The Advisors' Blog

– Broc Romanek

First, there was this WSJ article entitled “Does Verizon Really Pay the Typical Worker 60% More Than AT&T?” Then, as noted in this Steve Quinlivan blog, there was this request by Public Citizen for the SEC to investigate irregularities & inconsistencies in pay ratios disclosed by companies so far. It will be interesting to see how this plays out…

– Broc Romanek

Hilarious item on the NASPP blog yesterday from McLagan’s Ryan Gildner – here’s an excerpt:

The newly formed Data on Ratio Comparison Society (D.O.R.C.S) is pleased to announce preliminary results from a groundbreaking ongoing study of CEO pay ratio disclosures. According to Ryan Gildner, president of the Society, “This is the first study of its kind and uses an unprecedented innovative approach to evaluate the content of CEO pay ratio disclosures. We hope our data will provide a new perspective on this controversial disclosure and lead to a more complete understanding of its value.”

Using a proprietary 16-point qualitative analysis, the Society has identified the following disclosure to be the best disclosure to date:

As required by Item 402(fu) of Regulation S-K, we are providing the following information:

For fiscal 2017, our last completed fiscal year:

– The number of words comprising the CEO Pay Ratio Regulation (Item 402(u) of Regulation S-K) is 2,933.
– The number of words comprising the Compensation Discussion & Analysis Regulation (Item 402(b) of Regulation S-K) is 1,282.

Happy Anniversary Baby! 10 Years of Blogging & Counting…

Today marks 10 years of my blither & bother on this blog (note that Mark Borges’ blog and Mike Melbinger’s blog – are both over 13 years old – not shabby!). It’s the one time that I feel entitled to toot my own horn – as it takes stamina and boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age…

– Broc Romanek

Here’s the teaser for this memo from FW Cook:

Many believe that Elon Musk already has revolutionized automotive technology, rocketry, and solar energy. He now may have done the same to U.S. executive compensation with shareholder approval of his new incentive compensation arrangement at Tesla’s annual shareholder meeting on March 21st. The shares held by Musk and his brother did not count in the vote, so the outcome cannot be attributed to ownership control.

The new incentive compensation arrangement is essentially 12 tranches of performance stock options, each vesting when Tesla’s market-capitalization value grows in $50 billion increments starting from $100 billion for the first option tranche and ending at $650 billion over 10 years. Market-cap was about $53 billion on the date of shareholder approval, making the goals aspirational. But if achieved, the earned compensation value delivered from the award is estimated to be $55.8 billion. This is a value-sharing ratio of 8.5% for Musk ($55 billion ÷ $650 billion).

Our comments are not a critique of the arrangement’s structure or rigor of the goals. It is on three potential high-level implications that we see as indicated in this memo.

– Broc Romanek

The title of this Bloomberg opinion piece by Matt Levine catches your eye (here’s a Cooley blog about it). Here’s an excerpt from the piece:

But also: Warren Buffett makes $100,000 a year? Really? I mean, yes, it is famously his salary. But Buffett increases his wealth each year in two ways: He gets paid for doing his job, and also he has billions of dollars invested in Berkshire Hathaway and most years Berkshire’s stock goes up. In 2017, Berkshire Hathaway’s stock was up about 22 percent, meaning that the value of Buffett’s shares increased by about $15.1 billion, to $84.1 billion. So in a sense he made $15.1 billion in 2017, or $15.1001 billion if you include his salary, or $15.10005 billion if you deduct the stamps. That’s a pay ratio of about 282,435 to 1.

Is that the right way to count? Meh. Every year Institutional Investor’s Alpha publishes its “Rich List of the World’s Top-Earning Hedge Fund Managers,” and every year people write stories saying that the list reveals how much hedge fund managers “are paid” or “take home,” and every year I point out here that it is actually mostly a list of how much those managers’ investments appreciated. It is not really how much they are “paid.” But people like to interpret it that way, and you can understand why, since for practical purposes that appreciation is a big part of their economic reward for running their hedge funds. Most years Buffett would be way above anyone on the hedge-fund-manager list, if he counted.

This CFO.com piece claims that pay ratios mislead investors – and this WSJ article posits how to fix misleading pay ratios…

– Broc Romanek

Following up on the theme of pay ratio disclosures from the past few weeks, here’s a nifty set of charts from Pearl Meyer that summarizes the pay ratio disclosures so far. Also see this Pearl Meyer memo – and this Mercer spot survey…

All of our memos about recent pay ratio disclosures are in our “Pay Ratio” Practice Area – also read Mark Borges’ blog for detailed analysis as they come out.

– Broc Romanek

Here’s the teaser from this memo by Andrews Kurth Kenyon:

This proxy season has revealed an intensifying trend to address limitations on grants to non-employee directors in many long-term incentive plans. Based on a review of approximately 50 LTIPs submitted for approval this proxy season thus far by Delaware companies, a majority of such LTIPs now include a director-specific limit on the size of annual non-employee director grants and a handful generally permit grants only in pre-determined amounts as set forth in the LTIPs.

