As Liz blogged recently, our own survey on pay ratio readiness shows that many companies seem to have been banking on a repeal of the rule. This short memo by Longnecker & Associates includes these stats:
In reviewing a number of early adopters of disclosures, we noted some trends in both the ratios and how they are disclosed:
– Ratios disclosed range from 6:1 to almost 80:1, initially indicating ratios much lower than some talking heads predicted early on.
– Ratios are being disclosed both within and outside of the CD&A. Some companies are including the
disclosure in the narrative to the Summary Compensation Table, while a minority of companies summarized
the ratio in the proxy summary.
– While supplemental disclosures are permitted, few early adopters have taken such steps. This trend may
shift as more companies disclose and market benchmarks potentially develop.
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
Over the years, we’ve blogged about the extent to which ISS influences voters at institutional investors (here’s an example). Different studies (or anecdotes) show different things – and the debate continues. This recent article from “Proxy Insight” (pg. 6) indicates that some investors that are considered “passive” may be more on auto-pilot than some would think. Here’s an excerpt from that article:
Looking at Proxy Insight’s ISS Vote Comparator table, for most of these investors this is not a right they often feel compelled to exercise. The majority of them vote 99-100 percent in accordance with ISS. Of course, this correlation makes the investors a reliable source for discerning ISS recommendations.
However, we thought it would be interesting to look at what issues would make auto-voters override the voting recommendations of ISS, providing some insight into the proposals that matter most to these investors. To do this we have taken the ten largest investors by assets under management who vote in accordance with ISS, and analyzed those proposal types where they override most frequently. These include say on pay, the re-/election of directors and auditor ratification.
Say on pay is not only one of the most frequently voted issues for auto-voters, but is also usually near the top (see Table 3) when it comes to the disparity between investor voting and ISS recommendations. This is unsurprising, given that say on pay is one of the most contentious proxy voting topics, which is seemingly never out of the news.
However, as Table 1 illustrates, even on contentious issues auto-voters receive a correlation with ISS that ranges in the high 90s. Moreover, the lower correlation on exclusively ISS against recommendations (Against recs (%)) indicates that the auto-voters are more passive than ISS, overriding the proxy adviser in order to vote with management. Other proposals near the top of the list include the approval of stock option plans and restricted stock plans.
Note that the meaning of “passive” depends on one’s perspective. To some, it’s voting with management. But others could say that breaking with ISS for the say-on-pay vote is the definition of “active” – given the time & effort required for an institutional investor to override a default voting policy.
Last week, ISS opened up its “Annual Policy Survey,” which is being undertaken in two parts this year:
1. Governance Principles Survey – Initial, high-level survey on high-profile topics including “one-share, one vote,” pay ratio disclosures, the use of virtual meetings, and board gender diversity. In this survey, ISS is asking companies (i) how they plan to analyze pay ratios and (ii) what is their view on how shareholders should use pay ratio disclosures. This survey closes on August 31st.
2. Policy Application Survey – More expansive portion that can be accessed at the end of the initial portion, allowing respondents to drill down into key issues by market and region as well as by topics such as responsible investment, takeover defenses and director compensation. This survey closes October 6th.
After analysis of the survey responses, ISS will open a comment period for all interested market participants on the final proposed changes to their policies as always…
Next Pay Ratio Webcast: Tune in on Tuesday, August 15th for the second of our monthly pre-conference webcasts on pay ratio: “Pay Ratio Workshop: What You (Really) Need to Do Now.” The speakers for the August 15th webcast are:
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP
If you plan to attend in Washington DC (rather than by video webcast), be warned that the Conference Hotel for our “Pay Ratio & Proxy Disclosure Conference” on October 17-18th is nearly sold out. The Conference Hotel is the Washington Hilton, 1919 Connecticut Ave NW, Washington, DC 20009. Reserve your room online or call 202.483.3000 to make your reservations.
Be sure to mention the “Proxy Disclosure Conference” to get a discounted rate. If you have any difficulty securing a room, please contact us at info@compensationstandards.com or 925.685.9271.
