– Broc Romanek, CompensationStandards.com

In response to my recent blog, Paul McConnell of Board Advisory weighed in with this:

Most of my Committees look past just the top 5 officers. In my opinion, the Committee should be looking at Compensation for the NEO’s, their organizational peers and any individuals that might be a near to mid-term succession candidate to this level. That is not to say that the Committee should be setting pay at this level, but the CEO should be discussing performance, potential and development needs for the group and then presenting their recommendations for pay actions (including any input from the individual’s direct boss) for the Committee’s approval/input.

One thing you want to avoid at this level is the Committee micromanaging the details so that execs learn they can lobby/befriend the Committee. I urge my clients to take an approach like Congress does with military base closings – approve it all or send it back to be reworked (e.g., use more options less RS, too much bonuses, etc.)

– Broc Romanek, CompensationStandards.com

Here’s this blog by Cooley’s Cydney Posner:

Even though pay-ratio disclosure will not need to appear in proxy statements before 2018, companies are still starting to fret about how their ratios will compare with their peers and whether an unseemly gap might be detrimental to their reputations and unsettle their work forces. In this article from the WSJ, the author consults with several “reputation management experts” for their recommendations on how to navigate this minefield. Some of the more upbeat types advise that companies treat the disclosure mandate as “an opportunity for the company to prove its commitment to transparency, reinforce its reputation and earn additional trust from key stakeholders.” If they blow it, of course, it could have, well, “the exact opposite effect.”

Collectively, these experts advise companies to:

– Devise a communications strategy that envisions the toughest questions the company is going to receive from its harshest critics and prepare responses that are transparent, avoid legal-sounding jargon and show sincerity. Communications should target employees, shareholders, customers and other stakeholders.
– Apprise employees of “what is happening” early, truthfully and clearly, and explain what the company is doing about the issue, including how the company and the employees may benefit.
– Typically, the CEO’s compensation reflects “company policies, board decisions and the value given to the CEO’s leadership.” Companies should consider “whether these reflect the priorities and values of the organization…..'[I]f not, the reputation risk isn’t simply disclosure.’”
– Consider “what a successful outcome looks like,” including shaping the narrative around the pay ratio with additional relevant information and adopting an appropriate tone to ensure that the message does not seem combative or defensive. In addition, companies “must come to grips with the fact that ‘even the best strategy may not lessen the outrage.’”
– Try to limit the news to a one-day event by releasing all the information at once. How the company responds to negative public reaction to the facts could extend the story too.
– “’Look for opportunities to be the white hat in the debate.’” For example, companies should consider how to “ensure their business results spread the rewards to all their constituents, including employees….” Some companies that favor an increase in federal minimum wage “are doing their own research to turn some CEOs into ‘poster children in the push for income equality.”’ Companies may also want to put policies in place that position the company “’as a visionary on compensation and benefits issues…..The more you do now the less you have to defend later.’”
– When determining performance metrics, companies should look beyond the stock price: “’Have executives provided excellent returns on invested capital? Have they strengthened the company’s ability to acquire other companies? Have they created jobs? If so, these achievements paint a broader and more accurate picture’” and may enhance the company’s narrative.

Soapbox: My two bits — be grateful that the pay-ratio information won’t be required to be disclosed at any point during the 2016 political campaign.

– Broc Romanek, CompensationStandards.com

Here’s a blog by Cooley’s Cydney Posner:

On September 30, the House Financial Services Committee approved, by a vote of 32 to 25, H.R. 414, the Burdensome Data Collection Act, following committee consideration and a mark-up session. Given that the bill is only one paragraph long, there was not too much to mark up. The bill will now go to a full vote of the House. The bill would repeal Section 953(b) of Dodd-Frank, the pay-ratio provision, and make any regulations issued pursuant to it of no force or effect.

Any of this sound familiar? It should. The very same bill was introduced in 2011, but went nowhere. (See this news brief.) With President Obama still holding the veto pen and a substantial constituency supporting the pay-ratio provision, a different result seems unlikely this time.

