We have posted an 10-second anonymous survey about the extent to which your company is prepared to implement pay ratio. Please take a moment to participate – will take less than 10 seconds. There will be a healthy discussion of the different ways that companies are getting prepared for pay ratio during the pre-conference webcast – “Pay Ratio Workshop: What You Need to Do Now” – that takes places next week…
Here’s the intro from this blog by Cooley’s Cydney Posner:
At more than half of the companies in the S&P 1500, the CEO is the lone board insider, according to this study and the related article in the WSJ. Isn’t that a good thing? Maybe not, say the authors, whose study showed that lone-insider boards can lead to lower profits, excessive CEO pay and more financial fraud.
The authors looked at data for companies in the S&P 1500 from 2003 to 2014 to examine the consequences of lone-insider boards. They found that lone-insider CEOs received on average “excess CEO pay,” that is, “pay above what objective factors, such as firm size and performance, would predict.” More specifically, they concluded that, “[o]n average, lone-insider CEOs received roughly 81% more pay a year than their peers. That’s an additional $4.6 million a year, which is money that could have been retained to fund growth strategies or returned to shareholders as dividends.”
They also found that CEO pay at companies with lone-insider boards was disproportionately higher than the pay of other key executives. CEOs who were lone insiders on their boards earned an average $7.39 million more than the average of the next four highest-paid executives, while CEOs who were not lone insiders made only $4.4 million a year more on average than the other executives. And here’s the stunner: according to the authors, “companies with lone-insider boards were 27% more likely to commit financial misconduct and…their profits were roughly 10% lower on average.” So much for good corporate governance?
Here’s the results from our recent survey on compensation committee minutes & consultants:
1. When it comes to providing comp committee minutes to consultants, our company:
– Provides upon request in electronic form only – 41%
– Provides upon request in paper form only – 5%
– Provides upon request in both electronic & paper form – 11%
– Doesn’t provide – but does allow inspection onsite – 25%
– Doesn’t provide – nor allow inspection onsite – 18%
2. Our compensation consultants ask for copies – or inspection – of committee minutes:
– Prior to each meeting – 12%
– Once a year – 4%
– On irregular basis – 25%
– They never ask for them- 59%
The Trump administration’s proposed overhaul of the federal income tax system includes a reduction of the maximum federal corporate income tax rate from 35 percent to 15 percent. If enacted, the proposal — a one-page outline released on April 26, 2017, and titled “2017 Tax Reform for Economic Growth and American Jobs” — would introduce sweeping changes and simplifications to the federal income tax system.
While the corporate income tax rate is unlikely to be cut to 15 percent, considerable bilateral support exists in Congress for a significant reduction. Any change also would alter the value of corporate income tax deductions. For example, a deduction taken by a corporate taxpayer on a $1 million payment at a 35 percent rate is worth $350,000, while a deduction on the same amount at a 15 percent rate is only worth $150,000.
A change in value of corporate tax deductions could, with proper tax planning, provide opportunities for substantial savings on compensation plans and arrangements. In the short term, potential savings would be possible from tax deductions on annual cash bonus payments and retirement plan contributions, while the long-term impact could involve significant changes to the structuring of compensation plans.
CEO pay is increasingly tied to performance – but while cash pay is at an all-time low (according to this recent Korn Ferry study) – overall pay is continuing to climb. This leaves key institutional investors wondering whether the performance bar is too low. Here’s a teaser from this WSJ article:
For two-thirds of S&P 500 companies, the overall pay CEOs received over the past three years proved higher than initial targets, according to an ISS analysis. That is typically because performance triggers raised the number of shares CEOs received, or stock gains lifted the value of the original grant. On average, compensation was 16% higher than the target.
The values companies disclose for CEO equity awards also show that about one-third of CEOs start the fiscal year expecting to beat the performance targets that determine the size of those stock grants, ISS said.
