– Broc Romanek

Now that Nasdaq’s new golden leash disclosure requirement is effective, it’s time to get up-to-speed. Here’s an excerpt from this Gibson Dunn memo about how Nasdaq’s new disclosure requirement intersects with the Form 8-K disclosure requirements:

However, under SEC rules, for directors appointed outside of a shareholder meeting, Item 5.02(d)(2) of Form 8-K requires disclosure of “any arrangement or understanding between [a] new director and any other persons, naming such persons, pursuant to which such director was selected as a director.” Where a company provides the 8-K disclosure, Rule 5250(b)(3)(A) states that separate additional disclosure “in the current fiscal year” is not necessary under the rule. This provides companies with one-time relief from the requirement to provide proxy disclosure, for the fiscal year in which an Item 5.02(d) 8-K announcing the appointment of a new director is filed, if the third-party compensation arrangement was disclosed in the Form 8-K. However, this relief may prove to be largely
technical.

In this regard, it seems likely that companies would repeat the information in the proxy statement because of the likelihood that shareholders would view it as relevant to the director’s election. Moreover, disclosure would be required in future years because the NASDAQ rule imposes an annual disclosure obligation thereafter.

– Broc Romanek

Here’s the intro from this Glass Lewis blog:

As the dust settles on yet another eventful AGM season, a report by The Investment Association — the leading trade association for trust and fund managers in the UK — has sought to address the problems that have led to a growing disconnect between companies and their shareholders over the amounts paid to top executives. Certainly, the 2016 AGM season will be remembered for publicised spats over pay. Indeed, such was the media scrutiny on remuneration practices at FTSE-listed firms that Theresa May, the new UK prime minister, sought fit to promise a curb on boardroom excesses, which included making all remuneration votes binding in nature.

– Broc Romanek

A lot has been written over the last week about PayScale’s recent study of pay ratios in the workforce. PayScale found an average ratio of 71:1 comparing median cash compensation for 168 of the highest-paid CEOs in the annual Equilar 200 study to cash compensation of the median employee for those companies.

This ratio is far below what other organizations – like the “AFL-CIO PayWatch” – have found. That’s because PayScale only used cash compensation in its calculations – not the big hitter items like options, restricted stock, etc. As noted in this blog, equity accounted for 68% of the CEO compensation included in the Equilar 200 study used for the PayScale comparison. In other words, on average, less than one-third of CEO compensation was earned in cash.

I find PayScale’s exercise a tad misleading because the SEC’s rules don’t allow a comparison of just cash compensation – annual “total” compensation must be used in the ratio. Enough said.

One good thing about the PayScale study is that it provides information about employee perception of CEO pay, including:

– 55% of employees were not aware of their CEO’s compensation – among those that were, 80% believed it was appropriate
– 57% of those who felt that their CEO is overcompensated also believe that this negatively affects their view of their employer
– Employees at higher levels have more knowledge about – and more readily approve – of CEO compensation than lower level employees

– Broc Romanek

Here’s a reaction from a member about this blog last week:

What does a “more indirect conflict of interest arise” mean? Is Equilar implying that NEOs who sit on compensation committees are willing to risk their reputation and abandon personal integrity to approve out-sized pay packages, to favorably boost their own pay “down the road”?

This is just another one of a string of post-2016 proxy season “studies” that suggest executive pay is a shareholder rip-off, wherein the authors try to “prove” the point with a bunch of statistics (and we all know the famous Mark Twain line about “lies, damn lies and statistics”).

The fact that CEOs occupy 10% of the Compensation Committee seats means 90% are occupied by non-CEOs. What is the 90%’s “excuse” for approving unreasonable pay? (Are the 90% are vying for another Board seat where they can become Chair of the Comp Committee?)

And here’s another reaction from a member:

CEOs on the board understand the challenges that face the company’s CEO better than anyone else. It’s like combat, no amount of reading gives you the knowledge of the job that actually doing it teaches you. Those CEOs often defend the job the company’s CEO is doing when other board members get impatient or show lack of understanding of the challenges involved. 25-30 years ago, that came with a less critical look at pay…these days it does not because all those CEOs on the board live in the same fishbowl environment and generally do not want to be associated with outliers.

The one constant over the years is that ex-CEOs on the board are tougher critics than most board members, especially once pay levels are above the most they ever made. They can be really tough on both CEOs and consultants when it comes to pay recommendations. None of my comments are backed up by data, of course.

– Broc Romanek

Can you believe it has been six years! Most companies were first required to conduct a say-on-frequency vote seven years ago – in 2011. These companies will need to place that item back on their ballot next year.

Back then, the annual option received the most support – at 80% of companies. The triennial option was supported at 19% and the biennial option at 1%. As a result, over 70% of Russell 3000 companies elected to conduct say-on-pay votes annually.

Our Executive Pay Conferences: 10% Reduced Rate: Say-on-frequency will be among the topics for our pair of 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.

