– Lynn Jokela

As reported in this Reuters article, recent statements by Corp Fin Director Hinman say the SEC won’t be writing new rules to require public companies to explain why and how they use adjusted or non-GAAP financial measures in the CD&A.

Last spring, Liz blogged about how CII had filed a petition with the SEC recommending changes to Item 402 that would require all non-GAAP financial measures presented in the CD&A be subject to Reg G and Item 10(e).  CII filed the petition after SEC Commissioner Rob Jackson had co-authored a WSJ opinion piece calling for increased transparency about the use of non-GAAP measures in setting executive pay.

The Reuters article high-lights some of Director Hinman’s remarks made at a December 2019 AICPA conference.  Here’s an excerpt:

“The CD&A is excluded from having to reconcile non-GAAP numbers, but we do in the rule ask people to show how you get to that number if it’s a non-GAAP number.  You don’t have to do the full reconciliation; many times people will sort of cross-reference the reconciliation. We would encourage people to, you know, when they are using [non-GAAP] … to provide at least how they got there. The method of calculation is it’s what the rule says. It’s not reconciliation but it’s pretty close.”

– Liz Dunshee

This 10-page memo from Cleary Gottlieb & PwC walks through accounting and financial reporting considerations that apply to executive pay – e.g. factors that impact how equity awards are expensed, and assets & liabilities for deferred compensation plans. This excerpt highlights why these issues matter to compensation committees:

Types of pay that seem economically similar may be recorded in the financial statements in different ways. Those accounting differences can impact the company’s earnings per share or industry ratios — attracting or driving away investors. Understanding them is important to the committee’s ability to effectively oversee compensation plans.

– Liz Dunshee

Other than paying them well, what do CEOs want from us? It all comes down to knowing your audience – and with a CEO, that means tying all conversations back to strategy, customers, investors and culture. Here’s a “cheat sheet” from an executive perspective – courtesy of Dan Walter of FutureSense (also see his “cheat sheet” from the CFO):

1. Start with something I don’t know and summarize it to a level that allows me to either make a decision or ask critical questions. Have the details at the ready, but don’t insist that I see them.

2. Give me solutions, not suggestions or problems. If it takes you a few extra days to turn your idea into a working prototype that proves its capabilities, please let me know in advance and we will meet in a few days.

3. Please know our business and be able to speak to me in terms I use on a regular basis. I don’t want to learn your “language” of HR and compensation. Listen in on investor conference calls and read any memo you can get your hands on. Please learn my language of success.

4. Don’t make assumptions about our business strategy. We explain it pretty darned well in our Proxy Statement. I secretly wish you had already read and understood our entire 10K and those of our most important peers.

5. Explain EVERYTHING from the perspective of how it helps our business become more successful. It’s great if something is new, or trendy, or if you want to make employees happier, but all of that is useless if we aren’t growing and winning.

6. PREPARE. There is a great quote from Woodrow Wilson that reads: “If I am to speak ten minutes, I need a week of preparation; if fifteen minutes, three days; if half and hour, two days; if an hour, I am ready now.” Which did you prepare for?

7. Please try and tell me everything from my perspective, not yours. I know this can be tough but, trust me, it is probably harder for me to see the world through your eyes (unprepared) than vice versa.

Every CEO really wants each department in their company to be a profit center. How can Compensation, a department that is an open tap of money pouring out the door, be a profit center? Know the business strategy and have a story that explains how the compensation philosophy, structure, pay levels and communication programs will create more value than they cost. Be specific. Use timeframes that make sense. Make sure you have backing evidence or credible opinions from consultants, academic studies or colleagues at similar companies.

If you do your homework, you will be quick on your feet. That, my friends, is perhaps the most important aspect of working with a CEO. Most are in their position because they are bright, fairly impatient and have high expectations of themselves and anyone who wants to be called their business partner. Truly understanding your preferred solution and at least two or three alternatives provides you with the simple and important function of exceeding expectations. Exceed expectations and you will be invited back to the table again and again.

– Lynn Jokela

Check out this updated “Compensation Committee Handbook” from Skadden Arps. Written in a style that is easily understood & 114 pages long…

– Liz Dunshee

I’ve blogged a few times about the expanding role of the compensation committee. Yet the number of committee meetings in a year seems to be holding steady at 4-5 – and the number of hours in a day hasn’t changed either. This Semler Brossy memo says that to reach the next level, directors will need to leverage technology in decision-making. Here are three areas where artificial intelligence & machine learning could help compensation committees:

1. Workforce & executive succession planning: Committees need a sense of a company’s cost of labor as they oversee the HR function and strategize about workforce automation – and can use predictive technology in executive succession & recruiting.

2. Pay design & pay management: Eventually, committees may be able to get real-time performance info to understand whether incentives are working – and non-financial metrics can be better incorporated into incentive plans as data tracking improves.

3. Company values & risk management: AI & ML-related issues will surface in risk reviews and require advance thinking about the ethics of using these capabilities in the workforce.