Next Pay Ratio Webcast: Tune in on Tuesday, August 15th for the second of our monthly pre-conference webcasts on pay ratio: “Pay Ratio Workshop: What You (Really) Need to Do Now.” The speakers for the August 15th webcast are:
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP
A recent Delaware case – Williams v. Ji – held that the entire fairness standard applies to equity awards in a subsidiary that were granted to directors of the parent company. The directors of the parent company approved & benefited from the grants. Here’s the intro from Steve Quinlivan’s blog:
The Delaware Court of Chancery examined an alleged scheme in which the directors of Sorrento Therapeutics granted themselves options and warrants for the stock of five subsidiaries over which the company had voting control. Shortly before or after the options grants, the board transferred valuable assets and opportunities of the corporation to the subsidiaries. The subsidiary option plans and grants were not approved by the stockholders of Sorrento.
The court acknowledged that directors may be compensated for additional service in managing subsidiaries – but rejected the defendants’ characterization that these were typical compensation decisions subject to business judgment review. It noted that “self-interested compensation decisions made without independent protections are subject to the same entire fairness review as any other interested transaction.”
According to this recent University of Georgia study, corporate valuations tend to rise after say-on-pay practices are implemented. The researchers looked at 17,000 companies in countries with – and without – say-on-pay laws. Here are a few other findings, as described by the press release:
– When say-on-pay is implemented, the decline in CEO pay is more severe at companies with poor performance. Those in the bottom quartile saw CEO salaries fall by 9.1 percent.
– Excess pay decreased following say-on-pay – especially in firms where CEOs had more power.
– CEO pay is increasing at a lower rate in countries with say-on-pay laws – and is more sensitive to company performance.
This Winston & Strawn memo – with stats through June 30th for Russell 3000 companies – reinforces what I’d previously noted in this blog: shareholders continue to strongly favor annual say-on-pay votes.
Here’s the details:
– 88% of companies recommended that shareholders support an annual say-on-pay frequency (compared to 56% in 2011)
– 11% of companies recommended a triennial vote (compared to 39% in 2011)
– Shareholders at more than 90% of Russell 3000 companies voted in favor of annual say-on-pay votes (compared to 80% in 2011)
– ISS recommended annual say-on-pay votes for all Russell 3000 companies
If your vote is still pending, don’t forget to disclose your board’s say-on-frequency decision in your 8-K after the meeting. Here’s other memos about say-on-frequency issues..
As lawyers, we might think that our painstakingly-detailed proxy disclosure is straightforward. But many feel that the required “grant-date fair value” reporting of performance awards obscures what CEOs actually earn – which has led to controversy over pay structures & amounts.
In response to this perceived information gap, activist fund ValueAct Capital created a framework to evaluate “realizable pay” scenarios. This article from the Stanford Business School & ValueAct examines the methodology. Here’s an excerpt:
Taken together, this framework provides a foundation for analyzing the scale and structure of CEO pay. It provides a rigorous and systematic method for evaluating critical issues,
such as the:
– Degree to which pay is “guaranteed” or “at-risk”;
– Degree to which payouts are driven by operating versus stock price performance;
– Sensitivity of CEO compensation to stock-price returns;
– Importance and rigor of performance metrics;
– Potential risk embedded in the CEO pay package.
Compare this to the static target grant-date fair value framework, which highlights only a single question: Is the target value of the CEO pay package larger or smaller than peers?
Based on the data they looked at, the authors conclude that the outputs of ValueAct’s analysis are very different from those disclosed in proxy statements. I’d love to know if you have seen companies that calculate & report compensation according to this type of formula.
Pay Ratio Conference: Discounted Rate Ends Today, Friday
Last chance to register at a reduced rate for our comprehensive “Pay Ratio & Proxy Disclosure Conference.” The discount expires at the end of today, Friday, July 28th. New Corp Fin Deputy Director Rob Evans will open the event.
It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or by video archive at your convenience. And in addition to the October Conference, you gain access to three pre-conference webcasts. And a set of “Model Pay Ratio Disclosures” in both PDF & Word format.
Register Now – Discount Ends Today, Friday: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register by July 28th to take advantage of the 10% discount.
Pay Ratio Conference: Discounted Rate Ends Tomorrow, Friday
Last chance to register at a reduced rate for our comprehensive “Pay Ratio & Proxy Disclosure Conference.” The discount expires tomorrow, Friday, July 28th. New Corp Fin Deputy Director Rob Evans will open the event.
It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or by video archive at your convenience. And in addition to the October Conference, you gain access to three pre-conference webcasts. And a set of “Model Pay Ratio Disclosures” in both PDF & Word format.
Register Now – Discount Ends Tomorrow, Friday: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register by July 28th to take advantage of the 10% discount.