The Advisors' Blog

– Broc Romanek, CompensationStandards.com

We have posted the transcript for our recent webcast: “The Top Compensation Consultants Speak.”

– Broc Romanek, CompensationStandards.com

No sooner do I blog on TheCorporateCounsel.net about a House bill that would make it challenging for the SEC to conduct any rulemaking, than Cooley’s Cydney Posner blogs about an executive summary of the “Financial Choice Act” – which would require the SEC to conduct rulemaking to dismantle nearly all of the corporate governance rules that the SEC has adopted under Dodd-Frank over the last six years.

The kicker is that all of this repealing isn’t in the executive summary (and the full bill isn’t public yet); rather the executive summary just says “repeal non-material specialized disclosures.” You can’t make this stuff up! But Cydney’s blog notes that Cooley’s “Government Analytics Practice Group” dug in to uncover what is behind the bill’s executive summary:

– Repeal specialized public company disclosures for conflict minerals, extractive industries and mine safety (Dodd-Frank Title XV)
– Expand the Sarbanes-Oxley Act Section 404(b) exemption for non-accelerated filers to include issuers with up to $250 million in market capitalization (up from the current threshold of $75 million) or $1 billion in assets for banks (Dodd-Frank Section 989G).
– Repeal the burdensome mandate that publicly traded companies disclose the ratio of median vs. CEO pay (Dodd-Frank Section 953(b))
– Repeal the SEC’s authority to further restrict the ability to engage in legitimate securities short selling (Dodd-Frank Section 929X)
– Amend the mandate on public companies to provide shareholders with a vote on executive compensation to occur only when the company has made a material change to the executive compensation package (Dodd-Frank Section 951).
– In the event of certain financial restatements, hold bad actors responsible by limiting ‘clawbacks’ of compensation to the current or former executive officers of a public company who had control or authority over the company’s financial reporting (Dodd-Frank Section 954).
– To reduce the burdens on emerging growth and smaller reporting companies, repeal the reporting requirement for public companies regarding employee or board member hedging of equity securities granted as compensation (Dodd-Frank Section 955).
– Repeal federal financial regulators’ ability to prohibit types and features of incentive-based compensation arrangements (Dodd-Frank Section 956).
– Repeal the SEC’s authority to issue rules on proxy access (Dodd-Frank Section 971).
– Repeal the SEC’s authority to issue rules to require disclosures regarding Chairman and CEO structures (Dodd-Frank Section 972).

As Cydney notes in her blog, it wouldn’t quite repeal all of Dodd-Frank’s corporate governance provisions – pay-for-performance would still be on the books. The bill would also incorporate about a dozen bills that are floating around in the House these days – and would “streamline” the SEC’s Enforcement Division process so that individuals received “fair treatment.” Cydney writes:

According to the NYT, the bill “has little chance of passing Congress this year.” And, even if it did, President Obama still holds the veto pen, at least until January. Nevertheless, Speaker Ryan has encouraged his Republican brethren to develop affirmative policies and programs, and, as the NYT suggests, this bill “may influence the presidential debate and help shape the Republican agenda in the next term.”

– Broc Romanek, CompensationStandards.com

Here’s the intro from this blog by Willis Towers Watson:

We’ve recently been hearing from some companies that they’re reluctant to employ statistical sampling in calculating their CEO pay ratios based on the notion that their calculation will not be as accurate as if they had used actual data for their entire workforce. This thinking draws an analogy to political polling, which is based on statistical sampling and has gotten a bad rap lately because certain polls have failed to accurately predict the outcomes of recent elections. Thus, the logic goes, if polling (and statistical sampling) do not lead to accurate or valid reflections of the true result, why would a company ever want to use this approach to disclose a number as highly charged as the CEO pay ratio?

In reality, however, the entire exercise of compiling the CEO pay ratio is based on estimates, regardless of whether a company uses statistical sampling. This is true because the Securities and Exchange Commission (SEC) does not require companies to calculate Summary Compensation Table (SCT) total compensation for all employees to identify the median employee. As a result, every company will be using a less-than-100%-accurate methodology to arrive at an estimate of the median pay, which is, of course, a permissible approach under the final SEC regulations.

This makes the calculation of the CEO pay ratio different from a political election in that there will never be an indisputable outcome. This may create concerns that some could challenge the approach used to compile the ratio as improper, a particular concern with respect to the plaintiff’s bar. This article is designed to help illustrate how companies can consider addressing those risks and makes the case that using statistical sampling actually can help companies defend themselves on this issue.

