– Broc Romanek

Here’s a recent “Heard On The Street” column by the WSJ’s Stephen Wilmot:

A controversial new metric on executive pay is on Congress’s chopping block. Shareholders should want it to survive, even if it only provides a sliver of insight into the companies they own. Beginning next spring, possible repeal notwithstanding, companies will be required to publish a Bigwig vs. Regular Joe pay ratio, or the total earnings of the chief executive compared with those of the median employee.

Supporters of the rule, part of the post-financial crisis Dodd-Frank Act, hope disclosure at an individual-company level might focus more attention on inequality and sky-high CEO pay. The ratio has ballooned since the 1970s: The bosses of America’s 350 largest companies made on average 276 times the money of their rank-and-file subordinates in 2015, up from 30 times in 1978, according to the left-leaning Economic Policy Institute. Republicans want to repeal the requirement, along with other controversial bits of Dodd-Frank, as a way to trim compliance costs for companies. Some also argue the ratio isn’t instructive: Wal-Mart will have a higher one than Goldman Sachs , but that only indicates that Wal-Mart employs more unskilled workers than Goldman Sachs. Comparisons within the same sector are likely to get bogged down in discussions of how one company’s business model or geographic scope is different from another’s. The rollback made it through a House of Representatives bill in June. Whether it can clear the Senate in time for next spring’s proxy-statement season is anyone’s guess.

If the ratio survives, however, shareholders might find it a modestly useful addition to their analytical toolbox. The key insights will come from seeing how it evolves for a specific company over time. A widening ratio could be a warning flag that a management team is getting greedy. Executive pay ballooned in the financial sector before the 2008 banking crisis. Those companies that went bankrupt were particularly guilty of deteriorating pay practices, according to an analysis of governance ratings by analysts at Bank of America Merrill Lynch. Pay ratios could have made this more obvious at the time—and may help bring subsequent lapses to wider attention.

Knowing what the median employee at a company makes would also fill gaps in investors’ understanding, such as how the wage bill compares with other costs. Admittedly, the SEC only requires companies to update the calculation once every three years, so useful insights into how the median wage changes relative to profit, say, would take years to emerge.

That said, investors shouldn’t assume more thriftily paid bosses offer value for money. Simplistic studies can show an association between lower pay and higher returns, but this is partly because larger companies pay better while small-caps usually outperform large-caps. Adjusting for size, using actual realized rather than the estimated target pay disclosed in proxy filings, and factoring in the performance of previously awarded shares, PricewaterhouseCoopers found a strongly positive correlation between executive pay and three-year total returns for big U.K. companies. This is logical, given how much executive pay is triggered by return thresholds these days.

Investors should welcome any move toward greater transparency, but wield their new analytical tool with caution.

Coming Next Week! “Annotated Model Pay Ratio Disclosures”: For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in on July 20th – next Thursday! – for the first in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You Need to Do Now.”

When you go to the webcast page on July 20th, you will be able to download a set of “Annotated Model Pay Ratio Disclosures“ in both PDF & Word format. The second webcast is on August 15th; the third webcast is September 27th. Register for the “Pay Ratio & Proxy Disclosure Conference” to be able to access these webcasts.

– Broc Romanek

Although we have never urged disclosure of pay ratios, we have long advocated that boards use internal pay equity (essentially the same thing as pay ratios) as an alternative – and much more reliable – benchmarking tool to help set executive pay levels. For example, here’s an excerpt from a blog that I wrote five years ago:

Shouldn’t boards demand to see those ratios to protect themselves from liability given the known bad data in the peer group surveys they get year after year? Of course, advisors should be willingly recommending the use of this alternative since it’s their job to protect the board. Sadly, most advisors blindly adhere to the status quo as too often happens.

I just can’t see what is wrong with putting together internal pay numbers for a board to consider. Where is the evil here? I suppose the downside is it likely will reveal how badly the board has been doing its job setting CEO pay levels over the past 20 years when historical numbers are crunched. But it’s better to make a fix now than perpetuate the problem. Note that I am not saying boards need to demand the ratios as called for by Section 952(b) as simpler ratios are easy to generate. We have sample spreadsheets posted in the “Internal Pay Equity” Practice Area on CompensationStandards.com.

By the way, I also don’t see any problem with using peer group benchmarks either. It’s just that the data in those surveys now are useless due to “pay in the top quartile” craze. There needs to be a reset before that type of data can be relied upon again. This reset will be hard to do, but it’s necessary and certainly doable, particularly if CEO pay levels are brought down to Earth on a widespread basis. The longer boards wait, the harder the medicine will be to take.

Sadly, I don’t think much has changed during the five years that I wrote that blog. Here’s what a member who works with a lot of boards recently told me:

I have been surprised by the lack of board curiosity of the likely pay ratio. I thought they would be pressing management for an estimate. Instead, they seem to be unconcerned and the ratio will “be what it will be.” I think that is a Doris Day song from an Alfred Hitchcock movie.

Coming Next Week! “Annotated Model Pay Ratio Disclosures”: For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in on July 20th – next Thursday! – for the first in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You Need to Do Now.”

When you go to the webcast page on July 20th, you will be able to download a set of “Annotated Model Pay Ratio Disclosures“ in both PDF & Word format. The second webcast is on August 15th; the third webcast is September 27th. Register for the “Pay Ratio & Proxy Disclosure Conference” to be able to access these webcasts.

– Broc Romanek

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in on July 20th for the first in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You Need to Do Now.” When you go to the webcast page on July 20th, you will be able to download a set of “Annotated Model Pay Ratio Disclosures” in both PDF & Word format. The second webcast is on August 15th.

