Here’s a blog from the UK proxy advisor Manifest about the experience in the United Kingdom with their new pay ratio rule. The blog describes this study that outlines what happened with the disclosure during the first year of the rule’s existence…
Our Executive Pay Conferences: 10% Reduced Rate: We have posted the registration information for our popular conferences – “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference” – to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
Discounted Rates – Act by September 9th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a reduced rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by September 9th to take advantage of the 10% discount.
Here’s the intro from this blog by Cooley’s Cydney Posner:
As reported in the WSJ, a new study from corporate-governance research firm MSCI showed that, over the long term, there was a signficant misalignment between CEO pay and stock-price performance. The study looked at CEO pay relative to total shareholder return for around 800 CEOs at more than 400 large- and mid-sized U.S. companies over a decade (2006 to 2015).
For the companies surveyed, the study found, on average, that CEO pay and performance had an inverse relationship; according to the WSJ, “MSCI found that $100 invested in the 20% of companies with the highest-paid CEOs would have grown to $265 over 10 years. The same amount invested in the companies with the lowest-paid CEOs would have grown to $367.” In light of how deeply embedded the concept of performance-based pay is among compensation consultants, boards, proxy advisory firms and institutional holders, characterizing that result as counter-intuitive might be considered an understatement.
What accounts for these stunning results? The WSJ concluded that the study “results call into question a fundamental tenet of modern CEO pay: the idea that significant slugs of stock options or restricted stock, especially when the size of the award is also tied to company performance in other ways, helps drive better company performance, which in turn will improve results for shareholders. Equity incentive awards now make up 70% of CEO pay in the U.S.” Fortune, reporting on the same study, quotes MSCI to similar effect: “‘[W]e found little evidence to show a link between the large proportion of pay that such awards represent and long-term company stock performance. In fact, even after adjusting for company size and sector, companies with lower total summary CEO pay levels more consistently displayed higher long-term investment returns.’”
Over the past six months, the SEC has issued two different concept releases relating to its disclosure effectiveness project – the first one dealing with Regulation S-X and the second one regarding Regulation S-K. As the Staff continues to analyze the comments submitted on those, the SEC decided a few weeks ago to issue this 318-page proposing release in an effort to update & simplify certain disclosure requirements with the goal of eliminating redundant, overlapping, outdated & superseded requirements. This includes proposing to eliminate the “Equity Compensation Plan Information Table” – under Item 201(d) of Regulation S-K – that is included in the proxy if a plan is being placed on the ballot for a shareholder vote.
The proposing release also seeks the same type of input for US GAAP. There is a 60-day comment period. Here’s the press release – and this is a “demonstration” version of the proposed redlined rule changes, which is another 193 pages by itself…
This is the piece of the SEC’s disclosure effectiveness project that has stirred up Senator Elizabeth Warren. Here’s an angry letter that Sen. Warren wrote to Chair White recently. I don’t believe that criticism is warranted as the SEC has said all along that the project is likely to elicit more disclosure than reduce it on balance – this just happens to be the part of the project that would reduce the volume of repetitive or useless disclosure…
As part of my “Big Legal Minds” podcast series – check out this 11-minute podcast, during which Shannon Kinney of ConocoPhillips describes how to best disclose a compensation committee’s decision to exercise negative discretion for an annual incentive plan, including:
1. How has the company improved the format & usability of the proxy in recent years?
2. Can you give us the background of how the compensation committee applied negative discretion for its annual incentive plan?
3. How did the company decide to describe its decision to apply negative discretion (pages 49-52 of the 2016 proxy)?
Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
Spanking brand new. By popular demand, this comprehensive “Form S-8 Handbook” covers the entire terrain, from share counting & filing fees to updating prospectuses & deregistration. This one is a real gem – 69 pages of practical guidance – and its posted in our “Form S-8″ Practice Area.
With the August 1st effective date looming, you should be learning about Nasdaq’s new “golden leash” disclosure requirement. We have posted memos about it in our “Director Compensation Disclosures” Practice Area (and I have updated our “Treatise Chapter” on disclosure compensation too).
Here’s a query that was recently posted in our “Q&A Forum” (#1144):
Newly adopted Nasdaq Rule 5250(b)(3), which requires listed companies to disclose the material terms of agreements and arrangements between their directors/nominees and third parties providing for compensation of the director/nominee in connection with that person’s board candidacy or service, contains an exception for agreements and arrangements that existed prior to the nominee’s candidacy (including as an employee of the third party) and where the nominee’s relationship with the third party is otherwise publicly disclosed in the proxy statement or annual report. The Nasdaq rule proposal then provides an example that would fit within this exception: “a director or a nominee for director being employed by a private equity fund where employees are expected to and routinely serve on the boards of the fund’s portfolio companies and their remuneration is not materially affected by such service.”