– Broc Romanek, CompensationStandards.com

As part of my “Big Legal Minds” podcast series – check out this 25-minute podcast, during which Blair Jones of Semler Brossy describes her vast experience on being a compensation consultant, including:

1. How did you wind up getting into the compensation consultant industry?
2. Can you give us a sense of what the compensation consultant industry is like?
3. Can you give us a sense of what different types of roles folks play within a consulting firm?
4. What are the least understood things that you do?
5. What are the hardest parts of your job?
6. What are the best parts of your job?
7. What are consultants best at? Less effective at?
8. How has the job changed since you first got into the industry? How do you expect it might change over the next several years?
9. What advice would you give someone that is just joining a consulting firm?

These podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”); you can subscribe to the feed so that any new podcast automatically downloads…

– Broc Romanek, CompensationStandards.com

Tune in tomorrow for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster, Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.

– Broc Romanek, CompensationStandards.com

In this 20-second video, Cap’n Cashbags receives $100 million in stock options for the year:

– Broc Romanek, CompensationStandards.com

With my webcast coming up this morning on TheCorporateCounsel.net regarding “Non-GAAP Disclosures: What Is Permissible?” – here’s a note from a member commenting on this WSJ article that I blogged about yesterday:

– It is extremely rare for any company to use GAAP earnings for bonus calculation purposes (word searching “non-GAAP” probably missed the other 42% of companies that refer to adjusted EPS, adjusted revenue, etc.).

– Most incentive plan targets are based on operating results, which is why it is common to exclude non-operating items – like FX or asset impairments – from the bonus calculation. It is also common for some industries to exclude non-cash expenses, like equity compensation expense.

– Agree that some items should not be excluded from GAAP results when calculating incentive payouts – and there is typically a very rigorous process that management and the compensation committee use to evaluate what to exclude.

– Lay-off expenses are mentioned as an example of a bad adjustment to GAAP results for incentive plan purposes. If you are the board, would you want to provide management with a financial incentive to delay a lay-off or plant closure until next year to avoid a reduction in the current year’s bonus? I can think of many examples where the entire industry faced excess capacity and closing facilities was not anticipated at the beginning of the year. Most boards would want the management team to get out in front on an issue like that – and would be happy to reward them for doing so, rather than create a financial penalty. I recognize that paying big bonuses to management during large layoffs is not a good practice and should be avoided.

– Agree that if management wants relief from FX headwinds one year, they need to exclude FX tailwinds in future years.

– Broc Romanek, CompensationStandards.com

With my webcast coming up tomorrow on TheCorporateCounsel.net regarding “Non-GAAP Disclosures: What Is Permissible?” – here’s an excerpt from this WSJ article:

But these adjusted metrics aren’t just showing up in earnings releases. Pro forma figures have been proliferating in annual proxy statements, too. There, when used with compensation metrics, they can help executives draw bigger pay packets. Research firm Audit Analytics finds that the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 that have released them so far this year. Five years ago, that term showed up in 27% of proxies for current S&P 500 constituents.

There is nothing improper about using non-GAAP measures as long as they are disclosed properly. And corporate boards decide on the measures they want to use for compensation purposes. Plus, there is an argument to be made for sometimes excluding items from results for compensation purposes. If, say, a natural disaster hits a company with expensive repairs, perhaps an adjustment is in order. But other items that often get excluded in pro forma results, such as layoff-related charges, do seem like a reflection of management’s performance. And boards have too often shown a willingness to set awfully low bars for executives to clear.

That, though, can disadvantage shareholders and wreck the idea of pay for performance. In that vein, the dramatic rise in the number of companies using pro forma measures to determine bonuses would indicate the balance between shareholders and executives is being skewed in executives’ favor. Indeed, an examination of the most recent proxy statements from companies in the Dow Jones Industrial Average shows about a dozen of the index’s 30 constituents had annual pro forma earnings well in excess of GAAP ones and used the pro forma ones in annual bonus calculations.

– Broc Romanek, CompensationStandards.com

Here’s an interesting article entitled “Here’s Why We Can’t Rely on Shareholders to Fix CEO Pay” – here’s an excerpt:

I asked Robert A.G. Monks, the founder of Institutional Shareholder Services, a leading corporate governance consulting firm, what he thought of BlackRock’s line of defense. “Sheer manure,” was his reply. Money managers who cast vote after vote in favor of management are “no longer upholding their fiduciary responsibility to shareholders. They’re acting solely in their own interest.” “The large money managers,” Monks explained, “don’t want a reputation for putting their finger in the eye of a CEO who might be in a position to give them more business.”

Such eye poking becomes particularly unlikely when the money managers who would do the poking have massive paychecks in their own pockets. But even mutual funds with top execs less outrageously rewarded than BlackRock’s Fink have proved reluctant.

– Broc Romanek, CompensationStandards.com

Here’s the latest survey of severance & change-in-control practices from Frederic W. Cook & Co…