Save this blog from Hunton Andrews Kurth for the next time a client asks about 83(b) elections. It explains the alternatives – and even gives an example. Here’s an excerpt (and here’s another memo from DLA Piper):
The question of an 83(b) election applies any time an employer grants certain restricted stock to an employee (i.e., restricted due to a time-based and/or performance-based vesting schedule). The primary objective of an 83(b) election is for the employee to maximize his or her capital gains treatment with respect to any appreciation in the restricted stock award from the date of grant.
From an economic perspective, the employee is generally better off making an 83(b) election IF: (i) the vesting shedule becomes satisfied (e.g., no forfeiture of the award due to the employee terminating employment) AND (ii) the fair market value of the award appreciates from the date of grant.
The House Committee on Financial Services is continuing to use pay ratio disclosure to hone in on human capital management issues at big banks. Yesterday, Committee Chair Maxine Waters (D-CA) issued this press release to recap what’s happened in recent hearings. It leads with a chart that highlights CEO pay and pay ratio at 8 banks. Based on that information, it says that Committee Democrats will continue to push for these steps:
– All megabanks should increase their minimum wage to at least $20 per hour by the end of the year, and to at least a “living wage” in the next two years so that all workers have enough to meet their basic needs, including food, housing, and clothing
– All boards for megabanks should consider ways to narrow excessive CEO-to-median worker pay ratios
– Financial regulators should finalize meaningful executive compensation rules that curb inappropriate compensation practices
Also yesterday, SEC Commissioners Rob Jackson & Allison Herren Lee issued this joint statement about the “modernization” amendments to Reg S-K that were proposed several weeks ago – expressing concern and soliciting comments about the proposal’s “principles-based” approach to human capital disclosure.
I’ve blogged that some investors & executives are starting to think that “pay-for-performance” is to blame for outsized CEO pay. In this blog, FutureSense’s Dan Walter suggests 5 additional reasons why some CEO pay packages “defy explanation”:
1. No one wants to admit they have below-average executives
2. Shame is not an effective deterrent because everyone wants more money
3. We have an unsustainable model of equity compensation that requires shareholders to accept increasing dilution and rank & file employees to accept a shrinking piece of the pie
4. Executives are increasingly portable – and get a pay bump with every move
5. Stock-based compensation is growing more predictably, because the stock market has been redesigned to grow for longer periods and fall for shorter – albeit more dramatic – periods
As I blogged in June, Glass Lewis is now using CGLytics (instead of Equilar) for compensation & data analysis of North American companies. According to this Georgeson blog, Glass Lewis has now elaborated on what that means – and confirmed that its new business partner will be its exclusive global provider of peer groups, compensation data and analytics.
In light of this move and client & company feedback, the proxy advisor is considering changes to its pay-for-performance peer review and scoring methodology. We’ll know more about the potential changes in a few months. For now, effective January 1st, Glass Lewis will:
– Use CGLytics as the sole provider of compensation data and analytical tools globally
– Provide model access exclusively through Glass Lewis and CGLytics
– No longer use Equilar’s peer groups
– No longer use Equilar data in any of their products
– Be the exclusive access point to Glass Lewis research reports and vote recommendations
I imagine I could place “better than sex” in the title for any blog and it would wind up as the most popular blog for the year. So thank me for not using that type of trick on the regular. But yes, the SEC did issue guidance on proxy advisors yesterday. Proxy advisors. A topic that many can’t get enough of. So that truly is gold for bloggers looking for attention. I didn’t really need the “better than sex” hook I guess. But I “doubled down” anyway.
Here’s what the SEC did:
1. The SEC issued this 14-page interpretive release about how the proxy rules impact proxy advisors. It forces proxy advisors to take more steps to disclose how they craft their recommendations – and the SEC issued a broad warning for when they convey incorrect information.
2. The SEC issued this 26-page interpretive release about proxy voting responsibilities for investment advisors, providing steps that mutual fund managers should consider if they become aware of potential factual errors or weaknesses in a proxy advisor’s analysis. (Here’s the press release about both of the SEC’s new interpretive releases – and here’s a WSJ article.)
3. Each piece of guidance passed with a vote of 3-2, with the two Democrat Commissioners dissenting (Robert Jackson & Allison Herren Lee).
