Although we have never urged disclosure of pay ratios, we have long advocated that boards use internal pay equity (essentially the same thing as pay ratios) as an alternative – and much more reliable – benchmarking tool to help set executive pay levels. For example, here’s an excerpt from a blog that I wrote five years ago:
Shouldn’t boards demand to see those ratios to protect themselves from liability given the known bad data in the peer group surveys they get year after year? Of course, advisors should be willingly recommending the use of this alternative since it’s their job to protect the board. Sadly, most advisors blindly adhere to the status quo as too often happens.
I just can’t see what is wrong with putting together internal pay numbers for a board to consider. Where is the evil here? I suppose the downside is it likely will reveal how badly the board has been doing its job setting CEO pay levels over the past 20 years when historical numbers are crunched. But it’s better to make a fix now than perpetuate the problem. Note that I am not saying boards need to demand the ratios as called for by Section 952(b) as simpler ratios are easy to generate. We have sample spreadsheets posted in the “Internal Pay Equity” Practice Area on CompensationStandards.com.
By the way, I also don’t see any problem with using peer group benchmarks either. It’s just that the data in those surveys now are useless due to “pay in the top quartile” craze. There needs to be a reset before that type of data can be relied upon again. This reset will be hard to do, but it’s necessary and certainly doable, particularly if CEO pay levels are brought down to Earth on a widespread basis. The longer boards wait, the harder the medicine will be to take.
Sadly, I don’t think much has changed during the five years that I wrote that blog. Here’s what a member who works with a lot of boards recently told me:
I have been surprised by the lack of board curiosity of the likely pay ratio. I thought they would be pressing management for an estimate. Instead, they seem to be unconcerned and the ratio will “be what it will be.” I think that is a Doris Day song from an Alfred Hitchcock movie.
For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in on July 20th for the first in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You Need to Do Now.” When you go to the webcast page on July 20th, you will be able to download a set of “Annotated Model Pay Ratio Disclosures” in both PDF & Word format. The second webcast is on August 15th.
The speakers for the July 20th webcast are:
– Mark Borges, Principal, Compensia
– Mike Kesner, Principal-in-Charge, Human Capital Advisory Services, Deloitte Consulting LLP
– Dave Lynn, Editor, CompensationStandards.com and Partner, Jenner & Block LLP
– Maia Gez, Of Counsel, Gibson Dunn & Crutcher LLP
The speakers for the August 15th webcast are:
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP
Register Now – 10% Discount Ends July 28th: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure 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.
Among the panels are:
1. Corp Fin Speaks (speaker from the Staff to be announced)
2. The SEC All-Stars: A Frank Pay Ratio Conversation
3. Parsing Pay Ratio Disclosures: US-Only Workforces
4. Parsing Pay Ratio Disclosures: Global Workforces
5. Pay Ratio: Sampling & Other Data Issues
6. Pay Ratio: The In-House Perspective
7. Pay Ratio: How to Handle PR & Employee Fallout
8. The SEC All-Stars: The Bleeding Edge
9. The Investors Speak
10. Navigating ISS & Glass Lewis
11. Keynote: A Conversation with Nell Minow
12. Proxy Access: Tackling the Challenges
13. Clawbacks: What to Do Now
14. Dealing with the Complexities of Perks
15. The Big Kahuna: Your Burning Questions Answered
16. Hot Topics: 50 Practical Nuggets in 60 Minutes
Discounted Rates – Act by July 28th: 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 discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by July 28th to take advantage of the 10% discount.
We have posted an 10-second anonymous survey about the extent to which your company is prepared to implement pay ratio. Please take a moment to participate – will take less than 10 seconds. There will be a healthy discussion of the different ways that companies are getting prepared for pay ratio during the pre-conference webcast – “Pay Ratio Workshop: What You Need to Do Now” – that takes places next week…
Here’s the intro from this blog by Cooley’s Cydney Posner:
At more than half of the companies in the S&P 1500, the CEO is the lone board insider, according to this study and the related article in the WSJ. Isn’t that a good thing? Maybe not, say the authors, whose study showed that lone-insider boards can lead to lower profits, excessive CEO pay and more financial fraud.
The authors looked at data for companies in the S&P 1500 from 2003 to 2014 to examine the consequences of lone-insider boards. They found that lone-insider CEOs received on average “excess CEO pay,” that is, “pay above what objective factors, such as firm size and performance, would predict.” More specifically, they concluded that, “[o]n average, lone-insider CEOs received roughly 81% more pay a year than their peers. That’s an additional $4.6 million a year, which is money that could have been retained to fund growth strategies or returned to shareholders as dividends.”
They also found that CEO pay at companies with lone-insider boards was disproportionately higher than the pay of other key executives. CEOs who were lone insiders on their boards earned an average $7.39 million more than the average of the next four highest-paid executives, while CEOs who were not lone insiders made only $4.4 million a year more on average than the other executives. And here’s the stunner: according to the authors, “companies with lone-insider boards were 27% more likely to commit financial misconduct and…their profits were roughly 10% lower on average.” So much for good corporate governance?
