– Broc Romanek

This blog by Margaret O’Hanlon provides some nice thoughts about how to handle the looming pay ratio conversation with employees and others. Here’s an excerpt:

So what good CAN you make of it? Well, your blueprint can address what employees DO after the announcement, which you are much more likely to have some influence on than their strong impulsive reactions. When it comes to imagining what employees could do that would be more constructive than feeling without thinking, my mental picture includes employees who:

– Don’t immediately verbally overreact to the numbers
– Are willing to listen to the rationale for the numbers with an open mind, even though they are skeptical (or more)
– Are able to spend a limited time mulling over with their colleagues what they have heard
– Won’t go on social media to comment on the announcement

Margaret’s second blog on this topic is even better than her first. Here’s an excerpt from that:

Use end-of-the-year focal review and merit pay communications. Articulate, repeat and reinforce what you do to make sure employee pay is competitive, how your practices are fair and how employee salaries are only one part of your company’s whole reward package. If you have made changes based on employee input, be sure to point this out,too. Evidence of a solid relationship based on responsiveness to employee needs will go a long way towards defusing employee disdain for select policies and practices — as long as employees would agree that you’ve been responsive.

Use people not technology. Distancing the message from the personal will leave your company open to employee claims that leadership is ducking responsibility. Identify a spokesperson to present the details of the CEO Pay Ratio, back it up with email or intranet information, but be sure that your communication strategy gives employees a chance to discuss their reaction with someone that they can open up to.

Train your managers. Whether or not you choose to use them as a primary communication channel, they will be. Every bit of research going back decades indicates that managers are employees’ preferred and trusted information source. Be sure they are able to handle employee questions well and that they are not afraid to talk about the findings in a group. If they have employees whose salaries fall near the median, odds are they will receive tough, candid questions that they will need to handle well.

Tune in next Tuesday, December 5th for the webcast — “Your Upcoming Pay Ratio Disclosures” – to hear Compensia’s Mark Borges, Gibson Dunn’s Ron Mueller, Wilson Sonsini’s Dave Thomas and Cooley’s Amy Wood discuss all the latest about how to comply with the new pay ratio rule.

– Broc Romanek

With our next pay ratio webcast coming up soon – next Tuesday, December 5th – thought I would remind you that we continue to post memos from various folks about what to do now in our “Pay Ratio” Practice Area.

It’s Done: 2018 Executive Compensation Disclosure Treatise: We just wrapped up Lynn, Borges & Romanek’s “2018 Executive Compensation Disclosure Treatise” — and it’s been printed. This edition has a major update to the key chapter on the new SEC’s pay ratio rules (now 120 pages long!) & more – this includes the latest pay ratio guidance from the SEC in September. All of the chapters have been posted in our “Treatise Portal” on CompensationStandards.com.

How to Order a Hard-Copy: Remember that a hard copy of the 2018 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1650-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.

– Broc Romanek

Here’s the intro from this note by Board Advisory’s Paul McConnell:

Much has been written about NFL Commissioner Roger Goodell’s contract extension and Dallas Cowboys President Jerry Jones’ objections to the amount he can earn and the lack of rigorous performance criteria. While Jerry might be right, I think the bigger issue is a classic example of misalignment between owners and the executive.

Owners earn a healthy annual return on their investment. But the serious money is made from the growth in the value of the franchise. The franchise value grows tax-free over time from enhanced TV contracts, merchandising, stadium deals, operating management and keeping the stadiums filled. When the franchise is sold, the gain is taxed at favorable long-term rates.

From press accounts, it appears that the contract being discussed is a collection of bonus arrangements designed to reward the Commissioner for improvements in the various metrics that drive the franchise value. One of the arguments is whether the performance goals are sufficiently difficult or if the bonuses are just disguised salary. This is a typical “managerial” approach to compensation – pay me for the things I can control and I’ll “manage the hell out of them”. Its not a contract compatible with the group of entrepreneurs that own the place. In a public company this would be like paying the CEO huge annual bonuses, but no stock.

– Broc Romanek

As noted on their blog, Glass Lewis posted 54 pages of ’18 policy updates last week, which includes a summary of the policy changes on the first page (we’re posting memos in our “Proxy Advisors” Practice Area). As the blog notes, the updates include:

– Feature increased discussion of board gender diversity in our reports, including a phased policy that will see nomination committee chairs targeted with against/withhold recommendations if boards do not include a female director, or provide a cogent explanation for their absence, by 2019;
– Set out our phased policy on virtual-only meetings, which from 2019 will hold governance committees accountable if shareholders are not offered the same rights and opportunities to participate as at a physical meeting;
– Address the emergence of proxy access in international markets, including Canada, and explain our rationale for approaching such proposals in the context of the regulatory landscape;
– Harmonize our approach in areas such as board responsiveness and dual-class share structures, including within the context of recent IPOs and spin-offs; and
– Clarify our methodologies, including for our pay-for-performance (P4P) grades and treatment of outside commitments for NEOs, and on shareholder proposals relating to climate change and proxy access.

