This “Stanford Law Review” article suggests that for some companies, executive pay could become about 20% more expensive following the repeal of Section 162(m). As I’ve previously blogged, companies could limit their tax burden by increasing fixed pay & time-vested awards as a portion of total compensation – but most people think that performance awards are here to stay. The professors advocate for a new rule that would require companies to disclose the tax cost of executive pay, so that shareholders have full information.
By the way, here’s a slew of memos about the new tax reform law…
Earlier this year, Broc blogged that State Street would start using “abstain” votes on pay proposals for which it previously would’ve cast a qualified “yes.” State Street has now circulated this memo to clarify the types of situations this “abstain policy” will apply to. The situations include:
– Large one-time payments that can’t be justified or explained
– Lack of adequate disclosure or some concerns with performance metrics but recognition of strong long-term performance etc.
– Where companies have responded to some but not all of State Street’s concerns
State Street has also released its “2017 Corporate Responsibility Report” – which highlights its progress on improving the environment, corporate citizenship and diversity & inclusion.
You don’t see this often. A complaint has been filed in US District Court – Eastern District of New York to enjoin shareholders from voting on two compensation committee members of Live Nation due to alleged misleading statements in the CD&A. The contested statements in the CD&A relate to whether the company achieved performance targets – and then whether the math is correct over whether bonuses & restricted stock awards were properly based on hitting targets. This lawsuit has now been withdrawn…
Yesterday, I blogged about why you might want to have a clawback policy in place – maybe one that’s even broader than what would be required under Dodd-Frank. I recognize, though, that this might be a hard sell at many companies. The policies can be difficult to implement and can hamper recruitment efforts. This Shearman & Sterling blog suggests a compromise: the “quasi-clawback,” which means forfeiture of amounts that haven’t been earned – or that have been earned, but not paid. According to the blog, here are a few ways to go about that:
1. Forfeiture of unvested incentive based compensation. Compensation committees should consider retaining the discretion to reduce or eliminate target amounts of unearned incentive compensation upon uncovering behavior by an employee warranting such reduction or elimination.
2. Deferred payment of earned incentive-based compensation. Once performance-based compensation has been earned (i.e., the targets have been achieved), consider delaying payment for a period of time to ensure there was no inappropriate risk-taking in earning the compensation. Upon discovery, the compensation can be forfeited without the need for a clawback.
3. Forfeiture of non-qualified deferred compensation. Although Section 409A of the tax code prohibits the use of non-qualified deferred compensation to offset current obligations, forcing a forfeiture of otherwise vested but deferred compensation can be utilized as a form of punishment for so-called “bad actors.” This type of provision may be the most troubling from a recruitment standpoint as it places a portion of retirement savings at risk.
Broc’s blogged about how we probably won’t see SEC rules on clawbacks anytime soon – it’s not a high priority for the SEC since companies are doing a decent job adopting, disclosing & exercising clawbacks on their own. In fact, some call misconduct clawbacks “directors’ best friends,” since they can save boards from no-vote campaigns in the midst of a scandal.
This Semler Brossy memo outlines the business case for having a clawback policy right now – and explains why it might be good to have one that’s even broader than what the Dodd-Frank rules would require. Check out the charts in the memo that show CEO pay & clawbacks as compared to the loss in market value for recent high-profile corporate scandals.
As I blogged yesterday, the consumer discretionary industry is shaping up to have the highest average pay ratios – 977:1 among the S&P 500. That compares to a supposedly ideal ratio among consumers of 7:1, according to this study. And while the high numbers aren’t surprising given the workforce for most of those companies, this WSJ article says it could impact their bottom line. Here’s the high points:
A recent study found that consumers are significantly less likely to buy from companies with high CEO pay ratios. First, it found that sales declined for Swiss companies when their high pay ratios were publicized.
In a follow-up experiment, people had the chance to win a gift card to one of two retailers. In the absence of pay-ratio information, 68% of people chose one retailer’s card and 32% chose the other. But when participants were informed that the first of those retailers had a 705:1 pay ratio and the second had a 3:1 ratio, just 44% of people chose gift cards from the first retailer while 56% chose the second.
