– Broc Romanek, CompensationStandards.com

Here’s the final tally of say-on-pay votes from this Semler Brossy report. The report notes that a majority of companies continued to pass say-on-pay with substantial shareholder support: approximately 92% passed with over 70% shareholder approval. 61 companies (2.8%) failed in 2015.

– Broc Romanek, CompensationStandards.com

As Mike Melbinger blogged yesterday, Facebook has settled the lawsuit filed about it’s director pay (Mike lays out the terms of settlement – and here’s his follow-up blog). Here’s this Bloomberg article:

Officials of Facebook Inc., owner of the world’s largest social network, settled a shareholder lawsuit by agreeing to revise pay schedules and keep a closer watch on how company officials are compensated. Investor Ernesto Espinoza sued Facebook and controlling shareholder Mark Zuckerberg saying a 2012 pay plan improperly allowed directors to set their own pay and that Zuckerberg exceeded allowable compensation for some senior officials. Facebook’s board in 2013 paid non-employee directors an average of $461,000 in stock, exceeding industry peers by as much as 43 percent, Espinoza said in the Delaware Chancery Court lawsuit.

In a settlement agreement filed Monday, the company agreed to conduct annual compensation assessments, hire an independent compensation consultant, have the board monitor compensation changes and consider stockholder approval of the compensation program at this year’s annual meeting. “We believe that resolving this matter is in the best interests of the company and its shareholders so we can continue to focus on our mission and business,” Vanessa Chan, a spokeswoman for Facebook, said in an e-mailed statement.

Espinoza’s lawyers agreed in part to avoid “the significant risk, expense and length of continued proceedings,” they said in court papers. “Counsel also are mindful of the inherent problems of proof and possible defenses to the claims alleged in such actions,” they wrote. Kathaleen McCormick, an attorney for Espinoza, didn’t immediately respond to a request for comment on the settlement. The accord will be considered by a judge at a fairness hearing. The case is Espinoza v. Zuckerberg, CA9745, Delaware Chancery Court (Wilmington).

– Broc Romanek, CompensationStandards.com

Here’s the key findings excerpted from this blog by Willis Towers Watson about a recent change-in-control survey:

The survey responses suggest that enhancing severance for terminations in conjunction with a CIC is widespread. The vast majority (93%) of respondents indicated they do so for some portion of employees below the NEO level, with two-thirds (67%) of those companies offering enhanced cash compensation (salary and/or bonus) and accelerated vesting of equity and about a quarter (26%) offering only accelerated vesting of equity (see Figure 1).

Other key findings include the following:

– Many (40%) of those companies that provide enhanced cash compensation include employees below the senior vice president (SVP) level. And about half of companies that provide enhanced cash compensation do so for all employees at a given level, while half provide it selectively.
– The percentage of companies offering a flat severance amount irrespective of tenure versus those offering a tenure-based benefit is significantly higher for CIC severance than for other types of severance. For example, 61% of companies provide executive vice presidents (EVPs)/SVPs a flat severance benefit in the absence of a CIC, while 96% offer a flat benefit following a CIC. Employees below the EVP/SVP level see an increase in the percentage receiving a flat amount of severance, but neither the magnitude of increase nor the percentage receiving a flat amount are as high as for EVPs/SVPs.
– Those that switch from tenure-based to a flat amount in a CIC provide more severance as a result of the switch at most tenure levels.
– Of those that maintain tenure-based severance in a CIC, median minimum benefits are higher in a CIC situation than in a normal severance situation at all levels to guarantee a certain level of benefit for more recently hired employees. Of those that provide flat severance with or without a CIC, median benefits are one-third to one-half higher following a CIC at all levels.
– Treatment of bonuses for the year of termination is enhanced following a CIC in about half the respondents for EVP/SVPs and in a quarter to a third of the companies for employees at lower levels. The most common treatment is to pay at least full target bonus regardless of performance or portion of the year worked. The most common treatment of bonuses in normal severance situations is to pay a bonus prorated for the part of the year worked.
– The most prevalent treatment of both time-based and performance-based equity awards is accelerated vesting for those who are terminated following a CIC (i.e., double-trigger vesting).

