– Broc Romanek, CompensationStandards.com
Here’s this study by Jim Reda of Arthur J. Gallagher & Co. that has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages and the evolving features of short-term and long-term incentive plans (STIs and LTIs), the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design.
– Broc Romanek, CompensationStandards.com
Here’s the latest survey results on perks practices that are quite lengthy (compare to the same survey a decade ago) – and come with a big fat disclaimer that they do not necessarily reflect what the actual law is (and don’t forget to take our new “Quick Survey on Auditing Standard #18: D&O Questionnaires“):
A. Company Airplane Use
1. Spousal/family member tag-along on corporate plane where executive is flying for business reasons (assume no incremental cost of tag-along):
– Definitely a perk – 52%
– Leaning toward a perk – 20%
– Leaning toward not a perk -14%
– Definitely not a perk – 15%
2. Spousal/family member tag-along on corporate plane where executive is flying for personal reasons (assume no incremental cost of tag-along):
– Definitely a perk – 87%
– Leaning toward a perk – 5%
– Leaning toward not a perk – 2%
– Definitely not a perk – 6%
3. Executive use of corporate plane for outside board meetings (i.e., director of another company):
– Definitely a perk – 60%
– Leaning toward a perk – 20%
– Leaning toward not a perk – 14%
– Definitely not a perk – 7%
4. Outside director’s use of corporate plane to attend company’s board meeting (i.e., picking up directors for meetings):
– Definitely a perk – 7%
– Leaning toward a perk – 5%
– Leaning toward not a perk – 25%
– Definitely not a perk – 64%
5. Executive use of corporate plane to attend a meeting of the board/trustees of a charitable organization:
– Definitely a perk – 59%
– Leaning toward a perk – 22%
– Leaning toward not a perk – 16%
– Definitely not a perk – 3%
B. Other Spousal/Family Member Issues
1. Travel costs associated with spouse attendance with directors at annual board retreat/meeting where all spouses are invited:
– Definitely a perk – 43%
– Leaning toward a perk – 24%
– Leaning toward not a perk – 21%
– Definitely not a perk – 12%
2. Travel costs associated with spouse attendance with directors at a board meeting where spouses are welcome, but not formally invited, and only a few spouses attend:
– Definitely a perk – 70%
– Leaning toward a perk – 21%
– Leaning toward not a perk – 6%
– Definitely not a perk – 4%
3. Spousal golf and other extra services, such as day travel or spa services, for when the board is in a formal meeting:
– Definitely a perk – 85%
– Leaning toward a perk – 9%
– Leaning toward not a perk – 4%
– Definitely not a perk – 2%
C. Mixed Business & Personal Use
1. Country club membership paid by company that is not used exclusively for business purposes, if the membership is used a few times by the executive or a family member for personal reasons:
– Entire amount of country club expenses is a perk – 22%
– Allocate incremental cost of those few personal uses as a perk – 52%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk – 24%
– Not a perk – 3%
2. Luxury box paid by company that is not used exclusively for business purposes, if the box is used a few times by the executive or a family member for personal reasons:
– Entire amount of ownership expenses is a perk – 6%
– Allocate incremental cost as a perk (eg. cost of refreshments) – 50%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk (eg. by dividing number of events box is paid for in order to allocate the cost on a per event basis) – 36%
– Not a perk – 7%
3. Membership in airline club paid by company that provide facilities at airports, if the club is also used by executive during personal travel:
– Entire amount of club expenses is a perk – 11%
– Allocate incremental cost as a perk (eg. cost of refreshments) – 40%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk (eg. valuation based on percentage of personal use) – 17%
– Not a perk – 32%
4. Relocation expenses for existing executive that the company has required to relocate:
– Definitely a perk – 25%
– Leaning toward a perk – 11%
– Leaning toward not a perk – 9%
– Definitely not a perk – 55%
5. Relocation expenses for newly hired executive, extended to induce the executive to accept an employment offer:
– Definitely a perk – 35%
– Leaning toward a perk – 29%
– Leaning toward not a perk – 24%
– Definitely not a perk – 12%
6. CEO’s assistant (whose compensation is paid for entirely by company) who spends 60% of his time taking care of personal tasks (such as maintaining the CEO’s personal calendar, paying personal bills, etc.) and the other 40% is work-related:
– Definitely a perk – 35%
– Leaning toward a perk – 29%
– Leaning toward not a perk – 24%
– Definitely not a perk – 12%
7. Would your answers change to the above questions if the executive paid the full incremental cost to the company?
– Yes to most – 60%
– Yes to a few – 19%
– Maybe for a few – 10%
– No – 11%
– Broc Romanek, CompensationStandards.com
We are excited to announce that we have just posted 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. 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.
