– Broc Romanek
Here’s a teaser for this Pay Governance memo about director pay:
Twenty years ago, the Director pay model at a large corporation often had the following features:
– Directors were commonly eligible for certain benefits programs and pensions;
– Vesting schedules for equity awards were 3 or 4 years long, similar to those for executives;
– Equity awards were in the form of stock option grants (also used for executives), and Director awards were expressed as a number of shares rather than a grant value;
– Many companies did not differentiate pay for Committee service; and
– Lead Director roles and Director stock ownership guidelines were absent.
– Broc Romanek
Last chance to take advantage of the 30% discounted “early bird” rate for our popular conferences – “Tackling Your 2018 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 14th Annual Executive Compensation Conference” – to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
Early Bird Rates – Act by March 31st: 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 March 31st to take advantage of the 30% discount.
– Broc Romanek
Here’s an excerpt from this article by Alex Edmans:
I strongly believe that executive pay should be reformed. My own research demonstrates the substantial benefits to firms of treating their workers fairly. However, disclosure of pay ratios may have unintended consequences that actually end up hurting workers. A CEO wishing to improve the ratio may outsource low-paid jobs, hire more part-time than full-time workers, or invest in automation rather than labor. She may also raise workers’ salaries but slash other benefits; importantly, pay is only one dimension of what a firm provides. Research shows that, after salary reaches a (relatively low) level, workers value nonpecuniary factors more highly, such as on-the-job training, flexible working conditions, and opportunities for advancement. Indeed, a high pay ratio can indicate promotion opportunities, which motivates rather than demotivates workers. A snapshot measure of a worker’s current pay is a poor substitute for their career pay within the firm.
The pay ratio is also a misleading statistic because CEOs and workers operate in very different markets, so there is no reason for their pay to be linked — just as a solo singer’s pay bears no relation to a bassist’s pay. This consideration explains why CEO pay has risen much more than worker pay. As an analogy, baseball player Alex Rodriguez was not clearly more talented than Babe Ruth, but he was paid far more because baseball had become a much bigger, more global industry by the time he was playing. Even if the best player is only slightly better than the next-best player at that position, the slight difference can have a huge effect on the team’s fortunes and revenues.
I agree with some of what Alex says – but he also doesn’t understand that boards can take internal pay into consideration as just one factor in their decisionmaking. And instead of comparing pay ratios of different companies – a company should just be looking at its own pay ratio over an extended period (ie. decades).
In fact, one of the main reasons why a company should be doing this internal look is that comparing a CEO’s pay package to peers is one of the primary reasons how we got into this mess – peer group benchmarking where everyone got paid in the top quartile for years & years…
– Broc Romanek
We have posted the transcript for our recent webcast: “Pay Ratio: The Top Compensation Consultants Speak.”
– Broc Romanek
Here’s an excerpt from this interview with Meridian Partner Bob Romancheck:
What catalysts exist today, including the results of the presidential election, that could trigger a reemergence of the use of stock options?
There are multiple catalysts now in place that could prompt an increase in the use of stock options. The single strongest factor is the recently created expectation of economic growth. The articulated policies of President Trump have caused the stock market to jump in anticipation of a much stronger rate of US economic growth than we have seen for years. Recall that from the historic barometer, economic growth means some compensation committees may return to the use of stock options to incent further share price growth and to capture this upside (which is leveraged around 3 or 4 to 1, since economically, it typically requires the grant of three or four stock options to equate to the grant value of one restricted share or performance share—so potential upside is significantly higher with the use of stock options).
Additional catalysts include the much lower dilution rates that now exist across US public companies (making room for option grants). Also, the initial shock of requiring an accounting expense for stock options has long since worn off. The accounting cost is now mostly neutralized, since all types of long-term incentive vehicles require an expense charge of about the same magnitude (note, although the Black-Scholes expense for a stock option, in simple terms, may be approximately one-third of the grant price, since it often takes three times as many NQSOs to equal the grant value of restricted shares, the expense comes out about the same).
Finally, there is still the benefit of a corporate income tax expense and possible cash inflow for the company at exercise. And stock options have always been a great income tax deferral mechanism for executives, although tax deferrals may not be quite as valuable in the future, with the likelihood of lower marginal income tax rates.
– Broc Romanek
Here’s an excerpt from this blog by Roy Saliba, ISS’ Head of Global Compensation Products:
ISS observes actual payout levels for short-term performance awards and finds that the general trends in fiscal year 2015 are consistent with expectations, where 88 percent of companies achieved threshold payouts as defined by their awards, 56 percent achieved target payouts, and while only 7 percent of companies achieved maximum payouts, it is still within the range of expectations. Some differences exist between large-cap, mid-cap, and small-cap companies with S&P 500 companies having the highest achievement rates of threshold payouts and slightly lower achievement rates of maximum payouts, although all indices have achievement rates that are in line with general expectations.
– Broc Romanek
Recently, FW Cook’s 2016 director compensation report came out. Here’s the intro:
In terms of pay levels, total compensation increased by 1.3% at the median of the total sample versus last year’s study, which reflects an apparent stabilization of director pay among large- and mid-cap companies in particular. Large-cap companies in our study pay directors $260,000 at the median and $300,000 at the 75th percentile, unchanged from last year. The mid-cap median of $200,000 reflects only a 1.1% increase from last year, while the small-cap median of roughly $145,000 reflects a larger increase of 6.0%. Technology continues to be the highest-paying sector in our study, and Financial Services the lowest, consistent with recent years.
