If you ask most people about Keith Hernandez, some might recall his career as a professional baseball player – while more still would remember him from his recurring role on the immensely popular sitcom Seinfeld. But did you know he also holds the major league record for most game-winning RBIs in a season and all-time?
If you’re shaking your head, you’re not alone. Even major league baseball has discarded the stat because it’s virtually meaningless: it didn’t distinguish between a 1st-inning single in a lopsided game & a decisive home run in the bottom of the 9th.
Baseball – a sport driven by statistics and numerical analytics – got rid of a stat because it failed to provide meaningful information. Public companies now have their own version of the game-winning RBI statistic – it’s known as “pay ratio.”
This new report from Semler Brossy about the latest say-on-pay and pay ratio results & disclosures is chock full of useful charts & graphics. Check it out!
Since the SEC provided companies with some flexibility, there has been a debate as to where a pay ratio should be disclosed within a proxy statement – we cover this starting on page 72 of our “Pay Ratio” chapter in our Treatise. But where within the proxy pales in comparison to whether a company highlights its pay ratio on its online proxy or “Investor Relations” page.
That’s why I found what United Techologies did to be so notable – they broke out the disclosure of its pay ratio onto a separate page on its site. If you scroll down on the home page of the company’s interactive proxy, you’ll see a tab for “CEO Pay Ratio” in the 3rd row, two spots in from the left. Kudos…
By the way, here are the pay ratio extremes so far: Kinder Morgan – 3.7; Mattel – 4987 (supplemental ratio excluding one time awards of $22 million lowers it to 1527).
Efforts to conserve an equity plan’s share reserve should begin the day the issuer’s stockholders approve the plan (or share increase), and should continue going forward. Issuers that do not make such efforts tend to face problems relating to dwindling share reserves, including moving to cash-based programs, hiring proxy solicitation firms to garner stockholder support for share increases, and overcoming possible negative reactions from ISS.
We have found that most companies are arming their managers with FAQs rather than delivering a set of FAQs to employees directly. Obviously, you’ll need to modify our sample FAQs to best fit your circumstances…
By the way, this pay ratio article about Wal-Mart was trending #1 on my Facebook feed yesterday…
I have a toddler at home. I’ve noticed that when I “motivate performance” by taking away toys, I may get the result that I want in the moment. But in the long-term, I’m just teaching him to do the bare minimum to regain his prize – not the result I’m going for. This “Harvard Law” blog suggests that the same logic might apply to CEOs. Here’s an excerpt:
Boards often cut CEO pay following poor performance. These pay cuts can go beyond the general pay-for-performance relation. Agency theory suggests that such pay cuts can act as a disciplining mechanism against the CEO and, therefore, can lead to better performance in subsequent periods. Consistent with this line of reasoning, there is some empirical evidence that firm performance improves following a CEO pay cut.
The article – “Accounting & Economic Consequences of CEO Paycuts” – examines the possibility that cutting the pay of an incumbent CEO might also induce an adverse response. Specifically, whether – in response to pay cuts – CEOs actually increase their efforts to improve the underlying economic performance of the firm, or simply resort to managing measured performance through activities such as accruals manipulation and real activities management. These latter activities may be designed to boost reported earnings in the short-run at the expense of long-term shareholder value. Since CEO pay is often linked to reported earnings performance, CEOs have incentives to engage in earnings management after a pay cut because such activities can lead to faster improvement in reported performance – and hence to speedier restoration of their pay to prior levels. Thus, the efficacy of a CEO pay cut as a disciplining mechanism is unclear.