– Broc Romanek

Here’s a note from Pearl Meyer’s Dave Swinford in response to this blog:

A recent Wall Street Journal article proclaimed, “Best-Paid CEOs Lag in Results, Study Says.” The article was based on an MSCI study titled “Are CEOs Paid for Performance? Evaluating the Effectiveness of Equity Incentives.” The article essentially, said two things: 1) the summary compensation table (SCT) in proxy disclosures does not predict what executives will actually receive; and 2) three years is not a long enough frame to measure the relationship between pay and shareholder returns.

This is not news.

Everyone in this business knows that the SCT measures accounting cost, not compensation actually paid or received. Three years is simply not long enough to get a good read on management’s long-term performance. The MSCI report makes these points, but then goes on to provide the headlines that excite the press.

MSCI argues that we should measure and report realized pay—something that a number of companies already do in their proxies. However, the authors of the study did not examine that, probably because the analysis would be extraordinarily time-consuming and complex.

There are other more important and relevant points we should glean from the MSCI study:

1. The SCT was not designed as a pay-for- performance (PFP) analysis tool. It started out as a measure of compensation expense when the SEC took an accounting approach to the compensation disclosure issue. However at that time, PFP was not the focus that it is today.

2. Corporate governance professionals and Congress (through Dodd Frank) are asking the proxy statement to provide information that current disclosure rules were not designed to provide, so we need something different, like realized pay.

The headlines make it sound as if executive pay is flawed, but the study says that the reporting of executive pay is flawed for the purpose of analyzing the relationship of pay- to- performance. That’s a big difference. Until we move away from SCT definitions of pay, and extend the time frame of evaluation to a minimum of five years, we will not be able to properly assess pay vs. performance.

A good analysis of PFP requires looking at financial performance beyond Total Shareholder Return (TSR) because TSR is impacted by many outside pressures over three- to- five-year time frames. Earnings growth and return on capital measures are far more indicative of management’s recent performance than TSR. They indicate fundamental company health, and both are more substantially within management’s control.

This is why the alternative measure reporting in the proposed SEC rules on pay versus performance is so important—TSR is not the answer for the time periods that we have been measuring. Until we sort out the basis for making pay versus performance comparisons, we will continue to debate CEO pay without the benefit of relevant or accurate facts.

Also see this rebuttal to the MSCI study from Pay Governance…

– Broc Romanek, CompensationStandards.com

In our “Compensation Committee” Practice Area, we have posted this memo by Pearl Meyer about the role of the committee during deals…

– Broc Romanek

Someone recently posted a question in our “Q&A Forum” (#1142) asking why Section 162(m) doesn’t apply to private companies. Here’s the answer that I posted:

This was the first piece of legislation signed by President Clinton, and he wanted to make a statement about where he stood on “fat cat” CEO pay. It is my understanding that the leadership at the Treasury Department did not favor this legislation as they believed this was a shareholder issue, not a tax policy issue and the tax code was not an effective way to address the problem. It is also my understanding their objection to the law is one of the reasons the performance based exemption was written so broadly.

The reason the law was enacted was Congress believed public company CEO pay was a rigged game, as CEOs sat on each other’s boards and/or the CEOs picked their friends to be on the Board (just like Cap’n Cashbags). Thus, Congress wanted to try and reign in CEO pay or punish public company (shareholders) if pay exceeded $1 million (because, after all, Section 280G worked so well in 1984 in limiting the spread of in golden parachutes!)

Because the law stated that options were “inherently performance based” and therefore all gains were fully tax deductible, the size of stock options shot up over the next few years, creating thousands of stock option millionaires and a few option billionaires (the accounting rules also helped facilitate outsized option grants as there was no P&L charge for options).

The law also pushed CEO base salaries to $1 million base salary (just like Section 280G created the 3x severance formula).

The reason entertainers and sports figures were not covered by Section 162(m) is their pay is set by arms-length negotiations, and not a friendly public company board, thus there was no reason to limit tax deductibility.

Private companies were not included because the IRS already had Section 162 (a) , which they use extensively to attack owners of private companies when pay was not considered reasonable…

– Broc Romanek

In this 23-minute podcast, Russ Miller & Yonat Assayag of ClearBridge Compensation Group discuss the evolution of director compensation, including:

1. What is the upshot of the recent director compensation lawsuits?
2. Why haven’t boards been sued more frequently since there is the tricky circumstance that directors set their own pay?
3. How are companies reacting by changing their plans? (see their study: “S&P 500 Trends in Director Pay Limits“)
4. Are directors resisting the movement to amend their pay plans & place limits on their pay?
5. What is the role of the compensation consultant in helping directors set their own pay?

This podcast is also posted as part of my “Big Legal Minds” podcast series. 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…

– Broc Romanek

As noted in this Gibson Dunn blog, ISS has posted its annual policy survey (here’s info about the survey). The deadline is August 29th – and the big topics include:

– Overboarded CEO-Chairs
– Director Tenure & Refreshment
– Pay-For-Performance & Non-TSR Financial Metrics
– Say-on-Frequency
– Dual-Class Companies