– Broc Romanek

This FEI blog discusses this recent study that shows that CEOs at companies that rely on non-GAAP metrics tend to earn higher compensation. The upshot is that CEOs of S&P 500 companies that made large positive adjustments to non-GAAP earnings between 2010 and 2015 got paid $2.7 million (or 23% more) on average more than their expected annual compensation if GAAP numbers were used…

– Broc Romanek

Here’s an excerpt from this column by NY Times Gretchen Morgenson:

It remains unclear, though, whether the company’s executives will take a financial hit for the failures that allowed thieves to steal Social Security numbers, driver’s license numbers and other sensitive data. Indeed, Equifax’s top managers may not feel any financial ill effects, given the company’s past compensation practices.

Over the last three years, when Equifax determined its top executives’ incentive compensation, it has used a performance measure that excluded the costs of legal settlements made by the company. If it follows this practice after dealing with the costs of settling legal claims arising from the security breach, Equifax’s top managers will essentially escape financial accountability for the blunder.

This troubles Charles M. Elson, a professor of finance at the University of Delaware and the director of its John L. Weinberg Center for Corporate Governance. “To the investors in the company, the legal settlement does impact earnings and stock price,” Mr. Elson said in an interview. “If the shareholders suffer because of this breach, why should management be excluded? These folks take home all of the upside and want none of the down.”

– Broc Romanek

A few days ago, ISS released the survey results for its upcoming policy changes – with findings including:

– Pay Ratio Disclosures – ISS asked respondents how they intend to analyze data on pay ratios. Somewhat surprisingly, only 16 percent indicated that they are not planning to make use of this new information. Nearly three-quarters of the investor respondents indicated that they intend to either compare the ratios across companies/industry sectors, or assess year-on-year changes in the ratio at an individual company or use both of these methodologies. Of the 12 percent of investors who selected “other” as their response, some of them indicated a wait-and-see approach while other comments indicated uncertainty or concerns regarding the usefulness of the pay ratio data. Among non-investor respondents, a plurality (44 percent) expressed doubt about the usefulness of such pay ratio data.

Today’s Pre-Conference Webcast: “How to Apply SEC’s Pay Ratio Guidance”

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in today – 2 pm eastern (audio archive goes up when the program ends; transcript available in a week or so) – for the third in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You (Truly Really) Need to Do Now.” There will be a heavy emphasis on “what now” given the SEC’s new guidance.

The speakers for today’s webcast are:

– Mark Borges, Principal, Compensia
– Ron Mueller, Partner, Gibson Dunn
– Dave Thomas, Partner, Wilson Sonsini
– Amy Wood, Partner, Cooley

Register Now: This is the only comprehensive conference devoted to pay ratio – and it’s only three weeks away! 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. Register today.

– Broc Romanek

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in tomorrow – 2 pm eastern (audio archive goes up when the program ends; transcript available in a week or so) – for the third in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You (Truly Really) Need to Do Now.” There will be a heavy emphasis on “what now” given the SEC’s new guidance.

The speakers for tomorrow’s webcast are:

– Mark Borges, Principal, Compensia
– Ron Mueller, Partner, Gibson Dunn
– Dave Thomas, Partner, Wilson Sonsini
– Amy Wood, Partner, Cooley

Register Now: This is the only comprehensive conference devoted to pay ratio – and it’s only three weeks away! 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. Register today.

– Broc Romanek

In our “Pay Ratio” Practice Area, we’ve already posted nearly a dozen memos on the SEC’s new pay ratio guidance – many more to come! And Wednesday’s pre-conference webcast will be deciphering this new guidance as well…

Meanwhile, I’ve asked my HQ to ascertain what is “capacity” for attending our upcoming comprehensive “Pay Ratio & Proxy Disclosure Conference” in DC since there’s been a mad rush. If you want to attend “in person” in DC – rather than by video webcast – you should register soon since it may reach capacity. The two-day event is less than three weeks away…

– Broc Romanek

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in next Wednesday, September 27th – 2 pm eastern (audio archive goes up when the program ends; transcript available in a week or so) – for the third in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You (Truly Really) Need to Do Now.”