– Broc Romanek, CompensationStandards.com

Here’s a piece from “Directors & Boards” penned by Prof. Charles Elson and Craig Ferrere:

Today, most boards justify their decision-making process for setting executive pay by referencing the pay of other “peer” company executives. In compensation disclosures most companies will use this “peer group” to explain that their particular executive is paid commensurately with others and that therefore the board has acted reasonably in setting compensation figures. However, now that they must publish the corresponding figure for median worker pay, companies will be forced to explain executive compensation decisions in a very different context. Rather than looking externally, to other executives, they will have to address the relation of pay to internal compensation dynamics.

Fodder for Discontent

Besides investors, a company’s own employees are the most important consumer of proxy statements and annual reports. The information that is conveyed and the impression that is imparted have the potential to greatly affect how employees — whether middle management or assembly-line workers — view the company’s mission, purpose and integrity. An employee’s perception of these reports will affect their confidence in the enterprise long term. Done well, an annual report can help solidify employee commitment and facilitate a highly functioning organization. Done poorly, however, the reporting and the substance can become fodder for discontent and disillusion, creating broad-based dissension.

Employees will pay particular attention to this antagonistic pay-disparity ratio. Moreover, pay comparisons to other executives will not provide an adequate justification of board decision making as far as this important constituency is concerned. Such explanations will only inflame the pre-existing broad-based concerns about preferential treatment and meritless reward for executives. Peer group references to other executives will only serve to reinforce the common notion of a clubby and back-scratching boardroom culture. Rather, boards and compensation committees will have to work closely with their human resources professionals to design and explain executive pay around internal company compensation system protocol.

No, It’s Not ‘Political’

All employees understand that as one is successful and promoted within the enterprise, pay goes up concurrently. It must be communicated that executive pay, and the CEO-to-median-worker ratio, are ultimately the result of this dynamic internal incentive structure and not of “political” or unfair treatment. This, instead of simple reference to other executives, will make executive pay disclosures relatable and palpable to more employees. Additionally, if done correctly, by communicating the character of the incentive structure of the organization, and valorizing the potential rewards to long-serving and successful employees, this disclosure may in fact provide positive benefits.

A company’s response to this rule needs to involve more than just a change of approach with regards to proxy disclosures. The aforementioned peer groups are not just utilized to explain pay but are also heavily relied upon in setting it too. In a mechanistic fashion companies will target the total value of a CEO’s compensation to a specified percentile, or benchmark, almost always at the 50th percentile or above. This process has become a substitute for a careful board consideration of the company’s internal compensation dynamics and, in effect, drives the decision-making process.

Major Disconnect

The result has been executive pay practices that are increasingly disconnected from the internal contextual factors that should otherwise shape and influence their development. However, in order to respond effectively to this new disclosure in a manner that will be acceptable to employees and avoid dissension, companies will need to incorporate these factors and concerns. Companies will have to move away from the rote application of peer benchmarking and percentile targeting and engage in a more holistic approach to setting pay.

As such, the ratio disclosure could be the impetus for a sea change in compensation practice, one which we have advocated before — see “What Is a CEO Worth? Don’t Look to Peers,” Directors And Boards, Third Quarter 2011. This change will ultimately benefit the compensation area and, through that, corporate America greatly.

We’ve posted dozens of memos on the new rules in our “Pay Ratio” Practice Area. Also see this CFO.com page which has 3 different articles with different perspectives on pay ratio…

– Broc Romanek, CompensationStandards.com

As the pressure to use “Total Shareholder Return” becomes more intense with the SEC’s proposed rules to mandate disclosure of pay-for-performance through the TSR lens comes this study by Pearl Meyer that it’s not a magic metric…

– Broc Romanek, CompensationStandards.com

I’ve kinda fallen off the “reporting on say-on-pay failures” bandwagon as the number of failures seems to be relatively flat every year – at least in the big picture. We’ve had 54 failures so far in 2015 – compared to 60 in ’14; 71 in ’13; 61 in ’12; and 43 in ’11 (per this video). This latest Semler Brossy report gives the head count for 2015. The primary interesting tidbit regarding the failures is how many companies who score 90% in one year then fall the next. About 15% who received 90% support face lower support the next year, and the average drop is 20%…

– Broc Romanek, CompensationStandards.com

This is how this memo from Frederic W. Cook begins:

This alert is a reminder to compensation professionals that, beginning with 2016 financial statements, the concept “extraordinary items” as a technical accounting term will no longer exist. Going forward, the correct terminology will be items that are “unusual in nature” or “infrequently occurring,” as explained below. This will be important when drafting beginning-of-year resolutions establishing performance measures and goals for incentive plans. Any pre-exclusionary language should refer to items that are unusual in nature or infrequently occurring, and references to extraordinary items should be of the generic sense and not explicitly referencing accounting rules. Shareholder-approved plan documents and grant agreements should also be reviewed and changed as appropriate.