It’ll be interesting to see whether this holds true in “real life,” where customers probably aren’t looking at pay ratios at the same time they’re making a purchase – and may not have the option to buy from a company with a 3:1 ratio. The lowest ratios I’ve seen for that industry are around 100:1.
By the way, here’s this CNBC piece entitled “Companies with Closer CEO Pay Ratios May Generate Higher Profit Per Worker.”
A member of Congress is now using pay ratio data to examine income inequality. This study from Rep. Keith Ellison’s staff (D-Minn) looked at pay ratios from 225 large companies that were responsible for employing more than 14 million workers. When it comes to “extreme gaps,” it “names names” – and it also seems to assume that companies that excluded portions of their workforce were doing so to keep their ratio down.
This article describes the findings – here are the main ones:
1. Pay ratios ranged from 2:1 to 5000:1. The average was 339:1 – compared to 20:1 in 1965
2. 188 companies had a ratio of more than 100:1 – so the CEO’s pay could be used to pay the yearly wage for more than 100 workers
3. Median employees in all but 6 companies would need to work at least one 45-year career to earn what their CEO makes in a single year
4. The consumer discretionary industry had the highest average pay ratio – 977:1
I think it’s easy to become numb to high CEO pay when you work with it all the time and you’re focused on the mechanics of programs and disclosures. This study is a reminder that no matter how useless pay ratio seems to companies, people outside of this field are paying attention – and they’re synthesizing the data not just to compare companies, but to show that outsized executive pay is a pervasive issue that interests many.
This blog from Meridian’s Bob Romanchek notes a “small but emerging trend” of granting fully-vested stock to directors – with a holding requirement. Here’s an excerpt:
The whole concept of vesting — it really doesn’t make sense for outside directors. They are elected; they’re not employees. Also the vesting term has changed. About five years ago, the majority practice was three-year vesting. When we had classified boards with staggered three-year terms, three-year vesting made sense. Over the last couple of years, the practice has changed very quickly. The majority of board directors are elected every year – and the equity vesting schedule now matches that.
In addition, there are now about 10 to 15 percent of companies that provide outright director stock grants with no vesting whatsoever. I think that’s an increasing trend – grant shares outright, with holding requirements.
The blog also addresses some other trends – such as lead director pay, shareholder ratification of director pay limits and proxy advisor policies on “excess” director compensation.
This memo from Gallagher’s Jim Reda asks the question that’s been on everyone’s mind this year: how will the repeal of the Section 162(m) performance-based exception for tax deductions affect incentive programs, particularly after a decade of steady stock option decline and increasing prevalence of “performance-based” awards? Here are some of Jim’s predictions:
1. ISOs will regain some popularity – but the use of non-qualified options will decline & stock option programs will be redesigned to maximize executives’ tax benefits
2. Fixed pay & time-vested awards will increase as a portion of total compensation
3. SERPs and other non-qualified deferral programs will make a comeback
4. CEO pay growth will slow
Ultimately, though, Jim predicts that performance awards are here to stay. Not only do many states have tax laws based on the pre-Tax Reform version of 162(m), but shareholders & proxy advisory firms continue to demand a connection between pay & performance. And don’t forget that written binding contracts in effect on November 2, 2017 are grandfathered in – as long as they aren’t materially modified.
Although “pay ratio” taxes have been proposed in seven jurisdictions, Portland is the only one to-date that’s enacted a tax surcharge based on pay ratios. This blog from Meridian’s Don Kalfen has a handy chart summarizing the proposals & their status. Don also gives this commentary:
The recent disclosures of CEO pay ratios has neither caused a flood of new jurisdictions proposing taxes linked to a company’s CEO pay ratio nor any meaningful movement on outstanding legislative proposals. We believe this reflects the largely symbolic nature of these tax proposals, which do not appear to have broad-based legislative support. In fact, the California proposal is the third attempt to pass such legislation in that jurisdiction. At this juncture, we would be surprised if any of these proposals were enacted.