Boards must juggle a range of factors in setting performance targets. Investors and proxy advisers have their preferred measures, and consultants recommend targets that are challenging but not impossible. They can evaluate how well they have chosen by considering the market’s reaction, said Ira Kay, managing partner at consultancy Pay Governance. “If we beat it and our stock goes down, it was probably not such a hard goal,” Mr. Kay said.
For more thoughts, check out this blog by Cydney Posner & my recent blog on the growing unrest over LTIPs.
Through the end of last month, shareholders approved “annual” say-on-pay votes at 92% of reporting Russell 3000 companies. As noted in this WSJ article, an annual vote can give shareholders an outlet for expressing discontent & protect companies from more drastic action – such as votes against directors. A longer period might be appropriate for some companies – and anecdotally, some shareholders prefer it – but only if solid engagement efforts exist.
Despite the community’s apparent comfort with the status quo, the bill that eventually replaces Dodd-Frank may modify the frequency requirement for say-on-pay votes – to require voting only in years where there is a “material change” to executive pay. Here’s an excerpt from this Dorsey blog:
So, each year the issuer would have to determine if there has been a material change to executive compensation when deciding what proposals are put before shareholders at the annual meeting. Many issuers would likely continue to hold an annual vote to seek feedback from their shareholders even if there was no material change in compensation.
However, given the high profile nature of a negative say-on-pay result, would issuers shy away from the advisory vote in a year of poor company performance (absent an obviously material change to executive compensation)? Will an issuer’s determination not to include the advisory vote bring on another wave of proxy disclosure litigation? Could an issuer determine not to hold a say-on-pay vote for multiple years in a row?
As John has blogged, the Choice Act isn’t likely to survive Senate review, but the Senate is likely to come up with its own replacement bill. And this aspect seems to fall in the category of “if it’s not broke, don’t fix it.” Visit our “Say-on-Frequency” Practice Area to read recent memos that examine the pros & cons of 1, 2, and 3-year voting practices.
Last month, an institutional investor sued United – demanding the board recover $37 million paid to former executives who participated in a 2011 bribery scheme. United’s board says clawing back severance would hinder its ability to recruit executives & cause competitive harm. Some people think the board was initially reluctant to claw back severance because it wanted the departed executives to cooperate in the related DOJ investigation.
Either way, it begs the question of how far a CEO would have to go before they’re denied severance or it’s clawed back. This NY Times article describes the circumstances:
You may recall this inquiry: It centered on United’s reinstatement of a money-losing air route between Newark Liberty International Airport and Columbia, South Carolina. United had canceled the route but re-established it at the behest of David Samson, then the chairman of the Port Authority of New York and New Jersey, who had a vacation home near Columbia.
Mr. Samson, whose position gave him great sway over Newark Airport, wanted access to convenient flights to his second home. He had threatened to bar United from building a crucial hangar on-site if it did not start flying to Columbia.
Mr. Smisek, United’s CEO, didn’t report this pressure. Instead, federal investigators said that he approved the restoration of the route “outside of United’s normal processes.” The same day, the Port Authority approved the airline’s hangar project. In 2015 – after the scandal came to light & the route had lost almost $1 million – Smisek & other involved executives departed United with significant severance packages.
Recently, we held the 4th Annual “Women’s 100 Conferences” – in both Palo Alto & New York City. I’ve been attending these from the beginning & this year’s continued to live up to the hype! Here are 5 things I learned:
1. How To Know Your Shareholders: If you don’t have a centralized database to track notes from your shareholder engagement meetings (and your shareholders’ voting guidelines) – start one. Some companies have added this element to existing IR software – e.g. Ipreo. Others have a more basic approach. The bottom line is that institutional investors expect you to know where they stand on important issues. And they don’t want to rehash the same issues every year – you should just cover how their concerns have been considered or resolved. Your notes should also include your shareholders’ current contact procedures & preferences, which often change from year to year.
