Here’s an excerpt from this blog – “Should Say-on-Pay Votes Be Binding?” – by two Canadians about the effectiveness of non-binding say-on-pay votes:
Some findings reveal disturbing and unintended consequences. For instance, studies suggest that shareholders base their votes on the performance of a company’s stock rather than on an analysis of the firm’s compensation policies and practices. If company shares do better than those of its peers, almost any compensation package will be approved. This perverse result tends to increase the pressure on management to focus on short-term stock performance, sometimes through decisions that may negatively affect future performance.
This is not surprising, though. It has become far harder to read and understand the particulars of executive compensation. Indeed, for the 50 largest (by market cap) companies on the Toronto Stock Exchange in 2015 that were also listed back in 2000, the median number of pages needed to describe their executives’ compensation rose from six in 2000 to 34 in 2015, with some compensation descriptions consuming as many as 66 pages. Investors holding shares in hundreds of different firms face a formidable task. The simplest approach is to vote according to the stock’s performance or, more likely, to rely on the recommendations of proxy advisory firms, which also base their “advice” in part on relative stock market performance.
Thus, 66 percent of corporate directors do not agree that say-on-pay resulted in a “right-sizing” of CEO compensation. Yet 83 percent of directors very much agree or somewhat agree that say-on-pay increased the influence of proxy advisors, according to a 2016 PwC and Cleary Gottlieb survey: Boards, shareholders, and executive pay.
Here’s an excerpt from this Cooley blog (also see this blog):
According to this paper, one group that have experienced some impact from say on pay are directors. The academic study indicates that, following low favorable votes for say-on–pay proposals, directors incur significant reputational damage and financial costs, which the authors contend should motivate directors to provide better oversight of executive comp from the get-go. Moreover, the authors believe that their study shows that say on pay “has given shareholders an important, albeit indirect, increase in influence over executive compensation.”
Our Executive Pay Conferences: Less Than 2 Weeks Left!Here’s the registration information for our popular conferences – “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference” – to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
Register Now: 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 reasonable rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register now.
New research suggests chief executives and chief financial officers with a high proportion of stock-based pay are more likely to downplay material accounting errors so they can maximize compensation and minimize potential liability. “It is unsurprising,” wrote Brian Hogan, a clinical assistant professor of business administration at the University of Pittsburgh, and Case Western Reserve University associate professor of accountancy Gregory A. Jonas, “that executives take actions to maximize their compensation.”
In this blog, Davis Polk’s Ning Chiu notes that responses to ISS’s 2017 policy survey show strong investor support for the use of additional pay-for-performance metrics:
79% of investors supported ISS using additional pay for performance metrics beyond total shareholder return. 18% want revenue metrics (absolute revenue or revenue growth); 26% favored the use of earnings metrics (such as EPS or EBITDA); 35% supported return metrics (ROA or ROE); 47% supported return on investment metrics (such as ROIC); 25% supported cash flow metrics; and 22% favored economic profit metrics.
This new paper from the Stanford Business School & Rivel Research Group reveals the viewpoint of institutional portfolio managers on executive pay practices, finding that investors believe pay should be tied to performance, long-term in focus and aligned with shareholders. Return on invested capital was the most common metric cited by these investors as a good link between pay and performance; stock price was the least common.
Additionally, buy-side investors claim not to be influenced by proxy advisor recommendations – but this research found that investor voting practices are highly correlated with proxy advisor recommendations…
For corporate governance and compliance thinkers, Mylan Labs is the gift that keeps on giving. Earlier this week, we looked at the compensation incentives Mylan designed for senior executives—incentives that drove them to raise the price of EpiPens to punishing levels for consumers.
Let’s keep pulling on that thread. It leads to some excellent questions about boardroom governance, and as often happens with U.S. securities law these days, those questions don’t have good answers.
Those pay incentives, worth millions of dollars to CEO Heather Bresch and other senior executives, came from Mylan’s compensation committee. The committee itself used outside consultants (Meridian Compensation Partners and the law firm Cravath, Swaine, and Moore, according to the 2015 proxy statement), but ultimately the committee’s three members were responsible for creating the conditions that reward Bresch for a strategy of steep and steady price hikes.
