The Advisors' Blog

– Liz Dunshee

In this Pearl Meyer survey, 60% of companies said that ESG issues were a top concern. Not only is there a global regulatory trend to require disclosure on things like environmental & employment policies – but investment dollars are flowing to companies with demonstrably strong ESG metrics & shareholders are demanding that boards & comp committees proactively drive “sustainability” performance.

It can be an intense process to link pay to appropriate ESG measures for your company – but this memo suggests some whys & hows:

– Identify long-standing activities already taking place in your company that fall into the ESG category. Existing HR goals like hiring diversity or environmental, health & safety measures can easily be reported as ESG-related actions. Supply chain practices, energy usage & resource conservation efforts may also apply.

– Consider whether the identified actions are already indirectly represented as a component of some executives’ performance-based pay – particularly health & safety. If present at all, the metrics are most likely indirect & folded into larger measurement components – you may be able to create an explicit link.

– Catalogue the benefits of directly tracking these activities. For one, they can be packaged as a corporate social responsibility report – to meet regulatory requirements or serve as a positive corporate communication tool.

Check out Alcoa and also Exelon for examples of directly linking pay to sustainability goals & other operational metrics.

– Liz Dunshee

Recently, a member asked in our “Q&A Forum” (#1180) whether there were any quarter-by-quarter checklists for compensation committees. In response, we posted some new resources in our “Compensation Committees” Practice Area – including this detailed chart in Word from Mike Melbinger – and this high-level governance calendar for the board & all key committees.

– Liz Dunshee

As a follow-up to my recent blog, here’s an update from Steve Quinlivan:

The shareholder has now dismissed the case with prejudice. From the docket, you can’t rule out Intel from having entered into some sort of settlement agreement. If they did, let’s hope it was less than modest, so that we can thank Intel for holding the line and not encouraging this behavior.

– Broc Romanek

I worry that some companies might be relying on Congress to step in and delay the implementation of the pay ratio rule. That’s looking less likely by the day. So the time that you have to prepare is narrowing.

It’s also far from clear whether the SEC would take action to delay implementation of a rule required by Dodd-Frank. Then-Acting SEC Chair Piwowar’s re-opening of comments earlier this year did not result in an outpouring of complaints from companies. Beyond 13,000 form letters in favor of pay ratio disclosures, the SEC received about 180 comment letters – of which only about 15% were against the rule. In this blog a few months ago, I linked to some of the comment letters from specific companies. And Ning Chiu blogged yesterday about a specific comment letter.

Our upcoming “Proxy Disclosure/Say-on-Pay Conferences” will comprehensively cover what you need to be doing now to implement pay ratio – with 20 panels spread over two days. Many of the panels will be drilling down into pay ratio issues. Act by June 9th for a 20% early bird rate. You can attend in-person in Washington DC – or watch by video online.

– Broc Romanek

Here’s a piece from Willis Towers Watson about private companies & LTIPs. Here’s an excerpt:

These are the core LTI-related questions that should be addressed by companies that plan to stay private:

– Is the company willing to use real stock to compensate its executives? If so, securities law (i.e., registration exemption) must be considered. But most private companies, especially family-owned businesses, are not willing to offer such LTIs. Our data indicate that about 80% of these “permanent private” firms do not use real equity in their lLTI programs.

– How important is long-term value creation to the company’s owners? Long-term value creation frequently isn’t paramount to owners who don’t plan to sell in the near future. While value is certainly important, many private companies, notably family- and founder-owned businesses, tend to emphasize consistent long-term growth, profitability, cash flow and dividends over long-term value creation.

– How do business owners define and measure long-term success? When defining and measuring long-term objectives, private companies tend to emphasize growth, profitability, cash flow, sustainability, liquidity and risk level. They may also focus on reinvestment of cash in the business versus paid as dividends to shareholders. Moreover, several studies have shown that private companies are more likely to focus on mission-based objectives related to employees, community, customers and the environment.

– How long is “long term?” Not surprisingly, private businesses tend to think of the long term as 5 to 10 years versus the 2- to 3-year time horizons of public companies. In line with this, private companies are more likely to emphasize loyalty and longevity with regard to employees, customers, suppliers and other stakeholders. This longer-term time horizon is often reflected in LTI design.

– How important is long-term retention of employees and wealth creation? In private companies, LTI often plays a dual role of performance-reward and retirement-funding vehicle, which must be figured into incentive plans.

– How and when will the LTI plan be paid out or monetized? This is particularly important for a value-based plan where there is no market for the stock or phantom stock. In particular, monetization presents thorny tax code issues, including fairly rigid requirements around the timing of vesting and payment.

– Is the LTI plan affordable over the long term? It’s critical to model the LTI plan over at least 5 to 10 years to assess its accounting and cash costs to the enterprise.

