1. The SEC All-Stars: A Frank Conversation
2. Parsing Pay Ratio Disclosures: Year 2
3. Section 162(m) & Tax Reform Changes
4. Pay Ratio: How to Handle PR & Employee Fallout
5. The Investors Speak
6. Navigating ISS & Glass Lewis
7. Proxy Disclosures: The In-House Perspective
8. Clawbacks: What to Do Now
9. Dealing with the Complexities of Perks
10. Disclosure for Shareholder Plan Approval
11. The SEC All-Stars: The Bleeding Edge
12. The Big Kahuna: Your Burning Questions Answered
13. Hot Topics: 50 Practical Nuggets in 60 Minutes
14. Dave & Marty: True or False?
15. Steven Clifford on “The CEO Pay Machine”
Reduced Rates – Act by June 29th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a reduced rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by June 29th to take advantage of the discount.
In the latest effort to enhance transparency by proxy advisory firms, six members of the Senate Banking, Housing and Urban Affairs Committee sent letters to ISS & Glass Lewis – which they noted control 97% of the proxy advisory industry – requesting information regarding their eligibility for exemption from the proxy rules, accuracy of reporting and potential conflicts of interests.
The Senators’ letters reflect many of the concerns underlying the bill passed by the House of Representatives last December, titled the “Corporate Governance Reform and Transparency Act of 2017,” which would require proxy advisory firms to register with the SEC, disclose potential conflicts of interest and codes of ethics, and publicize their methodologies for formulating proxy recommendations.
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.