Wait a minute, I thought. Don’t compensation committees have to disclose how their pay plans might lead to unnecessary risk-taking? Wouldn’t that be reflected in Mylan’s proxy, since Bresch’s moves have led to a reputation risk nightmare?
Yes to the first question, no to the second. Which is precisely the governance dilemma U.S. securities law has foisted onto Corporate America.
Our compensation disclosure rules only address financial risks, relevant to shareholders. They ignore all the other enterprise risks that sloppy executive compensation can cause, and leave a company fumbling in front of all its other stakeholders.
Anecdotally, I am hearing that some companies haven’t been doing much yet to prepare for the implementation of the SEC’s pay ratio rules. That’s not surprising given how busy people are – and that the implementation date seems so far away. As this Mercer spot survey notes, advance planning is key – and now is the time to start preparing.
Here are some key findings from the survey:
– Companies are making significant progress toward compliance. Three-quarters of respondents have already determined a method to identify the median employee or are considering one or more methods.
– A majority (60%) of respondents have estimated their ratio, with more than half reporting ratios under 200:1 and only 20% reporting ratios of more than 400:1.
– Ratios vary by industry. Industries with low ratios tend to have more professional staff, and those with high ratios have more part-time, temporary, and less-skilled employees. Sectors with the lowest ratios are in banking/financial services, technology, and nonfinancial services. The highest ratios are in retail/wholesale and consumer goods.
– About one-third of respondents are using or considering statistical sampling as a method to identify the median employee.
– Over 80% of respondents believe their data systems are ready or, with some manual effort, adequate to identify the median employee.
Note that compensation consultants are starting to roll out new memos on how to best prepare – including these ones from Deloitte Consulting & Willis Towers Watson posted in our “Pay Ratio” Practice Area…
Our Executive Pay Conferences: Only 3 Weeks Left!Here’s the registration information for our popular conferences – “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference” – to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
Register Now: 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 reasonable rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register now.
As noted in this Compensia memo, the House approved a bill – the ‘Empowering Employees Empowering through Stock Ownership Act’ (HR 5719) – last week that would enable employees of certain privately-held companies to defer the income tax liability associated with the exercise of their stock options and the vesting of their restricted stock unit awards prior to an IPO. A similar bill has been introduced in the Senate, but has yet to be reported out of committee…
As noted in this Willis Towers Watson blog, on a mostly symbolic party-line vote, the House Financial Services Committee recently approved legislation (H.R. 5983) that would repeal the Dodd-Frank CEO pay ratio disclosure rule and make changes in a number of other Dodd-Frank requirements…
As noted in this NY Times article, MarketWatch article and Reuters article, CEO John Stumpf and the (now former) head of community banking for Wells Fargo have agreed to forfeit unvested equity awards to the tune of $41 million and $19 million, respectively (the CEO also agreed to forego bonuses for this year, nor draw any salary while an internal investigation is ongoing). These actions by the board more than effectuate what the company’s clawback policy would have otherwise required. The look of clawbacks going forward, perhaps? Here’s the related Form 8-K that Wells Fargo filed yesterday.
Here’s five notable items:
– The board was able to impose an “unvested equity” clawback that was much easier than clawing back dollars/stock that had already been delivered into the executive’s hands.
– Avoids possible need for the executive to amend past tax returns & file for a credit under Code Section 1341 (which Mike Melbinger has discussed in a few blogs).
– Necessary PR move, as the board was under a lot of pressure to show responsiveness. This came at little immediate cost to the company or the CEO (merely cancelling unvested equity awards for Stumpf). In theory, these forfeited awards could be made up in the future.
– We’ll see whether this situation leads to a restatement for the company. So far, news reports suggest it’s immaterial to the company’s financials. “Restatement” is such a subjective term as the numbers of “formal” restatements – those deemed material enough for an Item 4.02 8-K – are way, way down. In comparison, revision restatements (stealth?) are over 70% of all restatements now.
– Maybe a good lesson for drafting future clawback policies: don’t provide for a clawback triggered only upon a restatement…
Register Now: 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 reasonable rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register now.