– Broc Romanek

Yesterday, as noted in this FW Cook blog, ISS released these “Preliminary” Compensation FAQs, which provide insight into ISS’ updated quantitative pay-for-performance screening methodology and its Equity Plan Scorecard (EPSC) evaluation for stock plan proposals. “Final” FAQs are expected in a few weeks…see this note from Ed Hauder for more…

– Broc Romanek

Here’s a nice memo from Willis Towers Watson providing analysis of whether investors truly care about pay ratio – in particular, dissecting the ISS survey on this topic…

– Broc Romanek

Last week, ISS released its revised policy voting guidelines for 2018. We’re posting memos in our “ISS Policies & Ratings” Practice Area. Here’s an excerpt from this Wachtell Lipton memo (also see this Davis Polk blog):

1. Shareholder Rights Plans. In order to “simplify” ISS’s approach to rights plans and “to strengthen the [ISS] principle that poison pills should be approved by shareholders in a timely fashion,” ISS will now recommend voting against all directors of companies with “long-term” (greater than one year) unilaterally adopted shareholder rights plans at every annual meeting, regardless of whether the board is annually elected. Short-term rights plans will continue to be assessed on a case-by-case basis, but ISS’s analysis will focus primarily on the company’s rationale for the unilateral adoption.

2. “Excessive” Non-Employee Director Compensation. ISS will recommend voting against or withholding votes from members of board committees responsible for setting non-employee director compensation when there is a “pattern” (over two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Because “excessive” pay would need to be flagged for at least two years under the new policy, ISS will not make negative vote recommendations on this basis until 2019.

3. Disclosure of Shareholder Engagement. In considering whether to recommend against compensation committee members of companies whose Say-on-Pay proposals received less than 70% of votes cast, ISS considers the company’s disclosure regarding shareholder engagement efforts. ISS provided guidance regarding the level of detail included in such disclosures, including whether the company disclosed the timing and frequency of engagements with major institutional investors and whether independent directors participated; disclosure of the specific concerns voiced by dissenting shareholders that led to the Say-on-Pay opposition; and disclosure of specific and meaningful actions taken to address the shareholders’ concerns.

4. Gender Pay Gap Proposals & Board Diversity. ISS will vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy and its fair and equitable compensation practices. ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers. ISS also noted that it would highlight boards with no gender diversity, but would not make adverse vote recommendations due to a lack of gender diversity. In addition, ISS revised its “Fundamental Principles” to state that boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.

In Canada where there are new disclosure requirements on companies’ gender diversity policies, ISS is introducing a new policy on board gender diversity that will generally recommend withhold votes for the chair of the nominating committee if a company has not adopted a formal written gender diversity policy and no female directors serve on its board.

5. Pledging of Company Stock. ISS has codified its existing practice to recommend withhold votes against the members of the relevant board committee or the entire board where a significant level of pledged company stock by executives or directors raises concerns absent mitigating factors.

6. Pay-for-Performance Analysis. In connection with its pay-for-performance analysis, ISS will consider, in addition to other alignment tests, the rankings of CEO total pay and company financial performance within a peer group measured over a three-year period.

7. Other Changes. ISS has further revised its voting recommendations on climate change shareholder proposals in order to promote greater transparency on these matters.

– Broc Romanek

Love this blog by “As You Sow” because it points out a number of “real life” examples of companies that exercised “negative discretion.” Check it out!

Also see this “As You Sow” blog about companies adopting compensation best practices; getting rid of the worst ones…

– Broc Romanek

Following up on yesterday’s mid-morning blog, here’s the news from this FW Cook blog:

Last night, Senate Finance Committee Chairman Hatch released the first amendments to the Senate’s version of the Tax Cuts and Jobs Act. Amendments related to executive compensation largely mirror changes that were made to the House version of the bill last week. An important change was the deletion of new rules that would have taxed non-qualified deferred compensation (including non-qualified stock options) upon vesting. This means non-qualified stock options will continue to be taxed upon exercise and Section 409A lives on to govern deferred compensation.

The Senate bill also now includes a provision (also in the House bill) allowing tax deferral for “qualified equity grants” at privately-held companies, potentially until the earlier of five years after option exercise/RSU vesting or IPO.

There were no changes to the bill’s modifications to Section 162(m), which call for elimination of the exception for “performance-based compensation” from the $1 million deductibility limit for compensation of certain senior executives. While the House and Senate bills remain subject to change, the recent amendments should be a welcome development for companies as it relates to planning upcoming equity awards.

Also see this MarketWatch article. We’ll continue to post memos as they come in…

– Broc Romanek

As reflected in this Senate tax bill markup, the Senate bill has been amended to reflect how the House bill was amended late last week to preserve Section 409A. I haven’t done a complete analysis of where the executive pay provisions stand in the Senate bill (I’ll blog that tomorrow or you can read the markup now) – but I can report that Section 409B has been killed thankfully…