– Liz Dunshee

This study examines empirical evidence to conclude what most deal lawyers already know: advisory votes on golden parachutes aren’t very effective when it comes to curbing excessive pay. Institutional investors oppose golden parachutes in principle – and the failure rate for proposals has been increasing – but overall, caveats in voting policies result in higher support than you might expect. And as long as the deal’s approved, there’s not there’s not much of a consequence if some shareholders object to the severance arrangements.

The professors recommend adding some “teeth” to these votes. Here’s the intro:

We find that the Say-on-Golden-Parachute (“SOGP”) voting regime is significantly less promising than Say on Pay in controlling compensation. First, proxy advisors appear more likely to adopt a one-size-fits-all approach to recommendations on SOGP votes, focusing mainly on the presence of an excise tax gross-up provision and secondarily on aggregate payouts if extreme.

Second, shareholders appear more likely to adhere to advisor recommendations, with standard variables explaining far less of the voting results once controls for proxy advisor recommendations are removed. Finally, golden parachutes appear to be increasing in recent years and we find that golden parachutes that are amended immediately prior to an SOGP vote tend to grow rather than shrink.

These findings contrast with those of researchers who have studied Say-on-Pay. We suggest that the differences lie in the absence of second-stage discipline for SOGP votes. Directors at target firms who fail to respond to proxy advisor or shareholder complaints do not have to risk being voted out in subsequent elections since their directorships usually cease with the acquisition. For corporate governance more broadly, our findings suggest that advisory votes are only effective in certain situations where immediate or subsequent discipline is at least plausible.

We conclude by offering potential avenues for improving SOGP’s ability to shape compensation practices. They include making SOGP votes more binding and making the GP payment and SOGP voting information more readily available to shareholders of corporations where the target directors also serve as directors and also of acquiring corporations.

– Liz Dunshee

This recent Exequity analysis finds that, other than for companies in the “industrials” sector, pay ratio figures are significantly driven by employee headcount – even more than they’re driven by CEO pay, which is an input in the calculation. Here’s an excerpt:

– Employee count is strongly and positively correlated with the CEO Pay Ratio, 0.58, meaning the more employees a company employs, the higher the CEO Pay Ratio.

– Median employee pay is strongly and inversely correlated with the CEO Pay Ratio, -0.74, meaning the lower the median pay, the higher the CEO Pay Ratio; (though we would note, median employee pay is also an input to the CEO Pay Ratio, so this finding is less meaningful than the relationship between employee count and the CEO Pay Ratio).

– CEO pay correlates well with the CEO Pay Ratio, 0.53, but ranks below median employee pay and also ranks below employee count (again noting that CEO pay is an input to the CEO Pay Ratio).

– Revenues correlate well with CEO pay, 0.46, but bear little relation to median employee pay, -0.07.

– Employee count is inversely correlated with median employee pay, -0.46, and positively correlated with CEO pay, 0.28; this is notable because it means higher employee counts are associated with both lower median employee pay and higher CEO pay.

– Employee count is strongly correlated with revenues, 0.79.

– Market cap is weakly correlated with both median employee pay, 0.15, and the CEO Pay Ratio, 0.19.

As you can see, profit measures are absent from the list of things impacting pay ratio. That’s not too surprising since the intent for this disclosure was to draw attention to “average worker” pay, not to illustrate annual profitability. But the memo highlights that – statistically – pay ratios don’t bear any consistent relationship to shareholder returns:

Correlations between median employee pay, the CEO Pay Ratio and 1-, 3-, and 5-year performance show no meaningful relationship between median employee pay and performance or the CEO Pay Ratio and TSR. Segmenting the data into quartiles by each measure reinforces the fact that there appears to be no relationship between the CEO Pay Ratio and TSR performance. Therefore, drawing any affirmative conclusions about the “impact” of CEO Pay Ratios or median employee pay on performance is grossly misleading.

– Liz Dunshee

At the end of this month, previously-announced changes to the “Global Industry Classification Standard” (GICS) will shake up the codes for many tech, media, communications & e-commerce companies. This Compensia memo says it’s the biggest reclassification of companies in the history of the GICS – and explains the impact that it could have on compensation peer groups & ISS pay-for-performance assessments. Here’s an excerpt:

Although it is difficult to predict how the pending reclassifications will affect the analysis of a given company’s specific situation, we envision that changes could occur in these areas of ISS focus:

– Summary of a company’s total shareholder return performance (on a one-, three-, and five-year basis) relative to companies with similar GICS classifications;

– Construction of peer groups for purposes of pay benchmarking and relative “pay-for-performance” comparisons;

– Review of the relative alignment of the compensation of a company’s CEO as part of its quantitative screen for evaluating an executive compensation program in connection with formulating Say-on-Pay proposal voting recommendations;

– Review of the compensation arrangements for the non-employee members of a company’s Board of Directors relative to the competitive market for purposes of identifying “excessive compensation” practices;

– Review of new or amended employee stock plans to determine the shareholder value transfer and gross burn rate relative to companies with similar GICS classifications; and

– Calculation of a company’s “QualityScore,” which considers specific corporate governance and executive compensation-related policies and practices relative to GICS-based industry norms.

