– Broc Romanek

Tune in tomorrow for the webcast – “Pay Ratio: The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be” about the upcoming implementation of the pay ratio rules…

– Broc Romanek

Here’s the teaser for this memo by Pay Governance’s John England:

To qualify for the performance-based compensation exception under Section 162(m), payment of the compensation must meet several requirements, including that performance goals must be set by the corporation’s “compensation committee.” The Code defines “compensation committee” as the committee of independent directors that has the authority to establish and administer the applicable performance goals, and certify that the performance goals are met.

Since the name for the subset of the independent members of the board with responsibility for executive compensation doesn’t matter for deductibility, we wondered whether the compensation committee name implies anything about duties and responsibilities, and whether there are any corporate governance implications regarding the board’s oversight of broader human resources issues beyond executive compensation?

– Broc Romanek

Over on my video website – “CorporateAffairs.tv” – I occasionally post videos relating to executive pay. Here’s a few examples:

– Trends in Clawbacks & Director Compensation

– Short-Termism: Is Compensation Design to Blame?

– Audit Committees: Auditor Appointment, Compensation & Oversight

– Compensation Alignment for Long-Term Growth

– Broc Romanek

Check out this memo about “Assessing Risk in Incentive Compensation Plans” from Deloitte…

– Broc Romanek

Here’s the intro from this blog by Exequity’s Ed Hauder:

As companies begin to get their equity plan proposals ready for the 2017 proxy season, it is an appropriate time to review those equity plan proposals to see if they contain or permit the transfer of equity awards to third parties for value, e.g., the ability of participants to sell stock options to an unrelated investor, such as was done at Microsoft in 2003. If companies review ISS’s Equity Plan Scorecard Policy, there is not a specific mention of any concern over transferable stock awards. Instead, companies need to review the ISS policy on Transferable Stock Option (TSO) Programs. Under that policy, ISS indicates that it will recommend against equity plan proposals if the details of an ongoing TSO program are not provided to shareholders.

This is significant because the specific criteria that ISS expects companies to detail are not those ordinarily include in a typical equity plan proposal seeking shareholder approval of a new or amended equity plan, and include, but are not limited to, the following:

– Eligibility
– Vesting
– Bid-price
– Term of options
– Cost of the program and impact of the TSOs on a company’s total option expense, and
– Option repricing policy.

If a company’s equity plan provides for the transferability of equity awards to third parties, and the above TSO disclosure are not made (which ISS will then evaluate on a case-by-case basis), then the company can expect a negative ISS vote recommendation on their equity plan proposal even if they have run the ISS Equity Plan Scorecard model and believe the plan will pass muster.

Also check out this memo from Ed about the new FAQs from ISS…

– Broc Romanek

Both Mike Melbinger & Mark Poerio have analyzed the latest court decision that supports the enforceability of electronically delivered equity award agreements:

– Another Federal Court Affirms the Enforceability of Restrictive Covenants in Electronically Delivered Equity Award Agreements

– Stock Award Web Process Works: Non-Compete Enforced

– Broc Romanek

We have posted the transcript for the recent webcast: “The Art of Working With Proxy Advisors.”

– John Jenkins

This Orrick memo discusses the new edition of the IRS’s Golden Parachute Audit Techniques Guide – a reference tool for its auditors to use in their review of compliance with the golden parachute rules. A couple of the “new additions” to the document caught my eye:

The 2017 ATG expands and updates the list of documents for IRS examiners to review in connection with a golden parachute examination. The additional documents include:

– Information Statements (Schedules 14A and 14C). The schedules disclose information regarding golden parachute payments in connection with the solicitation for shareholders’ approval. Additionally, any parachute payments actually made upon a change in control must be reported.

– Registration Statements (Forms S-4 and F-4). The Forms are used to provide information to investors when registering securities, and provide information related to mergers, acquisitions, or when securities are exchanged between companies.

Seriously? You mean IRS auditors weren’t already being told to look at these? There’s a vast amount of information about change-in-control payments in merger proxies & S-4 registration statements. It’s kind of astonishing that the IRS doesn’t seem to have told its auditors to look at any of that stuff before now.

In fairness, this guide hasn’t been updated since 2005 – before the SEC adopted its current golden parachute disclosure requirements – so maybe the IRS is just catching its guidance documentation up with actual practice. I wonder though. . .

For more details on this new Golden Parachute Audit Techniques Guide, check out Mike Melbinger’s blog.

– John Jenkins

– Broc Romanek

Equilar recently issued a new report on peer group composition, with commentary from PayGovernance. Here are some key data points:

– 95.4% of S&P 500 companies disclosed a compensation benchmarking peer group in their most recent proxy statements; up from 91% in 2011
– Median peer group size for S&P 500 companies is 17, and more than 10% of companies disclosed more than 25 peers. The maximum number of peers was 132.
– Most S&P 500 companies named only one peer group in their most recent proxy statements, but a handful—11%—included two or more.
– More than 90% of S&P 500 companies chose their peers at least partially based on industry, while approximately 75% of companies chose peer groups based on revenue size.
– 3M was the most commonly cited peer company, named by more than 10% of all S&P 500 companies. Honeywell and Johnson & Johnson were the next-most included peer companies.
– About half of the S&P 500 included at least one peer based outside the U.S. Ireland was the most common headquarters country for non-U.S. peers, and companies based there were cited 183 times in S&P 500 proxy statements.
– Majority of S&P 500 companies — or 53.5% — paid their CEOs between the 25th and 75th percentiles of the peer groups they disclosed. And very few — less than 8% — paid the maximum or minimum in comparison to their disclosed peer groups.

– Broc Romanek

As reported in this CNBC article (also see this Business Insider article) – a study investigated the relationship between CEO leisure time & company performance. Using golf as a proxy for leisure time activity, this study examined the US Golf Association records of 363 S&P 1500 CEOs over a four-year period. The study claims that more time spent on the golf course leads to lower performance & market valuations. Here’s an excerpt from the “Business Insider” article:

– Companies with CEOs in the top quartile of golf play (22 rounds or more per year) have lower operating performance and firm values

– Some CEOs in the database played more than 100 rounds in a year! (There are 365 days in a year)

– “While some golf rounds may serve a valid business purpose, it is unlikely that the amount of golf played by the most frequent golfers is necessary for a CEO to support her firm”

– CEOs play more golf the longer they are the CEO

– The number of golf rounds a CEO plays is negatively correlated with changes in firm profitability

– Overall, higher golf play is associated with a higher probability of CEO turnover

– One CEO played 146 rounds of golf in a year