– Broc Romanek, CompensationStandards.com

A few days ago, I blogged on TheCorporateCounsel.net about ISS’ new policy survey results (here’s the press release – and the full summary). As noted in this Towers Watson memo, this year’s survey was light in questions related to executive compensation, with only three main questions overall. Here’s an excerpt from that memo:

Incentive Plan Design (U.S.)

The use of adjusted (non-GAAP) metrics within incentive plans has been common among U.S. companies. Investor survey participants generally agree that adjusted metrics are acceptable, depending on the rationale for their use and the degree of adjustment made by companies. Investors believe that performance goals and results should be clearly disclosed in the proxy. In addition to disclosing the rationale, companies should also disclose how the adjusted metrics reconcile with similar GAAP metrics.

Regarding the types of adjustments, investors generally feel it’s appropriate to adjust results for such items as discontinued operations, extraordinary charges and foreign exchange volatility, but not for compensation or litigation expenses. Some investors commented that adjustments should be considered on a case-by-case basis as industry and/or business model considerations may have a bearing on appropriateness. Some respondents also commented that the type of adjustments made should be consistent year over year. (For more on the extent to which companies adjust performance metrics for currency movements, see “Survey Reveals How U.S. Companies Address the Impact of Currency Fluctuations on Incentive Plans,” Executive Pay Matters, July 22, 2015.)

Say-on-Pay at Externally Managed Issuers (U.S. & Canada)

For externally managed issuers — generally real estate investment trusts that use external management — ISS sought guidance on the appropriate course of action with respect to say-on-pay resolutions where the issuer provides minimal (or no) disclosure about executive compensation because that is paid by the external manager. Almost three-quarters of investor respondents suggested that ISS should recommend a vote against the proposal for lack of disclosure.

When a say-on-pay resolution is not on the ballot, such as when the issuer doesn’t hold an annual say-on-pay vote, some investors noted that they might consider voting against compensation committee members if the disclosure did not meet minimum informational needs. Factors like stock price performance, the independence of directors and any history of pay or shareholder activism would be considered in these cases.

In the case of either of these topics, proxy disclosure that includes additional information and a clear explanation of the company’s rationale are key to helping investors make informed voting decisions.

Outside Directors & Equity (Global)

ISS sought feedback in the survey on which types of equity compensation, if any, are appropriate for non-executive directors. The investor respondents generally favored grants of shares in lieu of cash retainers or meeting fees, while a slight majority suggested that stock options/stock appreciation rights are inappropriate and over 60% said that performance-based restricted stock is inappropriate for outside directors. The general theme was that tying director compensation to management performance can create a conflict of interest, perceived or actual, because the directors are in charge of setting the underlying performance goals.

– Broc Romanek, CompensationStandards.com

This excerpt from this blog from “Crooks & Liars” is startling (see the video of Graham from that blog):

Phil Gramm, a former three-term Republican senator from Texas who once ran the Senate Banking Committee, told the House Financial Services Committee yesterday that “it was an outrage” that his friend Edward Whitacre, the CEO of AT&T, only got “$75 million” when he retired in 2007.

“If there’s ever been an exploited worker” it was Whitacre, said Gramm, testifying on the fifth anniversary of passage of the Dodd-Frank financial reform bill. Gramm appeared genuinely aggrieved by Whitacre’s shabby treatment and literally pounded the table while speaking.

Whitacre actually received a retirement package totaling $158 million.

Gramm attributed public anger at CEOs like Whitacre to “the one form of bigotry that is still allowed in America,” which is “bigotry against the successful.”

Talk about tone-deaf…