The thrust of Norges’ positions is that long-term creation best aligns the company’s interests with what shareholders want. Here’s the 1st of four positions that brings this point home:
1. The board should ensure that remuneration is driven by long-term value creation and aligns CEO and shareholder interests. A substantial proportion of total annual remuneration should be provided as shares that are locked in for at least five and preferably ten years, regardless of resignation or retirement.
The 2nd position takes on targets:
2. The board should develop pay practices that are simple and do not put undue strain on corporate governance. Allotted shares should not have performance conditions and the complex criteria that may or may not align with the company’s aims.
The 3rd position looks to install a cap on overall pay:
3. The board should provide transparency on total remuneration to avoid unacceptable outcomes. CEO remuneration should be determined and settled in cash and locked-in shares each year. The board should also disclose a ceiling for total remuneration for the coming year.
The 4th position challenges termination payouts:
4. The board should ensure that all benefits have a clear business rationale. Pensionable income should constitute a minor part of total remuneration. The board should commit to not offering any end-of-employment arrangements that effectively shorten or dilute the lock-in of shares.
As noted in this WSJ article, the bartering to tweak the “Financial Choice Act” continues. Most of the Corp Fin-related notables in the bill remain untouched (eg. pay ratio would still get the axe) – but there are a few proposed changes that would impact you, such as changes to the ownership thresholds under Rule 14a-8, the shareholder proposal rule. This chart contains the changes – so far – from “Financial Choice Act 1.0.”
Of course, it’s still too soon to say what form the Choice Act will ultimately wind up taking – and even too soon to know if this legislation will eventually be “the one” put forward to replace Dodd-Frank…
Recently, Semler Brossy put out a pair of new resources – this memo describing the first failures of the proxy season. And this one predicting how the overall season will go…
Recently, Corp Fin denied a no-action request from Celgene to exclude a shareholder proposal submitted by John Chevedden. The proposal sought a bylaw that would prevent the board from seeing a running vote tally when say-on-pay or shareholder approval of plans were on the ballot. The company made unsuccessful arguments under Rule 14a-8(i)(2) (arguing it was a state law matter) – and (i)(7) ordinary business. Over the years, Corp Fin has allowed exclusion of shareholder proposals that sought confidentiality for preliminary vote tallies for uncontested matters under (i)(7) – a broader plate of topics than the narrower “pay topics only” proposal at issue in this case.
The big news from Wells Fargo yesterday was that the company’s board exercised its discretion to clawback $75 million from its former CEO and former head of community banking. Here’s the 113-page Wells Fargo board report – and here’s the news:
Here’s an excerpt from this note by Willis Towers Watson’s Bill Kalten & Steve Seelig:
A clawback policy addresses what to do after the fact. Helping ensure that a company has done everything it can structurally to discourage actions or events that would cause reputational harm is paramount, although some of those actions are beyond the scope of pay programs. Within the compensation realm, it appears that virtually all public companies already perform some degree of risk review. It might be a good idea to revisit this review process to reassure the compensation committee that reputational risks are unlikely to be exacerbated by pay structures.
This raises the question of whether a review of the mechanics of the pay program and its risk-mitigation features, such as mandatory deferrals, is sufficient. These reviews need to go deeper than a mere “check the box” exercise — real attention should be paid to likely behavioral responses to a given pay structure.
The details of how this might be accomplished and how deep within the organization this inquiry should go will vary for each company. The essence of this review, however, must focus on asking managers to identify the potential unintended consequences of their pay structures, which should turn out to be knowable if the right people are asked.
While a company can’t anticipate and prevent all possible misbehavior, a thorough review focusing on likely responses to specific incentive structures — such as finding that a particular metric and payout curve could provide incentives for overly aggressive growth — should provide additional insights into the organization’s culture and perhaps reduce the motivations that prompt unwanted behavior.
This ClearBridge Compensation Group memo presents an analysis of the goals set by 100 companies for their annual & long-term incentive plans, including how goals are set vs. prior year results – and how companies set the range around target (from threshold to maximum)…
This memo by John Ellerman of Pay Governance is the latest to predict what the near future will be for executive pay in the wake of the coming changes wrought by the new Presidential Administration…
Here’s the abstract for this study by Professor Michael Doran:
This article sets out the case for repealing the $1 million tax cap on executive pay. The cap is easily avoided and, when not avoided, widely ignored. Since enactment in 1993, the cap has had little effect in reducing executive pay or in linking pay to performance. Even worse, the cap increases corporate tax liabilities – liabilities that likely burden workers and investors. In effect, the cap punishes rank-and-file employees and shareholders for pay deals made by directors and executives. The article demonstrates why prominent reform proposals would be ineffective and counterproductive.
It then devises a novel reform approach – a confiscatory tax on excessive executive pay – that would limit executive pay without burdening workers or investors. But the article rejects the confiscatory tax because of the serious distortions that it would cause for business-organization and labor-supply decisions. Ultimately, the superior policy position is to repeal the cap. Concerns about income inequality are better addressed through robust progressive tax rates, and concerns about corporate governance are better addressed through non-tax mechanisms, such as reform of the business-judgment rule and expansion of director liability.
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The rise in both the prevalence and prominence of long-term performance plans has been one of the most significant trends in executive compensation over the past 15 years. At the time of the dot-com market collapse (March 2000 to October 2002) and the demise of several prominent U.S. companies (e.g., the Enron scandal revealed in October 2001), long-term performance plans were only used by a relatively small portion of large U.S. public companies.
Today, more than 80% of S&P 500 companies use a variety of LTI performance plans, including performance shares, performance units, performance-vested restricted stock and/or units, and long-term cash-based incentives. More striking than the growth in prevalence of long-term performance plans is the increased prominence of performance plans in the mix of LTIs provided by companies. Long-term performance plans now represent approximately 52% of CEO total LTI compensation opportunities.
The increased prevalence and prominence of long-term performance plans have come primarily at the expense of stock options. Corporate America began using stock options in executive pay packages in the 1950s, with use peaking during the late 1990s tech boom and bull market for stocks. Today, even though stock options are granted to 54% of S&P 500 CEOs, they typically represent only 18% of CEO total LTI award value.