Also see this blog by Keith Bishop about the bizarre requirement for California corporations for directors to approve of their own compensation by “round robin” voting…
– Broc Romanek
As I’ve blogged before, the “Financial Choice Act” is a House bill that would roll back much of Dodd-Frank (and more). Here’s an excerpt from this Bloomberg article:
Now, though, the drive to wipe out or scale back Dodd-Frank has lost momentum. Trump issued an executive order on Feb. 3 for Treasury Secretary Steven Mnuchin to review the law, but the president made no mention of it in his priority-setting speech to Congress on Feb. 28. As with the Republican vow to repeal Obamacare, the sticking point may be finding a replacement for the law on the books. “We need to regulate more simply, cut back on unintended consequences, and see if we can recalibrate this,” says Douglas Elliott, a partner at management consulting firm Oliver Wyman. “That happens to be an extremely hard thing to do.”
Hensarling does already have a bill in the House, the Financial Choice Act, that’s being given long odds. “We think the chances that the bill becomes law are less than 20 percent—maybe as low as 10 percent,” Brian Gardner, Washington analyst at the investment bank Keefe, Bruyette & Woods, wrote to clients on Feb. 16. Even so, the bill offers a glimpse into Republicans’ thinking on how to shape financial regulation.
– Broc Romanek
Arthur J. Gallagher & Co. recently completed its 8th annual study of short- and long-term incentive plan design trends among Top 200 companies. Some key findings include:
Short-term Incentive Plans (STIPs):
• Of the 200 companies reviewed, 61% of companies with STIPs indicated the use of “umbrella” STIP plans (also referred to as “inside/outside” plans or “plan within a plan”), which along with prior-year results, were the highest in the past five years.
• Many companies use individual performance measures in their STIPs. Of the 198 companies with some form of a short-term incentive, including companies with umbrella plans, 27% included individual, specific objectives for one or more NEOs.
• Earnings per share (EPS) was the most common single measure in STIPs. Thirty-eight percent (38%) of companies with non-discretionary STIPs used EPS in 2015, which is slightly lower than last year (40%).
• Ninety percent (90%) of companies disclosing their STIP measures and metrics used at least one type of income-based measure in 2015, which is lower than last year (93%). This category includes EPS, net income, operating income, EBITDA, etc.
• Median performance over target was 1.4% as compared with 7.0% in 2014. Median payout was 10.8% over target as compared with 21.5% in 2014.
• Of those companies with bonus or short-term incentive plans:
o 86% used at least one financial measure.
o The remaining 14% of companies used discretion (no formula-based determination).
o In all, 64% used discretion in part or in whole in 2015.
Long-Term Incentive Plans (LTIPs):
• Continuing in 2015 and for the seventh consecutive year was the shift away from appreciation awards (stock options/stock appreciation rights (“SARs”)) and towards performance awards that are earned based on achieving performance goals.
• The collective use of performance-based awards (which includes performance shares/units, performance-based restricted stock, performance stock options, premium stock options, and long-term cash plans) totaled 95% in 2014 and 2015, up from 93% in 2013, 88% in 2012, 82% in 2011 and 77% in 2010. On the flip side, the prevalence of stock option/SAR grants, in total, has declined steadily from 82% in 2008 to 61% in 2015.
• TSR is the most commonly used performance measure in LTIPs, with 56% of LTIPs using TSR in 2015, down slightly from 57% in 2014. This measure had steadily increased in use over the past few years, from 46% in 2011, to 51% in 2012 and 55% in 2013.
LTIPs
• Similar to STIPs, some type of income measure is commonly used in LTIPs. Fifty-one (51%) of companies with LTIPs used at least one measure of income in 2015, up from 49% in 2014 but less than the 53% prevalence in 2013. Of the income measures, EPS is still used most often with 58% prevalence in 2015 as compared to 57% in both 2013 and 2014.
• The use of revenue measures was flat with 2014 at 20% of companies, up from 18% in 2013. This was just below the high of 21% over the last six years.
• Forty-seven percent (47%) of the companies used a capital efficiency measure in 2015, which has increased from 31% in 2009. This category includes return on invested capital, return on equity, return on capital, and return on net assets, economic profit, and economic value added.
• Median payout was 4.0% over target, up from 2.0% over target in 2014. For those companies disclosing results, performance was 5.0% over target as compared with 4.6% in 2014.
• Seventy-five percent (75%) of performance periods reported were three years in length. which is up from 69% in 2014. Twenty percent (20%) used one-year performance periods, down from 27% in 2014. Twenty-one percent of these plans added two or more additional vesting years to get to at least three years of vesting. Also, for those companies using one-year performance periods, over half (56%) of them set performance goals annually over a three-year period.
Thirty-eight percent (38%) of companies with STIPs and LTIPs used one or more of the same measures in both incentive programs, which is slightly more than 37% in 2014.
– Broc Romanek
In case anyone out there is worried that we have seen the last of greedy executives, check out this recent US District Court-SDNY opinion by Judge Jed Rakoff. You cannot read this first paragraph of the case without taking an interest!
Why would the executives (and former principals) of a paddle-board division of a sports and recreation company cause the company to make a one-time $60,500 purchase of one million stickers that the executives themselves immediately attempted to repurchase from the company for approximately $4 million?
The answer is that they thereby hoped to stick the company with a $10 million “earnout” payment to the executives, thus netting themselves a cool $6 million. Thanks, however, to the age-old doctrine of good faith and fair dealing, and similar legal protections, in the end it is these executives who are stuck.