– Broc Romanek

Following up on my blog from a few days ago, here’s a memo from Compensation Advisory Partners that summarizes the pay ratio disclosures so far. See this Cooley blog for a summary…

– Broc Romanek

Here’s an interesting article comparing the director pay of private & public companies from Jim Reda, Kimberly Glass and James Rice of Arthur J. Gallagher & Co.

– Broc Romanek

Do you have language in your compensation committee charter that provides that the CEO can set the compensation for certain officers provided it’s consistent with the budget or not in excess of approved guidelines? I know that a number of large companies delegate the compensation-setting authority for lower-level VPs to the CEO provided that certain conditions are met – but some have language in their charters that is inconsistent with their actual practices.

Here are some examples of potential problems that I have heard about over the years:

– Company has conditions that probably are met – but there’s no way to document it. For example, one condition that lets the CEO set compensation is that the compensation not be above 50th percentile of the peer group. That is an easy test for a CFO or CEO where you have access to peer group statistics – but what about a Chief Merchandising Officer or Chief Technical Officer, where the peer group probably does not publish data because they are not NEOs? And, in any event, the position is not the same everywhere? This type of condition is fairly common in charters.

– What if the charter is silent about whether the CEO has the authority to set lower-level comp decisions concerning bonuses and setting salaries? Some companies interpret the silence as still delegating authority from the board to the CEO to make these decisions. Thus, the compensation committee would delegate these lower-level decisions out even though it wasn’t specifically spelled out in the committee charter.

– Avoid the wording that “the Committee shall . . .” take some action. The charter should empower the committee, not obligate it. I think that sort of wording can create a problem if the committee failed to strictly follow a duty created in the charter. I’d prefer wording like “the Committee is authorized to….” I prefer minimalist charters, with the tasks, checklists, calendar, etc. that describe “duties” in separate documents that guide, but don’t obligate, the committee.

Here’s a pretty good example of delegation from a compensation committee charter. It doesn’t have the express delegation from the board to the CEO – but perhaps that’s in a separate resolution. But it does include language that addresses – from the committee’s perspective – the fact that the CEO has been granted authority:

– Compensation of Other Executive Officers – The Committee shall review and approve, in its discretion (without the need for further approval by the Board), but only upon recommendation of the CEO, the compensation (including salary, bonuses, stock bonuses, options and appreciation rights, severance payments and other benefits) and other terms of employment of all other executive officers of the Company and its subsidiaries that have been designated or reasonably can be expected to be designated as “executive officers” of the Company within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended (“Section 16 Officers”); provided that, the hiring, appointment or promotion of an individual into a position as a Section 16 Officer, and the conferring of the titles of the Section 16 Officers, shall be reserved to the Board……

– Compensation of Non-Section 16 Officers – While the CEO has been delegated the authority to determine the compensation (including salary, bonuses, severance payments and other benefits, but excluding equity awards except to the extent otherwise delegated to the CEO by the Committee) and other terms of employment of all other officers and employees of the Company and its subsidiaries who are not Section 16 Officers, the Committee shall periodically review and discuss with the CEO the compensation and other terms of employment of such other officers…

– Administration of Incentive Plans – The Committee shall review and approve, or to the extent required or deemed appropriate make recommendations to the Board regarding, the adoption of, amendment to, or termination of incentive compensation, stock, bonus and other similar plans and programs established by the Board from time to time as permitted or required thereunder. The Committee shall administer these plans, as and to the extent provided in the plan documents and upon the recommendation of the CEO, including without limitation establishing guidelines, interpreting plan documents, selecting participants, approving grants and awards, delegating authority to the CEO to make grants and awards to non-Section 16 Officers, and making all other decisions required to be made by the plan administrator under such plans.

– Broc Romanek

Here’s the intro of this blog by FW Cook’s George Paulin:

We recently presented an executive compensation program review to the board compensation committee of a successful, long-standing S&P 500 industrial company. The peer group had 20-or-so comparable companies. A primary conclusion was that after six years of say-on-pay and proxy advisor voting rules, both the pay levels and program structures in the peer group were never more alike.

In the discussion that followed, there was clear concern by committee members that the “one-size-fits-all” trend among peers (and more broadly) may be overlooking areas where differentiation could provide competitive advantage. This led us to ask whether our conclusion would be different if newer, innovative, high-growth companies were substituted for traditional peers.

We responded by comparing practices that were now generally shared by the traditional S&P 500 peers to five large companies widely recognized for growth and innovation in products, applications, and markets over the last decade: Apple, Amazon, Alphabet, Facebook, and Tesla. For simplicity and objectivity, we used proxy data covering the CEOs and other named executive officers (NEOs).