As reflected in this deck, Deloitte Consulting just completed a review of 293 “S&P 500” companies that have filed their proxies as of April 10th. Here are the highlights:
– Median pay ratio is 153:1
– Median employee’s total annual compensation $70,867
– 21% of companies disclose information about the median employee’s employment status, geographic location and/or role
– Pay ratio and median employee’s total annual compensation varied significantly across industries. As expected, consumer discretionary (i.e., “retail”) had the highest median ratio of 396x and lowest median employee compensation at $32k while utilities had the lowest median ratio of 96x and second highest median employee compensation at $122k)
– Larger companies (in terms of revenue) had higher median ratios than smaller companies; however, the median employee’s pay did not correlate with revenue size
– 51% of companies chose a date other than the fiscal year end as the measurement date
– CACM used to identify the median employee varied significantly, with total cash compensation used by 32%, base pay and wages 23%, W-2 wages 20% and total direct compensation at 18%
– Only 8% used statistical sampling
– Only one company adjusted pay for the cost-of-living (CEO lives in Switzerland)
– 16% of companies added health benefits to total annual compensation
– 81% of companies placed the pay ratio disclosure immediately following the termination tables, while only 4% included it in the CD&A
This Deloitte memo explains why director pay is a “hot topic” & summarizes popular structures to consider. But one stat surprised me – 18% of boards don’t review director pay annually. This is risky because ISS will recommend a vote against committee members if director pay is “excessive” in two or more consecutive years.
According to the memo, here are six other practices to avoid:
1. Excessive pay levels set based on an inappropriate peer group
2. Performance-based pay
3. Significant use of stock options instead of full value share awards (e.g., restricted stock or restricted stock units)
4. Perquisites (with the possible exception of matching contributions to charitable organizations)
5. Payment of compensation despite missed meetings
6. Retirement benefits, such as pensions and retiree medical
Cryptocurrency isn’t just for capital raising. This MoFo memo speculates that it’s also an emerging compensation trend – especially at cyrpto companies themselves – and explains what rules apply. Token awards are driven by the same securities & tax law considerations that apply to more familiar equity awards (see this memo about tax stuff). Companies who use cryptocurrency pay would have to figure out some novel questions. But if they’re in the industry, they’re probably used to that. And maybe there’d be cost savings when it comes to tracking awards – as well as possible upside from the tokens. Here’s an excerpt from the memo:
Whereas the market for compensatory equity is well understood, compensatory token-based awards raise new questions for companies to answer: Should the company offer both equity and token incentive awards? What percentage of tokens to be generated should be reserved for awards to service providers? Should token-based awards be allocated among service providers in the same proportions as traditional equity-based awards?
In any event, we do know that tokens may present solutions to some problems with traditional equity-based awards. For example, token-based awards can be automated using smart contracts, which could decrease administrative costs and errors that are sometimes incidental to equity-based awards. In addition, they more directly incentivize employees to develop the company’s product portfolio so as to expand the application and value of the awarded tokens. And of course, token-based awards can be a non-dilutive form of executive compensation.
In today’s political climate, it’s a tricky thing to employ non-US workers to keep costs down – and maybe not something you want to publicize. But when it comes to pay ratios, it could be nice to talk about those segments of lower-paid workers – in order to exclude or explain their impact. And therein lies the dilemma. This recent Cooley blog (and this WSJ article) provides more detail:
According to the WSJ article, in a sample of over 180 companies in the S&P 500, about a third have so far disclosed the proportion of the workforce that is located overseas. (In March, Mercer reported that 51% of companies with global employees were using the de minimis exclusion for non-US employees. And that percentage could increase as companies become aware of practices of their competitors and increase the sophistication of their methodologies over time.)
And in another case, almost 90% of the company’s employees were located overseas – mostly in Central America, the Caribbean and Asia. Consequently, the median employee made only $5,237, while the CEO made just under $10 million. This resulted in a pay ratio of 1,830 to one – certainly an outlier. The company spokesman told the WSJ that “the company provided the extra detail because it is one of the few U.S. publicly traded apparel companies to own a majority of its international supply chain instead of outsourcing the garment work to third parties—which means many company employees live in lower-cost countries.” Because employment of foreign workers in lieu of US workers is a prickly issue, other companies have explained, where appropriate, that “the expansion of their workforce abroad isn’t about shipping jobs to low-cost countries, but rather about employing workers closer to customers.”