2. How To Know Your Potential Shareholders: We didn’t debate whether “the law of attraction” applies to shareholder engagement – but several people recommended thinking not only about your existing shareholders, but also the type of shareholders you’d like to get. This plays out in governance structures (e.g. single v. dual-class shares), environmental & social initiatives and your outreach efforts. Don’t overlook the communication value of your public disclosures for both existing & potential shareholders.
3. The Art of Using Directors in Off-Season Engagement: Shareholders might ask to meet with a director if there’s been a big strategic or executive pay change – or if there was low support for a company proposal at the annual meeting. They want to understand the board’s decision-making process & how it’s processing shareholder feedback. Directors can be really helpful, particularly if there are messages that are difficult to convey in a written proxy statement. But it’s extremely important to prep them on that shareholder’s policies & concerns – and how they relate to the company & its existing disclosures. Avoid cringe-worthy moments like “we just approved the pay package because the consultant recommended it.”
4. Icebreakers Work: Everyone introduced themselves at the beginning of both events – super helpful for anyone trying to connect with a particular person. On the West Coast, we all described our practice – but almost everyone’s was similar. On the East Coast, we had everyone say a “favorite” – book, movie, band, travel destination, etc. In addition to getting some good recommendations, I learned that this 10 minutes can really set the tone for the day. People were relaxed & jumped in with lots of questions during the panels.
5. We’re Building Community: I’ve always loved these conferences because the format encourages lots of interaction – you can meet heavy-hitters during speed-friending & connect over lunch with peers at the same career stage. So it was especially cool to meet two women who are now close friends, after meeting at the conference a few years ago. We hope this becomes common!
Sights & Sounds: “Women’s 100 Conference ’17”
This 1-minute video captures the sights & sounds of the “Women’s 100” events that just wrapped up in Palo Alto & NYC:
This Seeking Alpha blog by Steven O’Byrne examines pay-for-performance in the S&P 1500. Here’s a summary of key findings:
1. CEO pay for performance at S&P 1500 companies is roughly 1/8 of the way to perfect pay-for-performance (i.e. relative performance explains only 12% of the variation in ten-year relative pay).
2. Pay-for-performance could be dramatically improved by better director supervision of CEO pay. If directors were able to achieve CEO pay alignment (r-sq) at their own company of 50%+ and limit their own company’s CEO pay premium to the current interquartile range, CEO pay at S&P 1500 companies would be roughly 3/4 of the way to perfect pay for performance (i.e. relative pay would explain 76% of the variation in ten-year relative performance across companies).
3. Only about a fifth of S&P 1500 companies have relatively well-managed CEO pay (i.e. only a fifth have alignment (r-sq) of 50%+ with an interquartile pay premium at industry average performance).
4. Say-on-Pay voting shows little ability to discriminate between companies with high alignment and moderate pay levels on one hand and companies with low alignment and extreme pay levels on the other. The average SOP vote support of companies with relatively well-managed CEO pay is only 1.2 percentage points greater than the average SOP support of companies with poorly managed CEO pay.
5. Directors have two readily available tools to improve pay for performance:
– The first tool is sharing analysis. Perfect alignment of relative pay with relative performance requires a fixed relationship between the CEO’s excess pay share of excess value and the CEO’s market pay share of expected value. The CEO’s market pay share of ex-ante expected value is easily calculated and should be a guideline for incentive plan sharing, but sharing concepts have largely disappeared from board deliberations and CD&A disclosure.
– The second, and more powerful, tool is “perfect” pay plans that lead automatically to perfect correlation of relative pay and relative performance. One perfect pay plan is the Dynamic CEO Compensation plan developed by finance professors Alex Edmans of London Business School and Xavier Gabaix of NYU. A second perfect pay plan is the perfect performance share plan developed by Stephen O’Byrne of Shareholder Value Advisors.
6. Better pay is correlated with better performance (i.e. ten-year relative TSR).