Here’s an excerpt from a recent column by NY Times’ Gretchen Morgenson:
But calibrating how much weight a stock price should have on C.E.O. pay is tricky: A company’s stock price can be influenced by share buybacks and other financial engineering that does little to produce long-term value. Why reward a C.E.O. for that?
And sometimes a company’s stock price rises for reasons that are unrelated to its operating performance. Remember when oil prices were hitting the stratosphere a decade ago? Executives at companies like Exxon Mobil reaped enormous pay awards not just because of able leadership but also because the escalating value of the commodity propelled the prices of their stocks.
Something similar may have happened after last year’s presidential election. Call it the Trump effect on C.E.O. pay. By early November, many stocks were barely up on the year — the S.&P. 500 had eked out a mere 2 percent gain. But after the election, the overall market rallied on expectations of the incoming Trump administration’s pro-business agenda. The S.&P. 500 wound up almost 10 percent higher for 2016.
For an outsider, determining precisely how a company assesses a performance metric is difficult, of course. But the lift from the Trump effect seems to have been most pronounced among industries in which investors believed the administration’s deregulatory fervor would be greatest and thus lead to lower costs and more profits.
Also see this NY Times piece entitled “As C.E.O. Pay Packages Grow, Top Executives Have the President’s Ear”…
Say-on-pay and shareholder advisor vote recommendations have caused a dramatic increase in the use of relative total shareholder return (TSR) as a long-term incentive (LTI) plan performance metric. Relative TSR prevalence in LTI plans has nearly doubled over the past 5 years, used by approximately 50% of companies of all sizes and industries.
This is largely due to shareholder advisors, such as Institutional Shareholder Services (ISS), using TSR as the primary metric in their relative pay-for-performance quantitative evaluations. ISS is appropriately attempting to enhance its company performance assessment model by adding 6 metrics. This new approach is clearly a response to critics, but it presents a new set of challenges.
As shown in this Semler Brossy chart, the say-on-pay failure rate of 0.6% is the lowest since voting began in 2011. Only seven Russell 3000 companies have failed thus far in 2017…
I started warning folks about needing to put say-on-frequency on the ballot this year as far back as this blog in August (and several times since). As could be expected, some didn’t get the “memo” and appear to have spaced.
For example, Retail Opportunity Investment Corp filed a revised proxy statement with the SEC (the original one was filed a week earlier), along with a separate cover letter saying they were sending out the new proxy to add the vote on the frequency of say-on-pay. At least they caught their mistake in time.
Back in 2011, quite a few companies forgot to amend their initial 8-Ks that reported voting results to explain the rationale for the company’s choice of frequency. It’s a strange part of the rule – so oversight of it isn’t surprising. But if a company fails to do this amendment within 150 days, it might not be considered a ‘timely’ filer.
In 2011, Corp Fin was fairly liberal in granting waivers for that oversight. Given that experience – and the publicity related to it – I imagine the Staff is not anticipating many waiver requests this time around. And they may not be amendable to granting such waiver requests…
As noted in this article, four institutional investors have banded together for Mylan’s annual meeting to “vote no” on a group of director nominees (with an average tenure of 12 years) – as well as the company’s say-on-pay – because the investors believe that the directors have sat on the board too long. This letter is signed by NYC Comptroller; New York State Comptroller; CalSTRS and PGGM…
LTIPs are usually the biggest element of pay – and have grown in complexity over the years. This “Proxy Insights” article (pg. 7) highlights mounting opposition to LTIP structures. Here’s an excerpt:
Growing shareholder unrest over LTIPs is reflected in the data with average support for their approval falling from 92.6% in 2014 to 89.7% in 2016. Of course, this still indicates a very high level of support. Even among the ten investors who vote against LTIPs most often, the majority still support LTIPs over 50% of the time.
Many critics point out that the three-year duration of LTIPs is not enough to truly focus executives on a company’s long-term interest. The real ramifications of any short-term investment in equipment or human resources may not be seen until long after executives have received their payouts. This discourages investments that create long-term value for the company, as it could reduce LTIP payouts over the three-year performance period.
