The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

April 4, 2017

Section 162(m): Time to Repeal?

– Broc Romanek

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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April 3, 2017

Considering Performance Stock Options

– Broc Romanek

Here’s the teaser for this Pay Governance memo:

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.

March 30, 2017

Is a “Target Range” Right for Your Incentive Plan?

– Broc Romanek

In a 2013 survey of compensation committee members co-sponsored by the NYSE, Conference Board and Pay Governance, the top 3 “challenges” that committees stated they were facing involved incentive pay & performance goal setting. Specific challenges noted in the survey included:

1. Determining appropriate incentive pay levels – 62%
2. Balancing P4P with retention – 57%
3. Ensuring the rigorous nature of incentive plans – 57%

See this memo by Pay Governance about possible ways to tackle these challenges…

March 28, 2017

Say-on-Pay: Startling Differences in Fund Voting Practices

– Broc Romanek

Mark Van Clieaf & Stephen O’Byrne have done an analysis of say-on-pay voting at 213 funds that shows startling differences in “voting quality.” The top quartile is 4x better than the bottom quartile – and the top decile is 16x better than the bottom decile.

This is a little technical. Their measure of voting quality is the sum of (1) alignment (r-sq) of SOP vote support with pay equity and (2) percent “no” for companies with 100%+ pay premiums. We calculate a custom measure of pay equity for each fund using 300+ votes to capture the fund’s weighting of external pay equity based on relative TSR, external pay equity based on relative ROIC and internal pay equity.

Their analysis shows that big funds don’t have higher voting quality – and asset owners, on average, are no better than asset managers…

“Funds” includes mutual funds, state pension funds and entities like Canada Pension Plan Investment Board. The voting data is from Proxy Insight – I’m not sure how they get all the data…

March 27, 2017

Does Say-on-Pay Reduce and/or “Compress” Pay?

– Broc Romanek

Here’s the teaser for this Pay Governance memo by Ira Kay, Blaine Martin & Clement Ma:

After 5 years of SOP votes, it is now possible to review the pre- and post-SOP statistical impact on CEO compensation. With sufficient historical data post-SOP, we answer 2 fundamental questions regarding this legislation’s consequences:

1. Did the amount of S&P 500 CEO pay decline since SOP (2011)?
2. Does the CEO labor market structure have a more compressed compensation range post-SOP?

March 24, 2017

Pay Ratio: Comments Received So Far

– Broc Romanek

Back in early February, the SEC’s Acting Chair – Mike Piwowar issued a statement directing the Corp Fin Staff to revisit the pay ratio rule & requested public comment about any challenges in complying with the rule. Comments were due within 45 days – so the deadline has now passed.

Here’s the list of comments received so far. Beyond a short form letter in favor of the rule (that was received over 3k times), there are several hundred comment letters. Most of these are short letters from individuals, also expressing an interest in keeping the rule. Overall, this new request for comment has resulted in a response that is a mere fraction of the 287k comment letters that the SEC received on it’s rule proposal.

Let’s dig down into these new comment letters. Only a handful of these letters are from companies explaining the challenges. But there are a few, like these:

– Plexus
– Finish Line
– Graco
– BorgWarner
– Flushing Financial
– Stein Mart
– National Association of Manufacturing (citing situations of anonymous companies)

There are a number of comment letters from institutional investors, including:

– Group of Couple Hundred Investors, Unions & Others (posted as “Aberdeen Asset Management”)
– CalSTRS
– Everence Financial & Praxis Mutual Funds
– Walden Asset Management
– Trillium Asset Management

And there’s a few from unions:

– International Brotherhood of Teamsters
– AFL-CIO
– AFSCME

March 23, 2017

Pay Ratio: Group of Senators Object to Implementation Delay

– Broc Romanek

Here’s the intro from this Davis Polk blog by Ning Chiu:

A group of senators have written this letter to SEC Acting Chair Piwowar opposing any delay in the implementation of the pay ratio rules. The senators are “extremely troubled” by Commissioner Piwowar’s decision to seek additional comments on the rule, and his directive to the staff to reconsider the rule’s implementation, which we previously discussed.

The senators note that the statute requiring the rule was passed nearly seven years ago, and during the proposal stage the SEC received more than 270,000 letters, including many from investors in support of having the information as a way to assess companies’ approaches to executive compensation and human capital. The senators argue that the disclosure helps investors evaluate a CEO’s value creation, and facilitates “better checks and balances” against insiders “paying themselves runaway compensation.” The letter goes on to cite the oft-quoted statistic that CEO pay at large companies has risen 997% from 1978 to 2014 while the compensation of non-supervisory employees rose about 11%.