The Advisors' Blog

– 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).

– Broc Romanek

Here’s an interesting chart that compares CEO pay in five developed countries, courtesy of Willis Towers Watson…

– Broc Romanek

Following up on my blog from a few days ago, here’s a blog from Gibson Dunn that summarizes the pay ratio disclosures so far. Here’s an excerpt:

As of March 9, 2018, 61 S&P 500 companies have reported required pay ratios, most commonly in a definitive proxy statement. The average pay ratio among these companies is 204:1, ranging from a high of 935-to-1 to a low of 12-to-1.

Also see this pay ratio checklist from Orrick…

– Broc Romanek

This Davis Polk memo does a nice job of summarizing the pay ratio disclosures so far…

Also see this Bloomberg article entitled “Less Is More for Companies Reporting CEO-to-Worker Pay Gap”…

– Broc Romanek

I’ve been running an executive pay conference for over 15 years now – and I’ve always been loathe to program about “pay-for-performance” because I don’t quite understand it. I’ve always been a hard worker – so I’m the type who gives “my all” in exchange for a salary. That’s all the incentive I really need.

But I certainly can be dis-incentivized. And if that happens, my reaction is to find a new job. And the memo that the United Airlines CEO recently sent to employees – described in this article – would fall into the category of things that dis-incentivized me.

First, there is the tone of the memo – aptly described in the article as tone-deaf. And then there is the subject of the memo: taking away quarterly performance bonuses from many employees (who expected them in the regular course as they hit certain benchmarks) – and instead pooling together that money to give much larger bonuses to those that win a lottery of the bonus money. To capture the essence of that, I’ll use this excerpt from the article:

It’s a curious logic, one that says: “How do we get them to improve? How about taking away their bonus?” To be followed by “heh. heh. heh.”

Can you imagine what the United CEO would say if his compensation was subject to a random drawing. I guess we’ll never know because employee backlash already led to the company shelving this horrible idea…

– Broc Romanek

As noted in the summary provided in this Torys memo, Ontario has joined the UK (see these memos) in trying to tackle gender pay equity:

On March 6, Ontario introduced “Then Now Next: Ontario’s Strategy for Women’s Economic Empowerment,” which includes a proposed “pay transparency” bill. The strategy sets out a three-year plan to increase gender equity, and makes recommendations for removing the gender wage gap in the province. If passed, the legislation—which is not currently publicly available—will have significant implications for employers in Ontario, and Ontario will become the first province in Canada to legislate pay transparency.

– Broc Romanek

We have posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.”

– Broc Romanek

In his blog on this site, Mark Borges is providing full analysis of pay ratio disclosures as they come in – and this Andrews Kurth memo does a nice job of summarizing the disclosures so far…

– Broc Romanek

Dig this updated “Compensation Committee Handbook” from Skadden Arps. Written in a style that is easily understood & 110 pages long…