Here’s the results from our recent survey on compensation committee minutes & consultants:
1. When it comes to providing comp committee minutes to consultants, our company:
– Provides upon request in electronic form only – 41%
– Provides upon request in paper form only – 5%
– Provides upon request in both electronic & paper form – 11%
– Doesn’t provide – but does allow inspection onsite – 25%
– Doesn’t provide – nor allow inspection onsite – 18%
2. Our compensation consultants ask for copies – or inspection – of committee minutes:
– Prior to each meeting – 12%
– Once a year – 4%
– On irregular basis – 25%
– They never ask for them- 59%
The Trump administration’s proposed overhaul of the federal income tax system includes a reduction of the maximum federal corporate income tax rate from 35 percent to 15 percent. If enacted, the proposal — a one-page outline released on April 26, 2017, and titled “2017 Tax Reform for Economic Growth and American Jobs” — would introduce sweeping changes and simplifications to the federal income tax system.
While the corporate income tax rate is unlikely to be cut to 15 percent, considerable bilateral support exists in Congress for a significant reduction. Any change also would alter the value of corporate income tax deductions. For example, a deduction taken by a corporate taxpayer on a $1 million payment at a 35 percent rate is worth $350,000, while a deduction on the same amount at a 15 percent rate is only worth $150,000.
A change in value of corporate tax deductions could, with proper tax planning, provide opportunities for substantial savings on compensation plans and arrangements. In the short term, potential savings would be possible from tax deductions on annual cash bonus payments and retirement plan contributions, while the long-term impact could involve significant changes to the structuring of compensation plans.
CEO pay is increasingly tied to performance – but while cash pay is at an all-time low (according to this recent Korn Ferry study) – overall pay is continuing to climb. This leaves key institutional investors wondering whether the performance bar is too low. Here’s a teaser from this WSJ article:
For two-thirds of S&P 500 companies, the overall pay CEOs received over the past three years proved higher than initial targets, according to an ISS analysis. That is typically because performance triggers raised the number of shares CEOs received, or stock gains lifted the value of the original grant. On average, compensation was 16% higher than the target.
The values companies disclose for CEO equity awards also show that about one-third of CEOs start the fiscal year expecting to beat the performance targets that determine the size of those stock grants, ISS said.
Boards must juggle a range of factors in setting performance targets. Investors and proxy advisers have their preferred measures, and consultants recommend targets that are challenging but not impossible. They can evaluate how well they have chosen by considering the market’s reaction, said Ira Kay, managing partner at consultancy Pay Governance. “If we beat it and our stock goes down, it was probably not such a hard goal,” Mr. Kay said.
For more thoughts, check out this blog by Cydney Posner & my recent blog on the growing unrest over LTIPs.
Through the end of last month, shareholders approved “annual” say-on-pay votes at 92% of reporting Russell 3000 companies. As noted in this WSJ article, an annual vote can give shareholders an outlet for expressing discontent & protect companies from more drastic action – such as votes against directors. A longer period might be appropriate for some companies – and anecdotally, some shareholders prefer it – but only if solid engagement efforts exist.
Despite the community’s apparent comfort with the status quo, the bill that eventually replaces Dodd-Frank may modify the frequency requirement for say-on-pay votes – to require voting only in years where there is a “material change” to executive pay. Here’s an excerpt from this Dorsey blog:
So, each year the issuer would have to determine if there has been a material change to executive compensation when deciding what proposals are put before shareholders at the annual meeting. Many issuers would likely continue to hold an annual vote to seek feedback from their shareholders even if there was no material change in compensation.
However, given the high profile nature of a negative say-on-pay result, would issuers shy away from the advisory vote in a year of poor company performance (absent an obviously material change to executive compensation)? Will an issuer’s determination not to include the advisory vote bring on another wave of proxy disclosure litigation? Could an issuer determine not to hold a say-on-pay vote for multiple years in a row?
As John has blogged, the Choice Act isn’t likely to survive Senate review, but the Senate is likely to come up with its own replacement bill. And this aspect seems to fall in the category of “if it’s not broke, don’t fix it.” Visit our “Say-on-Frequency” Practice Area to read recent memos that examine the pros & cons of 1, 2, and 3-year voting practices.
Last month, an institutional investor sued United – demanding the board recover $37 million paid to former executives who participated in a 2011 bribery scheme. United’s board says clawing back severance would hinder its ability to recruit executives & cause competitive harm. Some people think the board was initially reluctant to claw back severance because it wanted the departed executives to cooperate in the related DOJ investigation.
Either way, it begs the question of how far a CEO would have to go before they’re denied severance or it’s clawed back. This NY Times article describes the circumstances:
You may recall this inquiry: It centered on United’s reinstatement of a money-losing air route between Newark Liberty International Airport and Columbia, South Carolina. United had canceled the route but re-established it at the behest of David Samson, then the chairman of the Port Authority of New York and New Jersey, who had a vacation home near Columbia.
Mr. Samson, whose position gave him great sway over Newark Airport, wanted access to convenient flights to his second home. He had threatened to bar United from building a crucial hangar on-site if it did not start flying to Columbia.
Mr. Smisek, United’s CEO, didn’t report this pressure. Instead, federal investigators said that he approved the restoration of the route “outside of United’s normal processes.” The same day, the Port Authority approved the airline’s hangar project. In 2015 – after the scandal came to light & the route had lost almost $1 million – Smisek & other involved executives departed United with significant severance packages.