– Broc Romanek, CompensationStandards.com

Here’s a blog by Paul Hasting’s Mark Poerio:

The 8th Circuit refused in Rohr v. Reliance Bank to order payment of severance to a CEO, holding that the FDIC had not been arbitrary and capricious in applying its golden parachute rule. The court’s decision reviews other cases in which courts interpreted and applies the FDIC’s golden parachute rule. The court also addressed the regulatory misnomer that arises from application of the FDIC’s regulation to severance situations unrelated to a change in corporate control. The 8th Circuit stated: “Finally, Von Rohr attacks the FDIC for disregarding the common meaning of golden parachute payment. However, because the term is given a specific definition in the statute, the common meaning is irrelevant.”

– Broc Romanek, CompensationStandards.com

Last week, the IRS proposed regulations that clarify or modify some of provisions in Section 409A – learn more in these memos posted in our “Deferred Compensation Arrangements” Practice Area…

– Broc Romanek, CompensationStandards.com

As a follow-up to this blog about Mark Van Clieaf’s study & the related NY Times column, Mark sent me these bullets to drive home the point from his study:

– The median over-pay for the 74 companies was $ 7.8 million for the CEO role.
– If we use a 2.5x pay differential estimate to Layer 2 – then the overpay at that level is $3.1 million X 4 officers = $12.5 million per company.
– Then multiply that by 74 companies = $931 million overpay estimate at the median
– Add that to the actual CEO overpay of $835 million – and the total overpay estimate for the 370 name officers is easily $1.7 BILLION.
– That’s real money for under-performance.

Meanwhile, I received this note from a member in response to my original blog about the NY Times column:

It is hard to let another Gretchen Morgenson story that bashes executive pay go by without some commentary. While not intended to be a point-by-point refutation of her assertions and the data on which it is based, here are four comments for your readers to consider (items in quotations were taken from the article; my observations follow):

1. “Companies love total shareholder return in part because it is easy to calculate. But a company’s stock can rocket even when its operations are being run into the ground. So basing pay on total shareholder return can encourage an executive to manage more for a company’s share price than for its overall health.”

Observation: According to the author, therefore, the stock market is inefficient and cannot recognize companies are merely propping up short term results at the expense of long-term performance.

2. “Mr. O’Byrne and Mr. Van Clieaf began by examining each company’s return on capital over the last five years and then comparing it with companies in the same industry. This resulted in a relative return on capital for each corporation.”

Observation: It is worth noting that companies that do not make acquisitions will have much higher returns on capital than their industry peers, as the acquisitive companies are required to reflect the acquired company’s assets at FMV (i.e., the acquisition price) and the non-acquisitive companies have generally written-off their assets over time, and what is left on their balance sheet is the historical cost of their assets, less years and years of depreciation. The point here is the denominator of the non-acquisitive companies for purposes of calculating return on capital is much lower, thus generating a much higher return. Not to be repetitive but does the author believe the market does not understand this dynamic, and therefore only high return companies should be rewarded with good stock price performance?

3. “For example, at Salesforce.com, return on capital fell 23 percent over the last five years. As a result, Marc Benioff, its chief executive, received almost $31 million more last year than was warranted by the company’s performance against its peers”

Observation: To quote Mark Twain, “there are lies, damn lies and statistics”. Everyone knows percentages of percentages are used to exaggerate the results. Moreover, it is possible to drop 23% and still be a great performer. Recall Ted Williams hit .406 and won the batting title in 1941; the next year he hit .356 and won the coveted triple crown ( i.e., best batting average, most home runs and RBIs). The author would have you believe Mr. Williams had a lousy year in 1942 because he hit below 14% below the prior year. As an aside, no major league baseball player has hit over .400 in the last 75 years.
As noted by Salesforce.com “and over the last five years, Salesforce has delivered returns of 111 percent, more than double the S.&P. 500 index.” As a small aside, Salesforce.com’s ROC did not drop 23%, it had negative ROC, which was 23% below the peer group’s ROC. Ms. Morgenson did not correctly state what the minus 23% represented.

4. “Representatives for all of the companies challenged the idea that return on capital was the best way to measure their operations.” Response: Not surprising, as maximizing ROC often motivates shrinking the company so all that is left is the highest return businesses; it also motivates reduced CapEx since almost any new investment involves some level of risk and could reduce ROC.

Observation: One of the most fascinating findings of the study is the Co-CEOs of Chipotle are among the most underpaid executives. Chipotle’s shareholders may be surprised to learn they are underpaying these executives. But, I do not expect them to plea for a big increase given Chipotle’s stock price is down 17% year to date, and has performed at roughly ½ the S&P 500 the last 5 years.

– Broc Romanek, CompensationStandards.com

We have posted the transcript for our recent webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.”

– Broc Romanek, CompensationStandards.com

This Equilar report — featuring commentary from Equity Methods and Semler Brossy — analyzes trends in director stock ownership guidelines at Fortune 100 companies, finding an increase in the value of required stock ownership over the past three years and an increase in the combination both of ownership guidelines and holding requirements.

