– Broc Romanek
He’s on a tear! Yesterday, Acting SEC Chair Mike Piwowar issued yet another statement directing the Corp Fin Staff to revisit another set of existing rules – the pay-ratio disclosure rules. Last week, Piwowar did the same thing with the conflict minerals rules.
The stated rationale for the reconsideration is that some companies are experiencing “unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.” No mention of employee morale – or the desire to avoid negative publicity with the general public. Comments should be submitted on the pay ratio rules within the next 45 days.
Although this statement doesn’t repeal – or even suspend – the looming deadline for the effectiveness of the pay ratio rule, it evidences a clear intent to re-visit the rule. It also gives a strong indication that the rule is going to be under scrutiny from both regulators & Capital Hill over the next few months. Since pay ratio disclosures aren’t mandated until next proxy season, there is some time for this to play out. But not a whole lot of time…
In this blog yesterday, I noted this list of “major” rules that are on the potential “hit list” under the “Congressional Review Act” – the resource extraction rules were just killed under that Act. Conflict minerals & pay ratio aren’t on the list.
How Fast – Or Slow – Can the SEC Act?
That is the question of the day. Here’s an excerpt from this WSJ article:
Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.
But Maybe Congress Will Act Faster…
Mark Borges notes that this Bloomberg/BNA article reports that a new version of the “Financial Choice Act” will be introduced in Congress later this month. Not only is this bill likely to include a provision that would repeal of the pay ratio rule, it appears that it will also contain a version of the “Proxy Advisory Firm Reform Act of 2016.” As you will recall, that’s the bill that was introduced last year that would require the major proxy advisory firms register with the SEC and, among other things, disclose potential conflicts of interest.
– Broc Romanek
This Equilar blog gives a run down of how much typically is paid to those that serve on special board committees…
– Broc Romanek
Check out this Skadden memo that summarizes the ISS Equity Plan Scorecard, including the nifty Appendix A – which identifies the allocation of points by EPSC factor…
– Broc Romanek
Two days ago, the “Investor Stewardship Group” wrapped up two years of work to release these long-term value principles: “Framework for U.S. Stewardship and Governance.” The group includes 16 large institutional investors & global asset managers: BlackRock, CalSTRS, Florida State Board of Administration, GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, ValueAct Capital, Vanguard, Washington State Investment Board and Wellington Management.
– Broc Romanek
Here’s a study by FW Cook about annual incentives. The findings include:
– 83% of companies in the Top 250 use at least one specific financial measure to determine annual
incentive payouts, of which 75% use two or more financial measures.
– Non-financial measures (e.g. strategic and individual performance) are also common and are used as a stand-alone
measure by 52% of companies with non-discretionary plans.
– Profitability measures are not only the most prevalent annual incentive measures (utilized by 92% of companies with
non-discretionary plans), but profitability measures also carry the heaviest weighting among the companies that use
them (on average, comprise 59% of the weighting of annual incentive plans among those that use them).
– Among companies with heads of business units reported in their proxy statements, the dominant practice is to
emphasize corporate over business unit results for these officers.
– 62% of companies in the Top 250 provide a maximum annual incentive payout opportunity of 200% of
target, with the remainder divided approximately equally above and below 200%
– Broc Romanek
Tune in tomorrow for the webcast – “The Art of Working With Proxy Advisors” – to hear Strategic Governance Advisors’ Amy Bilbija, Davis Polk’s Ning Chiu, Teneo Governance’s Martha Carter and CamberView Partners’ Allie Rutherford analyze how to interact with proxy advisors to get the most out of your proxy season.
