Here is a somewhat-dated research report from Credit Suisse, which appears to favor companies that set earnings guidance (ie. external targets) slightly below incentive plan objectives (ie. internal targets) to avoid negative earnings surprises. The report focuses on the big food manufacturing companies and slots them into one of three categories:
– What you see is what you get (incentive targets near mid-point of the guidance)
– Conservative guiders (incentive targets below the mid-point of the guidance)
Most companies were categorized as “what you see is what you get.” I think the report provides some ‘food for thought’ when setting incentive plan targets:
– Earnings guidance and incentive targets are being evaluated by investors as a way of assessing the reasonableness of the incentive plan targets
– It does not look good if incentive targets are far below earnings guidance, as it suggests the incentive plans are rigged for a payout
– Similarly, it does not seem reasonable to have incentive plan targets far above earnings guidance, as it appears you are sandbagging what you’re telling shareholders that you can achieve for the year
A recent study by Meridian, based on 160 S&P 500 companies, examined the prevalence &structure of change-in-control agreements, finding that such agreements remain common – and that single-policy plans are increasing in prevalence. Cash severance is the most common benefit to provide in a change-in-control situation, with double-trigger vesting for unvested equity also increasing in popularity…
Also see this study of change-in-control agreements from Alvarez & Marsal…
For the many of you that have registered for our Conferences coming up next Tuesday, September 25th, we have posted the “Course Materials” (attendees received a special ID/PW yesterday via email that will enable you to access them; note that copies will be available in San Diego). The Course Materials are better than ever before – with numerous sets of talking points. We don’t serve typical conference fare (ie. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers certainly have gone the extra mile this year!
Here is some other info:
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take a few hours to post the video archives after the panels are shown live). A prominent link called “Enter the Conference Here” – which will be visible on the home pages of those sites – will take you directly to the Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the conference agendas; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if it’s possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see our “CLE Credit By State” list.
– Register Now to Watch Online: There is still time to register for our upcoming pair of executive pay conferences – which starts on Tuesday, September 25th – to hear Keith Higgins, Meredith Cross, etc. If you can’t make it to San Diego to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now to watch it online.
– Register to Watch In-Person in San Diego: Starting this Saturday, you will no longer be able to register online to attend in San Diego – but you can still register to attend when you arrive in San Diego! You just need to bring payment with you to the conference and register in-person. Through the end of this Friday, you can still register online to attend in-person in San Diego. And you can always register online to watch the conference online…
Last Thursday, the SEC came out with two salvos against “informal” staff guidance. First, there was this statement from SEC Chair Jay Clayton reminding us that all Staff guidance is non-binding (ie. creates no enforceable legal rights or obligations for the SEC or other parties) because it hasn’t been subject to notice & comment under the Administrative Procedures Act. That statement noted that the SEC “will continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments.”
A few moments later, the Division of Investment Management issued this statement that – ahead of the upcoming “proxy plumbing” roundtable – it was withdrawing two no-action letters granted in 2004 to ISS and Egan-Jones Proxy Services.
Over on “TheCorporateCounsel.net Blog,” I have blogged extensively about what this means, both in Friday’s blog – and today’s blog. For example, I cover these topics in today’s blog:
1. What Does This Mean for the “Proxy Plumbing” Roundtable?
2. Any “Real World” Impact?
3. Withdrawal Didn’t Change the Law?
4. How Much Do Companies Rely on Proxy Advisors?
5. Do Courts Give Deference to SEC Staff Guidance?
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.
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.
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.
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).
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.