The speakers for the July 20th webcast are:

– Mark Borges, Principal, Compensia
– Mike Kesner, Principal-in-Charge, Human Capital Advisory Services, Deloitte Consulting LLP
– Dave Lynn, Editor, CompensationStandards.com and Partner, Jenner & Block LLP
– Maia Gez, Of Counsel, Gibson Dunn & Crutcher LLP

The speakers for the August 15th webcast are:

– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP

Register Now – 10% Discount Ends July 28th: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.

Among the panels are:

1. Corp Fin Speaks (speaker from the Staff to be announced)
2. The SEC All-Stars: A Frank Pay Ratio Conversation
3. Parsing Pay Ratio Disclosures: US-Only Workforces
4. Parsing Pay Ratio Disclosures: Global Workforces
5. Pay Ratio: Sampling & Other Data Issues
6. Pay Ratio: The In-House Perspective
7. Pay Ratio: How to Handle PR & Employee Fallout
8. The SEC All-Stars: The Bleeding Edge
9. The Investors Speak
10. Navigating ISS & Glass Lewis
11. Keynote: A Conversation with Nell Minow
12. Proxy Access: Tackling the Challenges
13. Clawbacks: What to Do Now
14. Dealing with the Complexities of Perks
15. The Big Kahuna: Your Burning Questions Answered
16. Hot Topics: 50 Practical Nuggets in 60 Minutes

Discounted Rates – Act by July 28th: 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 discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by July 28th to take advantage of the 10% discount.

– Broc Romanek

We have posted an 10-second anonymous survey about the extent to which your company is prepared to implement pay ratio. Please take a moment to participate – will take less than 10 seconds. There will be a healthy discussion of the different ways that companies are getting prepared for pay ratio during the pre-conference webcast – “Pay Ratio Workshop: What You Need to Do Now” – that takes places next week…

Coming Next Week! “Annotated Model Pay Ratio Disclosures”: For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in on July 20th – next Thursday! – for the first in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You Need to Do Now.”

When you go to the webcast page on July 20th, you will be able to download a set of “Annotated Model Pay Ratio Disclosures“ in both PDF & Word format. The second webcast is on August 15th. Register for the “Pay Ratio & Proxy Disclosure Conference” to be able to access these webcasts.

– Broc Romanek

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

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in on July 20th – next Thursday! – for the first in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You Need to Do Now.”

When you go to the webcast page on July 20th, you will be able to download a set of “Annotated Model Pay Ratio Disclosures” in both PDF & Word format. The second webcast is on August 15th. Register for the “Pay Ratio & Proxy Disclosure Conference” to be able to access these webcasts.

– Broc Romanek

Here’s the intro from this blog by Cooley’s Cydney Posner:

At more than half of the companies in the S&P 1500, the CEO is the lone board insider, according to this study and the related article in the WSJ. Isn’t that a good thing? Maybe not, say the authors, whose study showed that lone-insider boards can lead to lower profits, excessive CEO pay and more financial fraud.

The authors looked at data for companies in the S&P 1500 from 2003 to 2014 to examine the consequences of lone-insider boards. They found that lone-insider CEOs received on average “excess CEO pay,” that is, “pay above what objective factors, such as firm size and performance, would predict.” More specifically, they concluded that, “[o]n average, lone-insider CEOs received roughly 81% more pay a year than their peers. That’s an additional $4.6 million a year, which is money that could have been retained to fund growth strategies or returned to shareholders as dividends.”

They also found that CEO pay at companies with lone-insider boards was disproportionately higher than the pay of other key executives. CEOs who were lone insiders on their boards earned an average $7.39 million more than the average of the next four highest-paid executives, while CEOs who were not lone insiders made only $4.4 million a year more on average than the other executives. And here’s the stunner: according to the authors, “companies with lone-insider boards were 27% more likely to commit financial misconduct and…their profits were roughly 10% lower on average.” So much for good corporate governance?

– Broc Romanek

Here’s the results from our recent survey on compensation committee minutes & consultants:

1. When it comes to providing comp committee minutes to consultants, our company:
– Provides upon request in electronic form only – 41%
– Provides upon request in paper form only – 5%
– Provides upon request in both electronic & paper form – 11%
– Doesn’t provide – but does allow inspection onsite – 25%
– Doesn’t provide – nor allow inspection onsite – 18%

2. Our compensation consultants ask for copies – or inspection – of committee minutes:
– Prior to each meeting – 12%
– Once a year – 4%
– On irregular basis – 25%
– They never ask for them- 59%

Please take a moment to participate anonymously in these surveys: “Quick Survey on Reg FD Policies & Practices” and “Quick Survey on Board Approval of 10-K.”

– Broc Romanek

Here’s the intro from this Skadden memo:

The Trump administration’s proposed overhaul of the federal income tax system includes a reduction of the maximum federal corporate income tax rate from 35 percent to 15 percent. If enacted, the proposal — a one-page outline released on April 26, 2017, and titled “2017 Tax Reform for Economic Growth and American Jobs” — would introduce sweeping changes and simplifications to the federal income tax system.

While the corporate income tax rate is unlikely to be cut to 15 percent, considerable bilateral support exists in Congress for a significant reduction. Any change also would alter the value of corporate income tax deductions. For example, a deduction taken by a corporate taxpayer on a $1 million payment at a 35 percent rate is worth $350,000, while a deduction on the same amount at a 15 percent rate is only worth $150,000.

A change in value of corporate tax deductions could, with proper tax planning, provide opportunities for substantial savings on compensation plans and arrangements. In the short term, potential savings would be possible from tax deductions on annual cash bonus payments and retirement plan contributions, while the long-term impact could involve significant changes to the structuring of compensation plans.