– Broc Romanek
Based on access to data supplied by Main Data Group, Steven Hall & Partners has a new study of incentive compensation programs, with highlights including:
1. Fixed vs. Variable Compensation
– CEO compensation is substantially incentive-based
– Target compensation is 86% variable and only 14% fixed
2. Short-Term Incentives
– Median annual incentive targets for CEOs are 104% of base salary, an increase of 3% compared to last year’s study
– Typical leverage provides the ability to earn half of the bonus at threshold performance levels and 200% for maximum achievement
– Earnings remains the predominant performance metric, utilized by 87% of the companies studied, with a median weighting equal to 50% of bonus opportunity
– While plans most commonly used three performance metrics, we note a significant increase (+15%) in companies using four or more metrics
3. Long-Term Incentives
– Annual grants of long-term incentive awards continue to be almost universal practice
– 96% of companies granted long-term incentive awards to the CEO
– Prevalence of performance-vested awards held steady as 67% of companies granted performance-vested awards
– Performance-vested awards comprised the largest portion of long-term compensation as measured by dollar value
– The most popular performance metrics continue to be earnings and stock price performance, typically measured using relative total shareholder return (TSR); TSR usage increased +5% in 2015
– 78% of companies utilize more than one vehicle in their long-term incentive program
– Restricted stock remains the most popular vehicle at 80% prevalence; usage increased +5% over last year
– Stock option/SAR usage (granted by 54% of companies) was flat
– Broc Romanek
I’ve been saying for years that the noise about out-sized influence by proxy advisors is overstated. This new study from ProxyInsight seems to back up my claim when it comes to say-on-pay results…
– Broc Romanek
We are excited to announce that we have just posted the registration information 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 article from the “Financial Times”:
BlackRock has demanded an end to pay awards that outpace ordinary employees at the UK’s biggest companies ahead of a round of critical shareholder votes in 2017. The world’s largest asset manager is also pressing companies to curtail the generous pension packages that are commonly granted to top executives, calling for retirement contributions to be “in line with the rest of the workforce”. BlackRock’s tougher stance on executive pay is detailed in a letter, seen by the Financial Times, that was sent last week to the chairmen of all companies in the FTSE 350 index. The letter will provide fresh ammunition to campaigners calling for reform of executive pay.
Total pay for bosses of FTSE 100 companies has quadrupled over the past 18 years as repeated efforts by shareholders to control spiralling remuneration awards have failed. BlackRock initially indicated that its stance on executive pay had hardened during a parliamentary hearing in December, when it said it would vote against members of remuneration committees that agreed to excessive rewards. The asset manager’s letter goes further, arguing that pay increases for top executives should reflect those given to the broader workforce. “In the case of a significant pay increase that is out of line with the rest of the workforce, BlackRock expects the company to provide a strong supporting rationale,” said Amra Balic, head of BlackRock’s investment stewardship team in Europe.
The letter also states that board committees should consider and respond to voting results on remuneration awards at the previous year’s annual shareholder meeting. Companies historically have frequently used comparisons with pay awards made to executives at peer groups as a justification for agreeing more generous remuneration packages for executives. BlackRock is highly critical of this widespread practice, known as benchmarking. “Benchmarking should only be used as a frame of reference for what competitors are paying, rather than as a starting point for negotiations,” said Ms Balic.
Companies should also disclose more information about their use of remuneration consultants, including the names of those appointed and their fees, she said. Roughly half of the companies in the FTSE 350 index will face binding votes on pay in 2017. Binding votes give shareholders the final say on executive pay awards, instead of company directors. Anger among pension funds over the long-running failure of companies to curb excessive pay for top executives is threatening to spark a fresh round of shareholder revolts this year.
Theresa May, the prime minister, has promised to tackle the issue and the UK government published a consultation paper in November that outlined a range of possible reforms. The government wants the link restored between executive pay awards and company performance. Academics say the metrics used most widely to judge performance — earnings per share growth and total shareholder return — are easily manipulated and promote damaging short-term decision making by executives. “We are wary of companies using metrics such as earnings per share or total shareholder return [as performance measures],” said Ms Balic. BlackRock would instead “encourage” companies to use fundamental measures of the value created by a company such as comparisons of returns on invested capital, she added.