– Broc Romanek, CompensationStandards.com

Last week, ISS added three more to its “Executive Compensation Policies FAQs” – they are:

– FAQ #15: Problematic Pay Practices & Equity Plans – Will consider three-year average concentration ratios above 30% for the CEO – or above 60% for the NEOs in the aggregate – as a signal that an equity plan is not broad-based
– FAQ #59: Externally-Managed Issuers – More details about the minimum level of disclosure required to avoid an automatic “against” recommendation
– FAQ #61: Subsequent event handling – More details about how ISS will evaluate agreements or decisions subsequent to the fiscal year covered by the CD&A

If you’re a member of TheCorporateCounsel.net, tune into today’s webcast – “Pat McGurn’s Forecast for 2016 Proxy Season” – to hear from ISS directly on a score of proxy season issues…

– Randi Morrison, CompensationStandards.com

Audit Analytics’ recent analysis of Russell 3000 executive pay peer groups revealed these and other interesting findings:

– Notwithstanding the fact that pay benchmarking peers usually include close competitors, companies of similar size and stature, regional companies, etc., 12 of the 13 companies most frequently named as a peer by others (at least 44 times) are considered manufacturing companies according to their SIC codes, and all are mature – with more than half having been public since at least 1965.

– Ten companies listed 100 or more peers (one company listed 366 peers), whereas the typical peer group for this index consists of 17 peers:

– Some companies don’t use any outside peers or other benchmarks.

– The most frequently cited peer company, 3M Company, disclosed in its 2015 proxy statement the following compensation peer group selection factors:

• Peer companies are monitored regularly by the same market analysts who monitor the performance of 3M (investment peers); and/or
• Peer companies have similar business and pay models, market capitalization (based on an eight-quarter rolling average), and annual revenues.

– Randi Morrison, CompensationStandards.com

The CFA Institute’s recent, creative online forum – “Executive Pay Disclosure in the Say-on-Pay Era” – is a convenient way for practitioners and boards to access the views of key, seasoned stakeholders in executive compensation engagement and disclosure.

In the forum, ISS’s Carol Bowie, Apache director & former Compensation Committee Chair Chip Lawrence, Covington & Burling’s Keir Gumbs, Towers Watson James Kroll, Prudential’s Peggy Foran and NIRI’s Ted Allen weigh in on a series of practical questions posed by CFA Institute’s Matt Orsagh including:

• What do investors want from the CD&A section of the proxy statement?
• What are some of the most significant improvements you have seen in the CD&A over the past 5–10 years? Please highlight some best practices that investors have found helpful.
• What is the state of engagement around executive compensation between companies and investors? How has increased engagement improved the CD&A?
• Re: engagement – who should be involved in the process from a companies point of view? At what point does the compensation committee speak with investors about compensation issues?
• What process do issuers go through in creating a strong CD&A — who is involved, what is the timeline?
• For small-cap and mid-cap companies with limited resources to devote to the CD&A, what are some of the most important things to focus on?
• Is the CD&A all about “say on pay” these days or are there other substantive issues at play?
• Are there any nascent compensation issues you expect to grow in importance this proxy season or in coming years?

See Matt’s blog about the forum and the CFA Institute’s CD&A Template.

