The Advisors' Blog

– Liz Dunshee

We’ve posted the transcript for the webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.”

– Liz Dunshee

According to Korn Ferry’s survey of the largest 300 companies, median CEO pay increased by almost 9% last year – double last year’s increase & the highest percentage increase since 2010. The increase was driven by both annual & long-term incentive pay along with overall stock market growth. This excerpt predicts what we might see going forward:

Looking to next year, Korn Ferry expects changes in the mix of CEO total direct compensation, due to significant changes to the executive compensation deduction rules in Section 162(m) of the Internal Revenue Code.

“Much will depend on each organization’s financial performance during the coming year, but with the changes in the tax rules governing executive compensation, we expect we will see slightly higher increases in base salaries than in recent years, and that base salary will represent a larger share of the overall mix of TDC for the CEO,” said Donald Lowman, Korn Ferry Executive Pay & Governance Practice Leader for North America.

A change in pay mix could also have a nominal impact on pay ratio: this Korn Ferry blog elaborates on how base pay for the average US worker is increasing at a faster rate than CEO base pay.

– Broc Romanek

As you can see from our list of SEC perks cases (posted in our “Perks” Practice Area), the SEC has averaged one perks enforcement case per year for the past dozen years. That’s why it’s so surprising that the SEC has now brought two perks cases in one week. Coincidence or a theme?

In this new case against Energy XXI, the CEO & board were charged with hiding more than $10 million in personal loans that the CEO obtained from company vendors and a candidate for the company’s board. The company wasn’t charged, interestingly. Here’s a blog about last week’s case.

The list of perks in para 56 of this complaint raises a couple of interesting issues. Is a bar stocked with cigars and liquor – on company premises for use in entertaining customers – necessarily a perk? You might ask what is a “Denny Crane” room? (Hint: TV show “Boston Legal” – that’s the character played by William Shatner). Come learn what you need to know as Mark Borges & Alan Dye lead a panel devoted just to perks at our upcoming “Proxy Disclosure Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast.

Reduced Rates – Act by August 10th: Time to act on the registration information for our popular conferences – “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Here are the agendas – nearly 20 panels over two days. So register by August 10th to take advantage of the discount.

– Liz Dunshee

As always happens this time of year, our Conference Hotel – the San Diego Marriott Marquis – is nearly sold out. Reserve your room online or by calling 877.622.3056. Be sure to mention the NASPP conference or Executive Compensation Conference or Proxy Disclosure Conference. If you have any difficulty securing a room, please contact us at 925.685.9271.

Reduced Rates – Act by August 10th: Time to act on the registration information for our popular conferences – “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Here are the agendas – nearly 20 panels over two days. So register by August 10th to take advantage of the discount.

– Liz Dunshee

This Forbes op-ed notes that a few “pace-setting companies” now link executive bonuses to diversity objectives – and makes the case for more companies to follow suit. Here’s an excerpt:

If an objective is important, then the company should ensure (1) its employees know about it and (2) that their performance in meeting this goal will be measured along with the company’s other core values and targets. Fostering greater diversity and preventing harassment and discrimination is more than simply the right thing to do on a broader societal level. Indeed, a business case exists for these initiatives. According to research by McKinsey & Company, achieving these goals correlates with concrete financial improvement.

At Intel & Microsoft, diversity is one of the strategic performance goals that determine 50% of executives’ annual cash incentives. This is described on pg. 66 of Intel’s proxy statement – and on pg. 39 of Microsoft’s proxy statement.

At Alphabet, a recent shareholder proposal to link executive pay to diversity received about 9% of the vote. The company’s statement in opposition (pg. 66) noted that the CEO receives a base salary of only $1 per year and isn’t paid based on performance – so it argued that a rule like this would have little impact. And at Nike, a similar proposal was withdrawn after the company agreed to meet quarterly to discuss diversity.

– Liz Dunshee

The fallout from last year’s Investors Bancorp case continues. I’ve blogged about how most companies now set director pay limits. But that’s only the first step in protecting directors and their pay decisions (and avoiding costly settlements). This blog from Jim Barrall tracks through recent settlements by Clovis Oncology and OvaScience – and examines a proactive approach by JP Morgan Chase. Here’s an excerpt:

JP Morgan Chase’s director compensation program, which is now locked into its shareholder-approved omnibus plan, was adopted one year in advance of the expiration of the 2015 plan and appears to have been informed by Investors Bancorp, provides companies with a good roadmap of the plan design issues and possible solutions that should be considered by companies that would like to reduce their exposure to Investors Bancorp and its progeny.