Critics also claim that LTIPs railroad executives towards single outcomes set by targets, rather than the complex patterns of behavior required to run a company. Indeed, many question whether executives are even responsible for reaching their targets, or whether external factors are the real drivers of company performance. Executives often seem to receive their payouts regardless of the actual reasons for company success or failure.
How can LTIPs be more effective? Private equity backers – whose influence is growing – tend to prefer infrequent & meaningful option grants that vest based on the PE firm’s absolute or internal rate of return over their 3-5 year investment period. In their view, annual restricted stock awards are just a favor to executives. Meanwhile, corporate governance advocates are speaking out against short-termism & suggesting LTIP structures that promote a true long-term view.
It’s important to understand these conflicting views so that you can tailor your LTIP to the company’s specific strategy – and clearly communicate to your executives & shareholders.
Among the panels are:
1. The SEC All-Stars: A Frank Conversation
2. The SEC All-Stars: The Bleeding Edge
3. The Investors Speak
4. Navigating ISS & Glass Lewis
5. Parsing Pay Ratio Disclosures: US-Only Workforces
6. Parsing Pay Ratio Disclosures: Global Workforces
7. Pay Ratio: Sampling & Other Data Issues
8. Pay Ratio: The In-House Perspective
9. Pay Ratio: How to Handle PR & Employee Fallout
10. Keynote: A Conversation with Nell Minow
11. Proxy Access: Tackling the Challenges
12. Clawbacks: What to Do Now
13. Dealing with the Complexities of Perks
14. The Big Kahuna: Your Burning Questions Answered
15. Hot Topics: 50 Practical Nuggets in 60 Minutes
Early Bird Rates – Act by June 9th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by June 9th to take advantage of the 20% discount.
– Companies that maintain pay practices viewed as “problematic” by proxy advisory firms (e.g. excise tax gross-ups, lower target annual incentive goals without a corresponding reduction in target pay, and target payout for median TSR performance) tend to underperform companies that do not maintain these “problematic” pay practices.
– Companies that maintain legacy excise tax gross‐up protections for NEOs, a common irritant for many investors, do not appear to underperform those companies that have eliminated excise tax gross-ups.
– Companies that have lowered annual incentive goals year-over‐year without a corresponding reduction in target incentive opportunity tend to underperform on three-year TSR compared to companies with flat or increased incentive goals year-over-year. Because the lower TSR performance negatively affects pay, we continued to see pay-for-performance alignment in these companies.
– Companies that set rigorous relative TSR goals (i.e., above‐median performance required for target payout) tend to outperform companies that maintain traditional relative TSR performance-payout structures (target payout provided for median performance) based on three‐year TSR results.
The FASB’s new revenue recognition standard – which applies starting in 2018 – is mainly getting attention for its impact on disclosure & internal controls (see my blog last week on TheCorporateCounsel.net). But if your pay metrics are keyed to revenue, you should also be discussing how the change will affect multi-year & future plans – and how to handle it. Check out this excerpt from Cydney Posner’s blog:
How to address that problem? Two approaches have surfaced so far: “One approach is to keep two sets of books, one under the new standard and another for purposes of the compensation plan or bonus arrangement…..The second approach is to change the comp plan or bonus arrangement.
Neither approach is an ‘obvious’ solution and comes with challenges and complications. ‘Can you do that unilaterally—there’s probably some legal implications—can you just say this was the bogey we had set up and we’re going to change that because we changed the way we’re keeping score for revenue we’re going to change the plan—not obvious how you just go ahead and do that….I’ve come across this with a number of companies and it’s presented some real issues in terms of how do we deal with this.’”
Delay in dealing with the issue, and in involving others outside of accounting, will just make it more complex.
These days there’s a lot of uncertainty around executive compensation laws, particularly given recent events in DC. Recently, Equilar collected views from a group of folks about what to do. Here’s some themes:
– Given its administrative complications, continue preparing for compliance with the pay ratio rule
– Monitor efforts to repeal or revise Dodd-Frank mandates – and redirect internal & external resources as matters evolve
– Continue to focus on shareholder engagement & proxy messaging – legislative changes won’t eliminate public critique of excessive executive pay
– Comply with current requirements for comp plans – e.g. 409A – until any rule changes are actually made