Here are the agendas – 20 panels over two days. You’ll notice that many panels have a new novel feature – a post-panel commentary by different experts than the experts on the panel. For example, after Corp Fin Director Keith Higgins speaks, Meredith Cross & Mark Borges will kibitz on what we just heard from Keith. Think of it as being akin to post-debate analysis on the cable networks. The panels include:
1. Keith Higgins Speaks: The Latest from the SEC
2. SEC Speaks: Post-Panel Commentary
3. The SEC All-Stars: The Bleeding Edge
4. The Proxy Designers Speak: How to Make Disclosure Usable
5. Navigating ISS & Glass Lewis
6. Hot Topics: 50 Practical Nuggets in 60 Minutes
7. Pay-for-Performance Disclosure: Now What
8. P4P: Post-Panel Commentary
9. Creating Effective Clawbacks (& Disclosures)
10. Clawbacks: Post-Panel Commentary
11. Pay Ratio: Now What
12. Pay Ratio: Post-Panel Commentary
13. Pay Ratio: The In-House Perspective
14. Pay-for-Performance: How to Do The Proper Messaging
15. Proxy Access: Tackling the Challenges
16. Proxy Access: Post-Panel Commentary
17. Pledging & Hedging Disclosures: What to Do Now
18. Pledging & Hedging Disclosures: Post-Panel Commentary
19. Dealing with the Complexities of Perks
20. The Big Kahuna: Your Burning Questions Answered
Early Bird Rates – Act by May 20th: 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 May 20th to take advantage of the 20% discount.
Check out this blog by Steve Quinlivan about how some companies have voluntarily disclosed ratios of the CEO’s compensation to other named executive officers…
Leading up to the SEC’s adoption of its pay ratio rules, a familiar refrain was that shareholders didn’t care about ratio disclosure. This new study by Professors Khim Kelly and Jean Lin Seow reveals what we have been pushing for a long time – that the most meaningful disclosure about ratios is when you compare a company’s own ratios over time – rather than comparing ratios to peers.
This is exactly what we wrote about over a decade ago – that internal pay equity is an internal look. Here’s an excerpt from our thinking:
To start the internal pay process, boards should start by evaluating the relationships for both total direct compensation and total remuneration (i.e., including special executive benefits and perquisites, assuming these are significant). Then, if these analyses raise red flags, the analysis can be pursued by component of total compensation, including a break out by long-term incentive component.
Boards should choose a relevant time period for the internal pay audit to cover. In some cases, companies may choose to go back 10 to 20 years (e.g., although this won’t be possible for all companies, since some companies and managers have not been around since the mid-80s; in addition, some business models have changed so dramatically that too far a look-back may not be sufficiently relevant).
It is important to choose a time frame that will allow a good understanding of how the current pay program and pay for particular executive officers came to be, and the changes that have evolved over time. For companies that are already looking at multi-year tally sheets, they can use this data for this analysis.
Once a company has conducted an internal pay equity audit, management and the board should determine whether they feel comfortable both with the internal pay equity relationships that exist today and the changes in those relationships that have taken place over time.
It is important to note that the internal pay audit is intended to be an internal look, not something that is benchmarked across companies. This might be one reason why the practice has diminished in recent years – benchmarking databases maintained by compensation consultants provide no help here. This is an exercise that must be undertaken internally, although guidance from experienced consultants can help guide you through the process
The new study is based on an experiment in which MBA students were asked to make judgments about a hypothetical company. Those to whom high CEO-to-employee pay ratios were disclosed were significantly more likely than others to regard the CEO’s pay as unfair – and the more unfair they regarded it, the less likely they were to view the firm as a worthy investment. This latter finding is particularly noteworthy, the professors believe, because one of the criticisms leveled against Section 953(b) is that it engenders overreach by the SEC, requiring it to meddle in issues of income inequality rather than stick to its intended job of protecting investors.
Here’s more from a press release about the new study:
Says Prof. Kelly: “Here were men and women with an average of six years’ work experience and a fair degree of sophistication about business and accounting, and clearly disclosure of a lopsided CEO-to-employee pay ratio turned out to be relevant to an investment decision. Actually it would be surprising if it didn’t. As a recent nationwide survey conducted by Stanford University suggests, the whole issue of CEO pay is in bad odor. Seventy-four percent of the respondents to that survey said CEOs were overpaid relative to the average worker; yet, ironically, when asked what they believed the pay of Fortune-500 CEOs to be, they vastly underestimated the amount. In this climate of opinion, how could perceiving the CEO-to-employee pay ratio as unfair not be relevant to investment decisions?”
The 75 participants in the experiment were asked to assume they worked in the investment department of a corporation and were assigned to assess the potential of a fictional firm in which their company was considering making a medium- to long-term investment. They were informed that the firm was in the semiconductor industry and was regarded a leader in market share and innovation. The subjects were provided with company financial data and information on CEO compensation, both of which were adapted from an actual NASDAQ-listed semiconductor firm.