As described on page 84 of the proxy statement, the key features worth consideration are that:

(i) it specifies the dollar amounts of the directors’ basic and special service retainers, thereby protecting these amounts under the business judgment rule because they have been ratified by shareholders;

(ii) even if the board exercises its discretion to increase any of the retainers after 2019 within the prescribed bands and even if such an exercise of this discretion would be subject to the entire fairness standard of review, the dollar amounts subject to this limited discretion are so small as not to make them attractive targets for plaintiffs’ lawyers, whose fees are largely based on the amounts that directors were paid using their discretion;

(iii) if the board ever determines to pay special fees to any directors under the plan’s safety-valve provision, it is highly likely that this compensation could be protected by the business judgment rule by having it approved by the board or a committee with a majority of members who are disinterested with respect to the compensation; and

(iv) these provisions apply to total stock and cash compensation and give the board discretion to determine the mix.

Finally, the terms of the director compensation program are included in an omnibus equity plan that also covers employees and could be resubmitted periodically to shareholders for approval when a company requests more authorized shares. Including these provisions in an omnibus plan and submitting them for approval with other plan changes every several years likely would not expose the directors program to as much risk of shareholders venting their possible unrelated grievances with the company or its board on director compensation as could be the case if the program were submitted in a free-standing director plan, as taught by the Clovis Oncology case.

We’ll be covering director pay at our “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Register by August 10 for a discounted rate.

– Broc Romanek

This blog by Performensation’s Dan Walter cracked me up – because he speaks the truth, such as this excerpt:

Ha! I tricked you. Just a couple of paragraphs ago I talked about better linkage of performance goals to LTI. Then I talked about how communications would improve. But, if the market falls away and stock prices drop precipitously, we won’t get either of those. We will see companies leap back into stock options. All of the “in things” like Performance Units and alignment will disappear as fast as the strong stock prices. When prices go low, stock option numbers will go high. Count on it.

The first two of these changes will happen gradually. I expect two or three years, at best. The change will be so slow that you may not even notice it (don’t worry I’ll remind you.) The third change, if it happens, will happen so quickly that all of us will forget about the other two for a very long time. If you had to add a fourth “big change” what would it be?

– Broc Romanek

I’m pretty excited that Steven Clifford has agreed to serve as the keynote for our upcoming “Proxy Disclosure Conference.” Steven is a former CEO who recently penned the book: “The CEO Pay Machine: How it Trashes America & How to Stop it.” Here’s a brief excerpt from the book:

After three negotiating sessions, Brad and I reached an agreement and signed a memorandum of understanding that we sent to our lawyers. The lawyers then did what they always do. “What happens if it rains frogs?” they asked. After three drafts, they reached an agreement on this point, and then turned to the question of whether a rain of tadpoles is the same as a rain of frogs. Once they had billed enough hours to satisfy their professional standards for minimum care, we had an agreement.

Our new CEO pay plan worked very well. Long-term value creation became the economic goal of both Brad and the shareholders. He is happier and more focused, and has remarked that the new system influenced his behavior and decision-making.* The board is happy. The shareholders are happy. Happiest of all is the comp committee. They don’t have to revisit the issues of CEO compensation or retain compensation consultants or deal with lawyers for seven years.

And here’s a few articles about the book:

– Atlantic Magazine’s “How Companies Actually Decide What to Pay CEOs”
– MarketWatch’s “This former CEO wants a luxury tax on CEO pay”
– NY Post’s “Why are CEOs getting paid tons of money for nothing?”
– Seattle Times’s “Local ex-CEO issues call to arms against ‘outrageous’ CEO pay”

Reduced Rates – Act by August 10th: Time to act on the registration information for our popular conferences – “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Here are the agendas – nearly 20 panels over two days. So register by August 10th to take advantage of the discount.

– Broc Romanek

Gary Lutin maintains this “Graphing Tool for Shareholder Support Rankings™” that allows you to track say-on-pay voting results for the past five years for any specific company. The graph includes a pie chart reporting “turnout” – which is to the right of each year’s bar of voting support. The percentage reported in the blue section of the circle is calculated from the total number of shares voted by shareholders for/against/abstaining/withheld, divided by the number of shares outstanding…

– Broc Romanek

You’ll be hearing a lot about the SEC’s Enforcement action against Dow Chemical over poor perk disclosures. As you can learn from the SEC’s order (and memos posted in our “Perks” Practice Area) – the company was not only fined $1.75 million – but it was ordered to retain a consultant for a period of one year to review its perks policies, controls & training (note that no individuals were charged, just the company). Wow! There were $3 million of perk omissions over four years.

So what can you do? For starters, we have an 82-page chapter on perk disclosure as part of the Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise” posted on this site.

Then, we’ve had a panel about perk disclosures for 16 straight years as part of our annual “Proxy Disclosure” conference – which is coming up soon: September 25th & 26th in San Diego and also available by video webcast. This upcoming big disclosure conference has nearly 20 panels. Register by August 10th for a reduced rate.