This webcast has taken on even higher importance given all of the SEC’s new pay ratio guidance that I blogged about last night (Mark blogged it too). Between this webcast – and the 20-plus panels of our two-day “Pay Ratio & Proxy Disclosure Conference” coming up in three weeks, you simply can’t afford to miss this year’s event (either in-person in DC or by video webcast; video archive available too).

The speakers for Wednesday’s webcast are:

– Mark Borges, Principal, Compensia
– Ron Mueller, Partner, Gibson Dunn
– Dave Thomas, Partner, Wilson Sonsini
– Amy Wood, Partner, Cooley

Register Now: 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. Register today.

The first webcast was on July 20th; the second webcast was August 15th (transcript & audio archive available for both).

– Broc Romanek

A few hours ago, the SEC – and Corp Fin – unleashed a torrent of guidance on the pay ratio rule – including this 7-page interpretive release, this detailed guidance from Corp Fin on calculating pay ratios – and one new, one revised & one withdrawn CDI.

This guidance is huge. For example, I am reading the interpretive guidance on sampling – and it appears to be far more expansive than what I’ve heard consultants have been recommending. In fact, I immediately lengthened the time allotted for the “sampling” panel during our upcoming comprehensive “Pay Ratio & Proxy Disclosure Conference” given that the standard for using sampling is now basically “not unreasonable & not in bad faith.”

I think a lot more folks are going to be using sampling than before. And you will want to hear how to do it. Our “Pay Ratio” conference is just three weeks away!

So the interpretive release lays out the SEC’s views on the use of reasonable estimates, assumptions and methodologies – as well as the statistical sampling permitted by the rule. It also clarifies that companies may use appropriate existing internal records in determining whether to include non-US employees & in identifying the median employee – and provides guidance as to when widely-recognized tests may be used to determine whether workers are employees.

Corp Fin’s guidance on calculating pay ratios supplements the interpretive release. Topics addressed include:

– Ability of companies to combine the use of reasonable estimates with statistical sampling or other reasonable methodologies
– Examples of various sampling methods & the permissibility of using a combination of sampling methods
– Examples of situations where registrants may use reasonable estimates
– Examples of other reasonable methodologies & the permissibility of using a combination of reasonable methodologies
– Hypothetical examples of the use of reasonable estimates, statistical sampling & other reasonable methods

Finally, Corp Fin also updated the Reg S-K CDIs addressing pay ratio to reflect changes wrought by the new interpretive release:

– Revised CDI 128C.01 was updated to add a reference to the new interpretive release – which clarifies that CACMs can be formulated with internal records that reasonably reflect annual compensation, even if the records don’t include every pay element, such as widely distributed equity
– New CDI 128C.06 addressing the permissibility of referring to a pay ratio as an “estimate” was added
– Withdrawn CDI 128C.05, which addressed classification of a worker as an independent contractor v. an employee was withdrawn

Next Wednesday’s Webcast: “Pay Ratio Workshop – What You (Truly Really) Need to Do Now”

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in next Wednesday, September 27th – 2 pm eastern (audio archive goes up when the program ends; transcript available in a week or so) – for the third in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You (Truly Really) Need to Do Now.” The first webcast was on July 20th; the second webcast was August 15th (transcript & audio archive available for both).

The speakers for Wednesday’s webcast are:

– Mark Borges, Principal, Compensia
– Ron Mueller, Partner, Gibson Dunn
– Dave Thomas, Partner, Wilson Sonsini
– Amy Wood, Partner, Cooley

Register Now: 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. Register today.

– Liz Dunshee

In 2013, New York adopted some interesting regulations – capping executive pay at “covered providers” (hospitals, health insurers & other entities that provide public benefits in exchange for state funds). The rules were – of course – challenged, and a NY appellate court recently issued its opinion in LeadingAge New York v. Shah.