One third of the subjects were informed that the CEO’s total compensation in the most recent year was about $4.3 million and that this amount was roughly the average for CEOs in the company’s industry.
A second group was informed that the CEO’s total compensation was about $7.4 million, and that this amount was higher than the pay of three fourths of the CEOs in the industry.
A third group was provided the same information as the second group plus the fact that the median pay for employees of the company (other than the CEO) was about $45,000 and, additionally, that this meant the CEO-to-employee pay ratio was about 162-1, well above the average industry ratio of about 96-1.
Asked their opinion of the CEO’s level of compensation, on a scale of -7 (very unfair) to +7 (very fair), the groups offered significantly different views, as follows:
– The first group produced an average positive fairness rating of +1.12.
– The second group, on average, bestowed a neutral fairness rating of +0.12.
– The third group rated fairness negatively at -1.32.
Statistical analysis indicated opinion of CEO pay fairness to be significantly related to assessment of the company’s investment worthiness. In other words, the less fair the chief executive’s compensation was perceived to be, the less potential the company was judged to have as an investment.
Why didn’t comparatively high CEO pay by itself push fairness ratings into negative territory? One important reason, the researchers found, was that participants viewed high compensation levels as beneficial in attracting executive talent. But this belief is evidently outweighed by the sense of unfairness created by the additional disclosure of a lopsided CEO-to-employee pay ratio.
Further research by Profs. Kelly and Seow has resulted in still another intriguing finding from a similar experiment, this one involving 100 MBA students who were asked to assess a hypothetical company in the restaurant industry. The experiment, reported in a working paper, tests not only the three conditions described in the JMAR study but a fourth condition in which both the CEO’s compensation ($4.3 million) and the CEO-to-employee pay ratio (96-1) are average for the industry. The professors find that the combination of the lower CEO compensation level and lower pay ratio evokes a fairness rating that is just as negative as the one produced by above-industry averages of $7.4 million and 162-1. In short, in the words of the study, “pay-ratio disclosures, even when they reveal less extreme CEO-to-employee pay multiples that are comparable to those in peer companies, can result in negative perceptions of CEO pay fairness and workplace climate that indirectly reduce perceived investment potential of companies.”
Prof. Kelly sums up: “High CEO-to-employee pay ratios, whether 100-1 or 200-1, clearly made a special impression on the participants in our experiments. It seems eminently plausible that high ratios will also impress actual investors, with concomitant effects on companies, when they stare out from proxy statements.”
A while back, I blogged about this fascinating Stanford/Rock Center survey about how people perceive CEO pay. Surprisingly, the survey got less attention from the mass media than I expected – but there were a number of articles – including this CNBC piece entitled “This CEO got $142 million more than he deserved.” Here’s an excerpt:
The real problem isn’t just lofty dollar figures. As Rosanna Landis Weaver, the lead author of the As You Sow report, details, the more nettlesome issue is the fundamental disconnect between CEO pay and performance: “CEO pay grew an astounding 997 percent over the past 36 years, greatly outpacing the growth in the cost of living, the productivity of the economy, and the stock market, disproving the claim that the growth in CEO pay reflects the ‘performance’ of the company, the value of its stock, or the ability of the CEO to do anything but disproportionately raise the amount of his pay,” Weaver writes.
A regression analysis conducted by HIP Investor, which rates investments by factoring in environmental, social and governance factors, found 17 CEOs who made at least $20 million more in 2014 than they would have if their pay had been tied to performance. Based on HIP Investor’s calculations, Zaslav, the Discovery Communications chief, made $142 million more than would have been warranted if his pay was more directly linked to performance.
Anyways, as I continue to be fascinated by the original set of survey results about how the public perceives pay (see my blog about it) – check out this second study from Stanford about how CEOs & directors perceive pay. As you can imagine, there are huge gaps between how the public and CEOs/directors perceive pay, including:
– 55% of CEOs and directors believe that CEOs are paid the correct amount relative to the average worker; 29% believe they are not; and 16% have no opinion. In contrast, only 16% of the public believe CEOs are paid the correct amount relative to the average worker, and 74% believe they are not.
– Only 12% of CEOs and directors support a relative limit (compared to the average worker) to CEO pay, while 79% oppose it, compared to 62% of the public favoring a pay cap – with just 28% opposed.
– 34% of directors – compared to 70% of the public – believe that CEO compensation is a problem.
– 97% of CEOs and directors agree that the government should not do anything to change CEO pay practices. In contrast, 49% of the public favors government intervention, and 35% oppose it.
But the disconnect is not limited to the one between the public and directors. Directors also disagree with CEOs about the most appropriate methods of determining CEO comp. For example, while both groups might agree that the extent of value creation is an important element of the equation, they tend to differ on the appropriate method of measuring value creation. According to the paper, directors think total shareholder return (TSR) should be used to measure value creation, while CEOs tend to look instead to profitability measures (such as operating income and free cash flow), which they are more likely to be able to directly influence. In reality, the paper observes, both measures are subject to outside forces, such as broad-market trends, behavioral sentiment or cyclicality.