– Broc Romanek, CompensationStandards.com

I’ve blogged several times about how buybacks impact executive pay. Now there is this Semler Brossy memo tying backbacks to CEO pay…

– Broc Romanek, CompensationStandards.com

Here’s the intro from this blog by Keith Bishop:

Most equity award plans that I come across include a statement of the plan’s purposes. I haven’t tended to give these provisions a whole lot of thought, but an opinion issued yesterday by the Ninth Circuit Court of Appeal makes it clear that a plan’s purpose clause can be very important indeed. The case arose from the retirement of the plaintiff, a Mr. Foster Rich, from Booz Allen Hamilton, Inc. (BAH). While working at BAH, Mr. Rich participated in the company’s stock rights plan (SRP) pursuant to which he was granted the right to purchase BAH shares. When Mr. Rich retired from BAH, he had accumulated 30,500 shares. BAH then exercised its right to repurchase those shares and paid Mr. Rich $4,507,900, or $147.80 per share. That is a lot of money, but a little over a year later BAH sold a portion of its business to The Carlyle Group and holders of BAH stock received $763 per share. Because Mr. Rich was no longer a BAH shareholder, he did not receive any compensation from that transaction. Presumably, Mr. Rich would have received $23,271,500 had his shares not been repurchased. It seems that while Mr. Rich became wealthy under the SRP, he didn’t become nearly as wealthy as others.

– Broc Romanek, CompensationStandards.com

Here’s a 28-page deck from Mark Van Clieaf & company that provides the analysis for this Sunday’s NY Times column, which reveals that say-on-pay support doesn’t really distinguish between those boards that really do pay for performance – and those that don’t. Here’s the key sentence from the column:

Among the top 200 companies, the study concluded that 74 overpaid their chief executives in 2015 based on five years of underperformance in return on capital. The total overpayment last year to the C.E.O.s at these companies, the study found, was $835 million.

Also check out this database – which is in beta form – where you can look up a company and its ROCC performance relative to peers over 5 years.

These are empirically driven insights & rankings of the most overpaid – and underpaid – CEOs based on analytics related to 5-yr relative returns on corporate capital & company size. I don’t believe this kind of thing has been done before – it goes beyond the pay listings published annually by other media outlets.

– Broc Romanek, CompensationStandards.com

We have posted the transcript for our recent webcast: “The Top Compensation Consultants Speak.”

– Broc Romanek, CompensationStandards.com

No sooner do I blog on TheCorporateCounsel.net about a House bill that would make it challenging for the SEC to conduct any rulemaking, than Cooley’s Cydney Posner blogs about an executive summary of the “Financial Choice Act” – which would require the SEC to conduct rulemaking to dismantle nearly all of the corporate governance rules that the SEC has adopted under Dodd-Frank over the last six years.

The kicker is that all of this repealing isn’t in the executive summary (and the full bill isn’t public yet); rather the executive summary just says “repeal non-material specialized disclosures.” You can’t make this stuff up! But Cydney’s blog notes that Cooley’s “Government Analytics Practice Group” dug in to uncover what is behind the bill’s executive summary:

– Repeal specialized public company disclosures for conflict minerals, extractive industries and mine safety (Dodd-Frank Title XV)
– Expand the Sarbanes-Oxley Act Section 404(b) exemption for non-accelerated filers to include issuers with up to $250 million in market capitalization (up from the current threshold of $75 million) or $1 billion in assets for banks (Dodd-Frank Section 989G).
– Repeal the burdensome mandate that publicly traded companies disclose the ratio of median vs. CEO pay (Dodd-Frank Section 953(b))
– Repeal the SEC’s authority to further restrict the ability to engage in legitimate securities short selling (Dodd-Frank Section 929X)
– Amend the mandate on public companies to provide shareholders with a vote on executive compensation to occur only when the company has made a material change to the executive compensation package (Dodd-Frank Section 951).
– In the event of certain financial restatements, hold bad actors responsible by limiting ‘clawbacks’ of compensation to the current or former executive officers of a public company who had control or authority over the company’s financial reporting (Dodd-Frank Section 954).
– To reduce the burdens on emerging growth and smaller reporting companies, repeal the reporting requirement for public companies regarding employee or board member hedging of equity securities granted as compensation (Dodd-Frank Section 955).
– Repeal federal financial regulators’ ability to prohibit types and features of incentive-based compensation arrangements (Dodd-Frank Section 956).
– Repeal the SEC’s authority to issue rules on proxy access (Dodd-Frank Section 971).
– Repeal the SEC’s authority to issue rules to require disclosures regarding Chairman and CEO structures (Dodd-Frank Section 972).

As Cydney notes in her blog, it wouldn’t quite repeal all of Dodd-Frank’s corporate governance provisions – pay-for-performance would still be on the books. The bill would also incorporate about a dozen bills that are floating around in the House these days – and would “streamline” the SEC’s Enforcement Division process so that individuals received “fair treatment.” Cydney writes:

According to the NYT, the bill “has little chance of passing Congress this year.” And, even if it did, President Obama still holds the veto pen, at least until January. Nevertheless, Speaker Ryan has encouraged his Republican brethren to develop affirmative policies and programs, and, as the NYT suggests, this bill “may influence the presidential debate and help shape the Republican agenda in the next term.”