– Liz Dunshee

Today’s the effective date for the new $250 million “smaller reporting company” threshold. This Pearl Meyer blog summarizes how newly-eligible companies can benefit from “scaled disclosure” on executive compensation topics (also see this blog from Mike Melbinger). Here’s an excerpt:

– No CD&A (but some scaled narratives are required);
– Fewer NEOs (just the PEO and next two highly compensated officers, and up to two former officers if applicable);
– Two years (vs three) in the Summary Compensation Table;
– Certain tables not required (e.g., GPBA, Option Exercises/Stock Vesting, Pension, NQDC);
– No CEO Pay Ratio;
– No discussion of compensation risk policies; and
– No description of retirement benefit plans.

Companies can choose to use scaled disclosure on an item-by-item basis – so you can still provide more information if you want. See this blog from Mark Borges for an approach to “intermediate” disclosure that provides more than the bare minimum.

Lastly, remember that many newly-eligible smaller reporting companies will continue to be “accelerated filers” – with all that status entails (e.g. the deadlines for Exchange Act filings haven’t changed).

– Liz Dunshee

I can only speculate about what it’s like to be a VIP tech CEO. One part that doesn’t sound too appealing is having a personal security detail. Because if someone is attacking Mark Zuckerberg, they’re probably after more than his $350 t-shirt. But if there’s a bright side, it’s that you don’t have to pay your bodyguards out of your own pocket – they’re pricey! This article looks at how much a few well-known companies spend on security & travel for high-profile executives – and how they describe those “perks” in their proxy statements:

1. Facebook – $7.3 million for CEO security & $1.5 million for CEO use of private aircraft ($2.7 million for COO)
2. Amazon – $1.6 million for CEO business & travel security
3. Oracle – $1.5 million for Executive Chair home security ($104k & $0 for the co-CEOs)
4. Salesforce – $1.3 million for CEO security
5. Google – $636k for CEO security and $48k for CEO use of chartered aircraft
6. Apple – $224k for CEO security and $93k for air travel
7. Qualcomm – $138k for Chair’s “insurance premiums, security & home office” and $153k for Chair use of corporate aircraft
8. IBM – $178k for CEO use of corporate aircraft

A member emailed to point out that there’s a reason security is expensive:

I met an executive’s bodyguard once. Former cop & one of the friendliest, most down to earth people I’ve ever met. He was very devoted to the executive, for whom he’d worked for nearly 30 years. However, it was also clear to me that this guy knew 6 ways to kill you with a paper napkin.

Remember that our recently-updated “Executive Compensation Disclosure Treatise” has a chapter devoted to perks – with comprehensive guidance on disclosure of airplane use & personal security, among other topics.

– Liz Dunshee

This article from Meridian Compensation Partners makes the case for building “preventative care” into the compensation committee’s calendar & agendas. The idea is that companies can avoid major overhauls by reviewing short- & long-term programs every 2-3 years – even in the absence of a low say-on-pay or changes to management & compensation committee members. Here are six tasks to include in this regular review:

1. Review market data on program design in order to understand competitive practices & describe reasons that the company’s programs differ.

2. Evaluate whether annual bonus metrics remain aligned with business strategy.

3. Consider the goal-setting process to ensure that it yields goals that are appropriately rigorous.

4. Determine whether the mix of long-term awards remains aligned with business objectives – e.g. retention, pay-for-performance.

5. Examine termination provisions to make sure they’re appropriate & consistent among the company’s various agreements & plans.

6. Evaluate pay-for-performance to identify and fix any misalignment.

– Liz Dunshee

Compliance, best practices & flexibility: according to this blog from Exequity’s Ed Hauder, these are the three keys to a “good” equity plan. This isn’t groundbreaking advice – but it can be easier said than done. Here’s an observation from Ed:

I listed the keys for a good plan in order of their applicability. In order to have a viable equity plan, it has to comply with the applicable rules, i.e., compliance. To have a better equity plan, it should reflect current best practices in its provisions (vesting, CIC, award limits, share limits, etc.).

Finally, to be a good plan, an equity plan needs to have sufficient flexibility to allow the company to address issues that arise, even if not expected. In my experience, the hardest thing for an equity plan to do is to incorporate adequate flexibility and reflect current best practices.