– Broc Romanek

Recently, Corp Fin denied a no-action request from Celgene to exclude a shareholder proposal submitted by John Chevedden. The proposal sought a bylaw that would prevent the board from seeing a running vote tally when say-on-pay or shareholder approval of plans were on the ballot. The company made unsuccessful arguments under Rule 14a-8(i)(2) (arguing it was a state law matter) – and (i)(7) ordinary business. Over the years, Corp Fin has allowed exclusion of shareholder proposals that sought confidentiality for preliminary vote tallies for uncontested matters under (i)(7) – a broader plate of topics than the narrower “pay topics only” proposal at issue in this case.

– Broc Romanek

The big news from Wells Fargo yesterday was that the company’s board exercised its discretion to clawback $75 million from its former CEO and former head of community banking. Here’s the 113-page Wells Fargo board report – and here’s the news:

– NY Times “Wells Fargo to Claw Back $75 Million From 2 Former Executives”
– USA Today’s “Wells Fargo clawing back $75.3 million more from former execs in fake accounts scandal”
– WSJ’s “Wells Fargo Claws Back Millions From CEO After Scandal”
– Fortune’s “How Wells Fargo’s Carrie Tolstedt Went from Fortune Most Powerful Woman to Villain”

Here’s analysis about this situation from Kevin LaCroix…

– Broc Romanek

Here’s an excerpt from this note by Willis Towers Watson’s Bill Kalten & Steve Seelig:

A clawback policy addresses what to do after the fact. Helping ensure that a company has done everything it can structurally to discourage actions or events that would cause reputational harm is paramount, although some of those actions are beyond the scope of pay programs. Within the compensation realm, it appears that virtually all public companies already perform some degree of risk review. It might be a good idea to revisit this review process to reassure the compensation committee that reputational risks are unlikely to be exacerbated by pay structures.

This raises the question of whether a review of the mechanics of the pay program and its risk-mitigation features, such as mandatory deferrals, is sufficient. These reviews need to go deeper than a mere “check the box” exercise — real attention should be paid to likely behavioral responses to a given pay structure.

The details of how this might be accomplished and how deep within the organization this inquiry should go will vary for each company. The essence of this review, however, must focus on asking managers to identify the potential unintended consequences of their pay structures, which should turn out to be knowable if the right people are asked.

While a company can’t anticipate and prevent all possible misbehavior, a thorough review focusing on likely responses to specific incentive structures — such as finding that a particular metric and payout curve could provide incentives for overly aggressive growth — should provide additional insights into the organization’s culture and perhaps reduce the motivations that prompt unwanted behavior.

– Broc Romanek

This ClearBridge Compensation Group memo presents an analysis of the goals set by 100 companies for their annual & long-term incentive plans, including how goals are set vs. prior year results – and how companies set the range around target (from threshold to maximum)…

– Broc Romanek

This memo by John Ellerman of Pay Governance is the latest to predict what the near future will be for executive pay in the wake of the coming changes wrought by the new Presidential Administration…

– Broc Romanek

Here’s the abstract for this study by Professor Michael Doran:

This article sets out the case for repealing the $1 million tax cap on executive pay. The cap is easily avoided and, when not avoided, widely ignored. Since enactment in 1993, the cap has had little effect in reducing executive pay or in linking pay to performance. Even worse, the cap increases corporate tax liabilities – liabilities that likely burden workers and investors. In effect, the cap punishes rank-and-file employees and shareholders for pay deals made by directors and executives. The article demonstrates why prominent reform proposals would be ineffective and counterproductive.

It then devises a novel reform approach – a confiscatory tax on excessive executive pay – that would limit executive pay without burdening workers or investors. But the article rejects the confiscatory tax because of the serious distortions that it would cause for business-organization and labor-supply decisions. Ultimately, the superior policy position is to repeal the cap. Concerns about income inequality are better addressed through robust progressive tax rates, and concerns about corporate governance are better addressed through non-tax mechanisms, such as reform of the business-judgment rule and expansion of director liability.

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– Broc Romanek

Here’s the teaser for this Pay Governance memo:

The rise in both the prevalence and prominence of long-term performance plans has been one of the most significant trends in executive compensation over the past 15 years. At the time of the dot-com market collapse (March 2000 to October 2002) and the demise of several prominent U.S. companies (e.g., the Enron scandal revealed in October 2001), long-term performance plans were only used by a relatively small portion of large U.S. public companies.

Today, more than 80% of S&P 500 companies use a variety of LTI performance plans, including performance shares, performance units, performance-vested restricted stock and/or units, and long-term cash-based incentives. More striking than the growth in prevalence of long-term performance plans is the increased prominence of performance plans in the mix of LTIs provided by companies. Long-term performance plans now represent approximately 52% of CEO total LTI compensation opportunities.

The increased prevalence and prominence of long-term performance plans have come primarily at the expense of stock options. Corporate America began using stock options in executive pay packages in the 1950s, with use peaking during the late 1990s tech boom and bull market for stocks. Today, even though stock options are granted to 54% of S&P 500 CEOs, they typically represent only 18% of CEO total LTI award value.