The court found the pay cap was okay to the extent that the costs are paid for by state funds – but that it’s unconstitutional to restrict executive pay that’s funded by non-state dollars. Since another court previously upheld the full pay cap, this opinion creates a split in the NY Appellate Division.

This Greenberg Traurig memo gives more background. Here’s an excerpt:

The 2013 regulations established a “hard cap” prohibiting Covered Providers from using state funds to provide compensation greater than $199,000 to any Covered Executive, as well as a “soft cap,” which prohibits the Covered Executive from receiving more than $199,000 — regardless of the source of the funds — unless, the compensation: (1) is no greater than the 75th percentile of compensation provided to comparable executives affiliated with comparable providers, consistent with the findings in a compensation survey recognized by the Division of Budget; and (2) has been approved by the Covered Provider’s board of directors or other governing body, including at least two independent directors or members.

In partially upholding the cap, the court found that the Department of Health has broad statutory authority to regulate the use of public funds, enter into contracts, and “ensure the provision of ‘high-quality medical care,” particularly in the Medicaid program. Justice Peters acknowledged, however, that “none of the . . . statutes expressly authorize[] the creation of the administrative cost and executive compensation limits.” But authority exists simply because they “are not inconsistent with the . . . statutory provisions or their underlying purpose of obtaining high-quality services with limited available funds.”

However, “by attempting to regulate executive compensation from all sources, DOH was acting on its own ideas of sound public policy; venture[d] outside [its] legislative mandate to manage the efficient and effective use of taxpayer money for health care and related services; [and] has no special expertise in administering regulations governing overall executive compensation or competence in regulating corporate governance as much.” Thus, this portion of the pay cap violates the separation of powers doctrine and is invalid.

– Liz Dunshee

The JOBS Act turned five in April – which means many EGCs are due to exit their scaled disclosure regime. This Aon/Radford memo suggests that exit planning should begin at least 6-12 months before filing the first post-EGC 10-K. It includes a handy chart comparing EGC and non-EGC disclosure requirements – and lots of tips. Here’s a teaser:

Planning early for post-EGC disclosure and voting requirements is critical in the present environment. Additional disclosures in combination with the requirement to hold Say-on-Pay votes expose former EGC companies to dramatically more scrutiny from investors and proxy advisory firms.

We recommend educating your board on potential governance changes and starting the investor outreach process well in advance of the first full filings in order to anticipate potential investor discontent and reduce the likelihood of unfavorable votes. A critical first step is cataloguing each of the practices that will be disclosed for the first time in your CD&A to compare against the proxy voting policies of the company’s significant shareholders.

Questions to ask include:

– Do the company’s equity practices qualify as sufficiently “performance-based” to withstand scrutiny from shareholders and proxy advisory firms, in the event that the firm’s pay-for-performance policies are triggered?

– Has the company adopted (or should it consider) stock ownership guidelines, clawback policies, and other “risk mitigating” policies that garner more favorable treatment in Say-on-Pay voting?

– Is the company benchmarking pay against a peer group that shareholders and proxy advisory firms would find objectionable?

– Liz Dunshee

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” we have just posted this invaluable set of course materials: The “Pay Ratio Employee Considerations” Guide. For many companies, the biggest issue related to the new pay ratio rule is how to message employees who might be angry about how their pay relates to the pay ratio median – not to mention the CEO’s pay package.

We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. This topic will be addressed numerous times during the two days of the upcoming “Pay Ratio & Proxy Disclosure Conference” in mid-October – and it will also be addressed in our third pre-conference webcast coming up next week (on Wednesday, September 27th).

More Course Materials: “How to” Pay Ratio Manual (w/ 138 Practice Nuggets) – For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” we have just posted this invaluable set of course materials: “How to” Pay Ratio Manual (w/ 138 Practice Nuggets). This is 55-pages of practice pointers that you need now to prepare for pay ratio.

We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.

Register Now: 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. Register today.