view, the “‘right’ answer exists when payouts to LTI recipients mimic payouts to long-term shareholders.” Theoretically, “a 10-year award would generally have 100% alignment, but such a long-term award is obviously not practical.”
What they found “is that shorter-termed awards led to a higher variability in payouts within individual firms.” In their analysis, if “there is too much variation in payouts over time, especially when overlapping award cycles exist at once, recipients are more likely to view their awards as lottery tickets. And, of course, the problem with a lottery ticket framework is its passivity — it’s nice if the award happens to pay out but outside one’s control if it does not.” In addition, analyzing the distribution of payouts across companies, they found “a higher variation in payouts on three-year awards versus five-year awards, as well as a “clustering between a 75% and 125% payout (where 0% to 200% is possible) on three-year awards.” That is, with the three-year measurement periods, “a large majority of companies pay out near target even though their relative long-run performance will be varied.”
To analyze the alignment to shareholder returns for the two-performance periods, the authors compared the payouts under hypothetical three-year and five-year TSR awards relative to a company’s cumulative 10-year TSR. They found that, for the five-year performance periods, the awards at 179 companies matched 10-year TSR, while for the three-year awards, only 147 companies matched 10-year TSR.
In conclusion, the authors contend that their analysis raised questions about whether 3-year performance periods are always appropriate for relative TSR plans. They suggest that companies model their own alternative scenarios, particularly since companies may use indices other than the S&P 500, which could lead to different results. Recognizing that the ideal of a “truly long-term performance period like 10 years or 7 years, which also more closely corresponds to the life cycle of business strategies” is impractical, they suggest that compensation committees “think about a performance period of five years or even four years, which may provide a better balance between executives’ reluctance to wait to receive compensation and shareholders’ concerns that equity awards should reward long-term value creation. Additionally, if there are tenure concerns with five years, it is possible to structure a five-year performance period on an award that only requires three years of continuous service.”
Of course, different compensation consultants will have diverse views on these issues (and, most likely, different studies to back them up). In addition, different facts and circumstances at companies will often lead to a variety of judgments about the pros and cons of longer (or shorter) performance periods.
Here’s the latest from this Towers Watson memo about Fortune 500 non-employee director compensation:
– Companies continue to impose gaps on potential stock grants to directors. Specifically, 27% of companies that adopted or amended stock plans that include directors as participants in the 2015 proxy season included an annual award limit specific to non-employee directors – compared to 22% in 2013. – Total direct compensation for outside directors climbed 4% at the median over the prior year, with the average mix of pay remaining constant year over year at 56% in equity and 44% in cash. – Median total cash pay remained flat at $100,000 for the second year in a row – a combination of an increased annual board cash retainer and a continuing decline in the use of cash per-meeting fees for board and committee service. – Full-value stock grants remain the primary method for delivering equity compensation to directors. Only 9% of companies issue stock option grants as part of their director pay program. – Retainers for governance committee members increased. The gap in pay between the three key committees continues to narrow.
Pay for performance — the concept that corporate executives earn gobs of stock grants when they perform well, but risk them if their company disappoints — should be a great leveler when it comes to executive pay. In theory, it creates a meritocracy. If the idea is to tie executives’ pay to shareholders’ results, then there should be no difference if the chief executive or chief financial officer is male or female.
But it doesn’t quite work that way, according to a recent study by a researcher at the Federal Reserve Bank of New York and two academic colleagues. The researchers, whose study was published in March, said they found three new facts that show how much pay still differs for men and women on the job, even at the very top of the house.
As noted in this press release, Staples has limited the severance benefits payments for its senior executives so they would not be paid more than 2.99 times the sum of their base salary plus target annual cash incentive award – unless a greater amount was approved by shareholders. The CEO also has elected to amend his severance agreement to align it with the terms of the new policy.
The move follows Staples’ latest shareholder meeting, where a majority of voters supported the non-binding anti-“golden parachute” proposal submitted by the New York State Common Retirement Fund and the International Brotherhood of Electrical Workers Pension Benefit Fund.
After I posted this blog, a member noted “In Staples’ 8-K – but not in press release – the company notes that this does not apply to office depot merger. Window-dressing.”