The text of the rule seems inconsistent with the example provided. Consider the following hypothetical: An employment agreement between a private equity fund and an employee of the fund provides for substantial additional consideration to be paid by the fund to the employee based on the number of portfolio company boards on which the employee serves. The agreement also provides for significant bonus payments by the fund to the employee based on the fund’s IRR in each portfolio company where the employee serves as a director. More than one year after commencing employment with the private equity fund and entering into the employment agreement, the employee is appointed to the board of Portfolio Company A, a public company controlled by the private equity fund. Portfolio Company A discloses in its proxy statement that this director is an employee of the private equity fund. This fact pattern seems to fit within the above exception to disclosing the terms of the compensation arrangement between the fund and the director. However, the individual’s compensation by the fund clearly could be materially affected by his/her service on the board of Portfolio Company A and therefore does not satisfy the condition laid out in the example. Any thoughts here?
Here was my answer (after I received some input from the Nasdaq Staff):
Based on the facts as presented in the hypothetical example, including that the director’s relationship with the third party has been disclosed, the Nasdaq Staff believes that the rule would not require disclosure because the compensation arrangement contemplates the director sitting on boards of portfolio companies in general but not on this particular board and, therefore, the material increase in remuneration (bonus in the hypo) is not “specifically in connection with” this director’s candidacy (see IM-5250-2).
Their answer might change, however, if the employment agreement at issue is amended or a new agreement or arrangement is entered into that contemplates the fund employee’s appointment to a specific portfolio company board.
If you call the Nasdaq Staff for input on a question that you have, please share with us in the “Q&A Forum” so that we can avoid duplicating the wheel…
For those following data privacy news out of Europe, you know about the new agreement reached in the EU recently that allows digital content to flow more freely between the EU & the United States. As noted in this NY Times article, the “E.U.-U.S. Privacy Shield” pact allows more than 4000 companies that have registered with the Department of Commerce to transfer data between Europe and the United States.
The pact became necessary after Europe’s highest court ruled last year that the previous one — known as the “Safe Harbor” — was invalid because it did not sufficiently protect Europeans’ privacy rights. Privacy is taken more seriously in Europe than in the US. [I’m posting memos about the Privacy Shield in the “Privacy Rights” Practice Area on TheCorporateCounsel.net.]
I haven’t seen anyone write about this yet. But I imagine that this could maybe make it a little more difficult to rely on the pay ratio rule’s “data privacy exemption? Perhaps the requirement to use reasonable efforts to find a compliant way to send payroll data would include registering for this…
Our Executive Pay Conferences: 10% Reduced Rate: We have posted the registration information for our popular conferences – “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference” – to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
Discounted Rates – Act by September 9th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by September 9th to take advantage of the 10% discount.
You might recall that the concept of non-binding say-on-pay came from across the pond. The British had implemented say-on-pay a decade before the US. More recently, the UK has been close to adopting binding say-on-pay (see this blog) – and even the European Commission proposed it a few years back.
In the wake of Brexit, it looks like the new UK Prime Minister Theresa May is seeking a number of governance reforms – as noted in this excerpt from the Glass Lewis blog:
On July 11 Theresa May launched her subsequently successful campaign to become leader of the Conservative Party and, by extension, Prime Minister of the UK, under the slogan “A country that works for everyone, not just the privileged few”. Having outlined her broader vision for the economy, Ms. May’s speech quickly turned to matters of corporate governance under the themes of “Putting people back in control” and “Getting tough on corporate irresponsibility”.
In detailing her priorities, Ms. May vowed to push for employee representatives on boards and to make shareholder votes on executive remuneration legally binding, moves which are likely intended to address growing inequality and perceived public distrust in the establishment, business and politicians.
Here’s a blog by Willis Towers Watson’s Jim Kroll:
The concept of say on pay has always been strongly connected with setting executive pay appropriately. Yet, in the wake of a contentious annual general meeting season in the U.K., there is compelling evidence that shareholders need to reconsider this traditional link.
From now on, we may want to think about say-on-pay efforts as having a direct impact on retention of key talent. The balance of reputational and talent risk is playing out in unexpected ways and is something that more companies will want to take into account when determining their own approach to shareholder engagement.
Critics of say on pay have long contended that these purely advisory votes (in the U.S. at least) are largely meaningless and are designed merely to shame company management and boards in the rare cases where executive pay crosses the line. In fact, the U.S. experience to date suggests that the reputational risk posed by unfavorable say-on-pay votes is relatively low.
While proponents of say on pay contend that giving shareholders a voice on executive compensation has helped sharpen the link to company performance and has discouraged the use of the most egregious pay practices (e.g., tax gross-ups), it seems pretty clear that these votes pose relatively little reputational risk for most U.S. companies.