– Broc Romanek

Here’s an excerpt from this European article entitled “Why It’s Right to Be Mad About Executive Pay”:

The critics are right and the defenders of CEO pay are wrong, according to a study for Handelsblatt Global Magazine by Zurich-based economist Gerhard Fehr. There is, on average, no discernible relationship between executive pay and company performance – suggesting that executives generally reward themselves regardless of whether they succeed or fail. Digging into the data for 70 leading companies in Germany, Switzerland and Austria – and comparing board members’ compensation with shareholder returns relative to other companies – Fehr found no pattern at all. “The idea that executive pay is generally based on performance is post-factual,” he says. Fehr is the founder and CEO of Fehr Advice, a consultancy and research group based on his work in behavioral economics.

If the idea were true that executives’ lavish pay checks were a reward for performance, then the data should show higher pay at companies producing higher shareholder returns – and vice versa. But in reality, Fehr and his researchers found no such connection, no matter how they sliced and diced the data. Pay goes up regardless of how companies perform.

Fehr’s study does not mean that there aren’t individual companies that reward their management for good performance, or cut pay when they do worse. What it does show, clearly, is that there is no such trend across all companies. For every company that rewards its executives for good performance, there is another where paychecks go up when times are bad. Many show little variation at all, signaling that these executives have managed to insulate themselves from the effects of their actions.

Unlike many company bonus systems, Fehr measures executives’ performance by looking at shareholder returns in relation to a company’s peers – what he calls a market-adjusted performance index. Executives shouldn’t be rewarded, he says, for share prices moving up or down with the general market.

– Broc Romanek

Here’s a few articles about how pay levels look this year based on this season’s proxy statements:

– WSJ’s “It’s Good to Be a CEO, Again: Stocks Rise, and So Does Pay”
– ISS Analytics’ “As 2017 Filings Pour in, U.S. CEO Pay Hits Record Levels”
– Equilar’s “Highest-Paid CEOs at the Largest Companies by Revenue”
– IR Magazine’s “CEO pay rises despite companies’ performance, study finds”
– Willis Towers Watson’s “Closer look at the findings of our 2017 proxy analysis”
– Willis Towers Watson’s “Total CEO pay in U.S. companies rose 6% in 2016”

– Broc Romanek

Here’s a piece from Willis Towers Watson about pay disclosures in the UK. Here’s an excerpt:

Interestingly, only 35 of the first 50 companies to report (70%) have put their remuneration policies to a vote, reflecting the significant minority that have conducted binding remuneration policy votes (which must be held at least every three years) since 2014. Looking at the new proposed policies, we see three clear themes:

– More reductions in pay levels than ever before
– A strong move toward increased long-term alignment in the form of more deferrals, holding periods and increased shareholding guidelines
– Many moves to align pension contributions with those of the wider workforce.

– Broc Romanek

As noted in this blog, the SEC brought an enforcement action against MDC Partners back in January for not disclosing perks for a former CEO adequately. At that time, the company agreed to pay a $1.5 million penalty.

Yesterday, the SEC announced it had settled with the former CEO himself – and that he paid $5.5 million ($1.85 million in disgorgement, $150k in interest and a $3.5 million penalty). That’s big money!

Here’s an excerpt from the SEC’s press release:

According to the SEC’s order, shareholders were informed in annual filings that Miles S. Nadal received an annual perquisite allowance of $500,000 in addition to other benefits as the chairman and CEO of MDC Partners. But the SEC’s investigation found that without disclosing information to investors as required, MDC Partners paid for Nadal’s personal use of private airplanes as well as charitable donations in his name, yacht and sports car expenses, cosmetic surgery, and a wide range of other perks. All total, Nadal improperly obtained an additional $11.285 million in perks beyond his disclosed benefits and $500,000 annual allowances. He has since resigned and returned $11.285 million to the company.

– Broc Romanek

Yesterday, the FASB issued “Accounting Standards Update No. 2017-09, Stock Compensation (Topic 718).” The ASU is effective for annual periods – and interim periods within those annual periods – beginning after December 15, 2017.

Here’s the intro from this “Accounting Today” article:

The Financial Accounting Standards Board has released an accounting standards update containing guidance on which changes to the terms or conditions of a share-based payment award require companies to apply modification accounting. The new standards update aims to give accountants more clarity on the guidance FASB provided in an earlier stock compensation accounting standard, known as Topic 718. FASB wants to reduce the differences in practice in applying the standard, along with the cost and complexity of applying it, to a change to the terms or conditions of a share-based payment award.

Companies can change the terms or conditions of a share-based payment award for a variety of different reasons, and the nature and effect of the change can vary significantly. FASB currently defines the term “modification” as “a change in any of the terms or conditions of a share-based payment award,” but some of its constituents have pointed out that the definition of the term modification is broad and its interpretation results in diversity in practice.

Some companies evaluate whether a change to the terms or conditions of an award is substantive. When they decide the change is substantive, they apply modification accounting in Topic 718. But when they conclude a change isn’t substantive, they don’t apply modification accounting. Topic 718 doesn’t include guidance about what changes are considered “substantive.”