Which of these measures, the paper asks, is more accurate, and, when measuring performance, are there ways that the board can control for fluctuations in the market and general economy? Would a more effective way of demonstrating “pay for performance” be to “calculate the relation between compensation realized by a CEO over a designated period and value creation during that period…. Would the results of this analysis assuage the controversy over CEO pay or exacerbate it?”
Yesterday’s (April 12, 2016) Equal Pay Day produced an extraordinary volume of discourse and disclosure on a vitally important topic – and one that is surfacing more frequently at the Compensation Committee level. As activist shareholders and a Presidential election year bring heightened attention to pay equity in the private sector, companies are increasingly disclosing their own demographic compensation statistics or chartering studies to ascertain where they stand. Further, Board Compensation Committees are showing significant interest in the issue as Committee agendas have begun to include pay equity as a subject for discussion.
Also see this CNN article entitled “One way to close the pay gap for women” that refers to this study…
As I blogged yesterday, the banking regulators are finally rolling out a permanent proposal under Dodd-Frank’s Section 956 regarding excessive incentive pay. The NCUA kicked the proposing off. Here’s the summary from this Sullivan & Cromwell memo (also see this WSJ article – and this blog):
Earlier today, the National Credit Union Administration issued a notice of proposed rulemaking for a new interagency rule on incentive-based compensation that applies to financial institutions with consolidated assets of at least $1 billion. Today’s new proposal replaces one originally issued 5 years ago in the first half of 2011. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission are all expected to propose the same new rule.
The new proposed rule establishes general qualitative requirements applicable to all covered companies, additional specific requirements for institutions with total consolidated assets of at least $50 billion and further, more stringent requirements for those with total consolidated assets of at least $250 billion. The general qualitative requirements applicable to all covered institutions include (1) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation, (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss, (3) establishing requirements for performance measures to appropriately balance risk and reward, (4) requiring board of director oversight of incentive arrangements and (5) mandating appropriate recordkeeping (which replaces the annual reporting contemplated by the 2011 proposal).
With a hat tip to Mike Melbinger, it looks like new proposed rules under Dodd-Frank’s Section 956 will be released this morning – at least by the National Credit Union Administration. The FDIC has already announced its open meeting planned for next Tuesday – and this WSJ article indicates that Office of the Comptroller of the Currency will act the same day. I don’t see anything similar from the SEC planned yet – but maybe the Commission will act in seriatim or will announce an open meeting at some point soon. I’m hearing that the proposed rule will be a re-proposal of the 2011 proposal (i.e. new comment period).
This WSJ article from last month telegraphed much of this – here’s an excerpt:
As part of a hard-fought update of crisis-era compensation rules expected in April, regulators plan to require banks to hold back much of an executive’s bonus beyond the three years already adopted by many firms, people familiar with the matter said. The new holding period has yet to be determined, though it likely will be shorter than the European standard of a decade, one person familiar with the matter said. Also unclear is the portion that will be deferred. The original draft of the rules five years ago said it should be as much as 50%. Whatever the final numbers, the rules will put further restrictions on payouts that already are under pressure as some big trading businesses dry up.
The moves are aimed at giving banks more time to claw back bonuses if it turns out the executive’s actions hurt the firm. They govern pay to risk-taking executives who are in a position to do material damage to their companies. In addition to extending the deferral window, regulators want to broaden the pool of bank employees subject to the new rules by expanding the definition of risk taker to include factors like the amount of money an employee handles. Regulators also are likely to be more specific on the instances in which executives might have to forfeit their bonuses entirely in the event of a material loss at the firm. Curbing executive pay is one of the remaining key issues left unresolved that were envisioned in the Dodd-Frank regulatory-overhaul law, passed in 2010 in the wake of the financial crisis.
The effort to complete the rule got a fresh push this month as President Barack Obama met with financial regulators at the White House, urging them to prioritize wrapping up rules that govern executive compensation during his remaining time in office. New rules ought to ensure that those working for financial firms are “less incentivized to take big, reckless risks” that could wind up harming the financial system, Mr. Obama said after the meeting.
As regulators complete the new version of the rule, they are discussing not just giving it more teeth than the original 2011 proposal but also forcing Wall Street to go beyond current compensation practices. Those have evolved over the past five years to align with the concepts of the original plan, even though it was never implemented. In addition to extending the deferral window for parts of bonuses, regulators want to broaden the pool of bank employees subject to the new rules by expanding the definition of “risk taker” to include benchmarks such as the size of the assets traded by an employee.
The new version of the rule is likely to codify for the first time as government policy a requirement that companies claw back some of their top officials’ incentive pay if they have to reinstate financial results. That provision wasn’t in the 2011 proposal but has become a common practice on Wall Street in recent years.