4. All five of the SEC Commissioners pushed out their opening statements about the new guidance promptly – they came out even before the SEC’s press release. I believe that was a first…
Recently, I blogged about a 10-minute video about private jets. A member sent this reaction:
Interesting but flawed economic analysis on the private plane video. One needs not to evaluate private jet use by the amount paid to the executive but instead by the value to the company of the executive’s lost time. Presumably on an hourly basis that amount is a multiple of the amount paid to the executive (3x, 5x, 10x?).
In addition to the time lost with security, boarding, check-in, etc., an executive can freely work on a private jet and even conduct meetings while flying with those taken along. So, one needs to take the entire length of a trip from door to door flying commercial, subtract the hours spent flying privately when no work is done and multiply that difference by the value per hour of the executive’s time to the company. That amount should then be compared to the cost of operating the private plane. That said, IMHO private executive use ought to be taxed to the executive at the value of a comparable chartered plane.
We’ve added this excellent analysis from Sullivan & Cromwell to our batch of reports indicating how pay fared on the ballots this proxy season at annual meetings. The S&C piece covers say-on-pay and equity compensation plan approvals. Here’s the overview:
Continued strength on say-on-pay:
– Public companies continued to perform strongly on say-on-pay, with support levels averaging over 90% and less than 3% of companies receiving less-than-majority support.
– Fewer than half of the companies who received less-than-majority support last year achieved over 70% support this year, suggesting low say-on-pay votes have become stickier.
– ISS negative recommendations on say-on-pay highlight the continued importance of the pay-for-performance assessment category, with the most important factor continuing to be the alignment of CEO pay with Total Shareholder Return (or TSR) in relation to the ISS-determined peer group.
– The most important qualitative factor was performance standards that are not deemed sufficiently rigorous by ISS or clearly explained.
Broad shareholder support for equity compensation plans, with only two Russell 3000 companies failing to obtain shareholder approval for an equity compensation plan and overall support levels continuing to average around 90%.
Here’s an interesting piece from Pay Governance about where relative TSR stands today. Here’s the intro:
Relative benchmarking is near-universal as companies assess historical pay-for-performance (P4P) alignment, but should relative performance be an explicit incentive plan measure? Most companies provide the majority of their long-term incentive (LTI) award opportunity to senior executives in equity-based awards, which has an underlying value directly aligned to stock price fluctuations. If companies decide this is insufficient, should they consider using Relative Total Shareholder Return (TSR) as an incentive metric? If so, should it be structured as a separate component or as a modifier? Before we address these questions, some historical context:
A recent survey of 600 private companies showed that 72% pay an annual retainer to directors – and 54% pay a per-meeting fee. That’s according to this article from Private Company Director, which also notes these findings:
– The median annual retainer is $30,000 – but companies in the 90th percentile pay $90,000 and those in the 10th percentile pay $10,000
– More than two-thirds of the companies have a board chair. One-third of these board chairs are independent; the rest are insiders. Nearly a quarter (22%) of the survey respondents have a lead director. Over a third of the respondents offer an additional retainer to board chairs or lead directors (37%) and to committee chairs or members (35%). The median retainer for the chairman of the board or lead director is $20,000
– The median fee for committee chairs or members is between $5,000 and $6,000. Fees for service on the audit committee, which generally requires more work than the other committees, tends to be higher
– 12% don’t compensate any board members – unpaid boards tend to be smaller and made up of all insiders
– 45% of survey respondents who compensate for board service say they pay their inside directors
– The median board workload reported by survey respondents is about 55 hours, with a median four meetings per year. The median board committee workload is 20 hours per year, also involving four meetings (see the survey in yesterday’s blog for how this compares to time commitments of public company directors)
– Enhanced external scrutiny of NED pay does not concern most respondents (87%), with only 4% indicating a concern and 9% saying the issue has not yet been discussed
– To date, just 16% of public company respondents have made or are planning proxy disclosure changes for NED pay
– Slightly less than half (45%) of public company respondents have established NED pay caps within shareholder approved incentive plans, most commonly applying for equity grant values or total compensation
These results surprised me. True, only a few companies will be “outliers” each year under the ISS policy and boards are very busy. But if you pay too much without a “compelling rationale,” the results are pretty serious – a recommended vote against the compensation committee members. And who knows when a plaintiff will come knocking. The directors won’t be happy in either of these scenarios, and the advisors will get blamed. It might be worth a discussion and some beefed-up disclosure!