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from this Willis Towers Watson memo:

Most importantly, the compensation committee should be involved in the design and execution of acquisition-related executive compensation programs in order to maximize the likelihood that key employees are retained and the acquisition is successful, while appropriately managing the company’s financial risk. Here are a few of the M&A-related items that compensation committees are most likely to focus on:

– Retention plans. Retention plans are among the most frequent plans adopted during an acquisition as they are seen as a major motivator for key employees who may be tempted to leave the new company before all transitions have taken place. In Willis Towers Watson’s 2014 M&A Retention Survey, we found that a high degree of senior leadership communication and interaction with acquired company leaders was strongly correlated with high retention rates. Board members can play a key role in that communication process, talking directly with acquired company executives about the retention strategy and growth opportunities that the new company offers. A compensation committee can also serve as a check on retention plan costs, ensuring that potential retention payments are not excessive relative to both the external market and internal compensation opportunities.

– Incentive plan adjustments for acquired company participants. Most acquisitions have an immediate impact on the revenue, earnings and financial performance of the acquiring company. However, those financial results may not have been considered at the time when the acquirer established its short-term or long-term incentive plan goals. A key decision for the compensation committee is how, if at all, it will account for the acquisition in measuring financial performance over the measurement period for outstanding incentive cycles. For example, is the acquisition completed early enough in the performance cycle that the incentive goals can be reset to include the acquired company, or should the committee look for ways to adjust the final measured performance (e.g., by “backing out” the acquired company performance)?

– Integration of the acquired company’s senior executives into the acquirer’s compensation structure. If any of the acquired company’s executives become executive officers of the new company, their compensation package likely will be subject to compensation committee review under the terms of the committee’s charter. Even if none of acquired company’s executive pay plans require committee approval under the terms of the committee’s charter, the committee may want to review management’s proposed timeline for transitioning all acquired executives’ pay packages onto the acquirer’s plans. This would typically include the salary structure, bonus and long-term incentive (LTI) plans, benefit plans and policies such as severance and stock retention, among others.

– Effect of the acquisition on equity and other LTI plans. The overall equity compensation program is most commonly managed by the compensation committee, and large acquisitions could result in significant increases in employee participation and total LTI plan value. Management may be required to show LTI grant projections for the combined company and ensure that the company has sufficient shares available in its shareholder-approved equity plan to make the planned LTI grants. In addition, the committee may be required to approve LTI grants at deal close to acquired executives, possibly to convert acquired company equity compensation to acquiring company equity compensation.

– Review of the legacy programs of the target company. Often, the terms of an acquisition will include legacy employee protections, policies or pay levels that would not otherwise be adopted by the acquirer. Examples might include tax gross-ups on change-in-control parachute payments or above-market compensation guarantees. The compensation committee should promptly be made aware of any such provisions and have ultimate authority to act on any terms that could harm the acquirer’s reputation from a governance perspective, whether with institutional investors, activist shareholders, proxy advisors or in the media.

– Broc Romanek, CompensationStandards.com

According to this Jones Day memo, it’s possible that Nasdaq is planning to propose new rules that would require disclosure of any compensation arrangements with those who serve as dissident director candidates. This would fuel the debate over “golden leash” payments made by activists to their director nominees in a proxy fight. The memo outlines the arguments both for – and against – such payments…

– Broc Romanek, CompensationStandards.com

This piece by Semler Brossy’s Ross Brondfield and Hanna Hoopingarner is chock full of graphs and charts, detailing how say-on-golden parachute has fared over the past few years…

– Broc Romanek, CompensationStandards.com

Here’s the teaser from this Pay Governance memo:

The past year has seen extensive criticism of share buybacks as an example of “corporate short-termism” within the business press, academic literature, and political community. The critics of share buybacks claim that corporate managers, motivated by flawed executive incentive plans (stock options, bonus plans based on EPS, etc.) and supported by complacent boards, behave myopically and undertake value-destroying buybacks to mechanically increase their own reward. In turn, so the criticism goes, the cash used for share buybacks directly cannibalizes long-term value-enhancing strategies such as capital investment, research and development, and employment growth, thereby damaging long-term stock price performance and the value of US markets.

Pay Governance has conducted unique research using a sample of S&P 500 companies over the 2008-2014 period that brings additional perspective to this debate.