– Broc Romanek, CompensationStandards.com
Here’s a blog by Steve Quinlivan:
The SEC alleges that Marrone Bio Innovations, Inc. misstated its revenue. The SEC recently brought a settled enforcement action against its former CFO. The SEC alleges the CFO received bonuses during the 12-month periods following the filings containing financial results that MBI was required to restate. The settlement requires the former CFO to reimburse MBI for a total of $11,789 pursuant to Section 304(a) of the Sarbanes-Oxley Act of 2002. The SEC did not allege that the former CFO participated in the misconduct giving rise to the restatement.
Section 304 of SOX requires the chief executive officer or chief financial officer of any issuer required to prepare an accounting restatement due to material noncompliance with the securities laws as a result of misconduct to reimburse the issuer for: (i) any bonus or incentive-based or equity-based compensation received by that person from the issuer during the 12-month periods following the false filings; and (ii) any profits realized from the sale of securities of the issuer during that 12-month periods. According to the SEC, Section 304 does not require that a chief executive officer or chief financial officer engage in misconduct to trigger the reimbursement requirement.
According to the SEC the former CFO violated SOX by not voluntarily tendering a check to MBI. The settlement also orders the former CFO to cease and desist from committing or causing any violations and any future violations of Section 304 of the Sarbanes-Oxley Act. The former CFO did not admit or deny the facts in the SEC order.
– Broc Romanek, CompensationStandards.com
Here’s a blog by Cleary Gottlieb’s Caroline Hayday and Sasha Belinkie:
It is well known that specified employees of publicly-traded companies must wait at least six months following a separation from service to receive payments of deferred compensation triggered by such separation. The six-month delay requirement must be set forth in the plan establishing the right to the payment of deferred compensation on or before the date the applicable individual first becomes a specified employee. Failure to do so, either as a matter of documentary or operational compliance, could result in the imposition of draconian penalty taxes and interest charges on the service provider under Section 409A of the Internal Revenue Code of 1986 (the “Code”).
What is perhaps less well known is that a non-employee director may also be considered a specified employee. A specified employee is defined by reference to Section 416(i) of the Code and includes “an employee who, at any time during the plan year, is”:
– An officer whose annual compensation is greater than $170,000 (up to the lesser of 10% and 50 employees),
– A 5% owner, or
– A 1% owner receiving annual compensation of more than $150,000.
While there has been some discussion about directors who also hold (formally or informally) an officer position, very little attention has been given to the two ownership prongs of the definition and how they might trigger specified employee status for non-employee directors. On their face the two ownership prongs do not appear to apply to non-employee directors since they simply refer to “employees”; the preamble to the regulations, however, declined to accept the request by certain commenters to limit the universe of specified employees to common law employees. Section 416(i)(3) of the Code provides that self-employed individuals described in Section 401(c)(1) of the Code “shall be treated as an employee,” with Section 401(c)(1) defining a self-employed individual simply as an individual who has earned income from self-employment. Since Section 401(c)(1) addresses qualification of retirement plans in which non-employee directors do not commonly participate, the broad definition of employee may not have been focused on non-employee directors, but it does not specifically exclude them from its reach. The Internal Revenue Service generally considers directors fees to be self-employment income (and in fact the proposed Cafeteria Plan Regulations specifically call out directors as being self-employed individuals). Furthermore, Dan Hogans, one of the IRS architects of Section 409A, noted at a 2007 Steptoe & Johnson LLP audio-conference (memorialized in the annotated Section 409A regulations) both that the determination of who is a specified employee is by reference to the top-heavy rules and that directors could be picked up on the basis of share ownership.
Both 1% and 5% ownership of a public company are certainly a significant stake that may be uncommon among non-employee directors, although that level of ownership may be more likely among founders and long-time directors. Companies should also be aware that the ownership need only exceed the requisite threshold at any point in the year and such ownership is determined pursuant to the attribution rules of Section 318 of the Code. Section 318 of the Code sweeps in significantly more than the beneficial ownership rules applicable to public disclosure (e.g., unvested stock options regardless of whether they would vest in the relative short term). These rules may also require attribution of the ownership by partnerships and corporations, relevant for representatives of private equity, hedge fund and venture capital firms who serve on the board of a company in which such a firm holds a stake (although in practice these representatives may not receive compensation for the board service that is settled upon ceasing to be a board member, making designation as a specified employee effectively irrelevant).
Absent additional guidance to the contrary, public companies should consider making sure that their arrangements with their non-employee directors are in documentary compliance on this point, and including non-employee directors in their internal process around determining who their specified employees are and which payments may need to be delayed. For example, many companies provide for director awards that are settled at the time of departure from the board (e.g., restricted stock units that settle upon ceasing to be a board member and deferred fee arrangements) and thus, to the extent the departing director is a specified employee, settlement of those awards would almost certainly need to be delayed the requisite six months.
– Broc Romanek, CompensationStandards.com
Recently, NorthWestern Energy filed its preliminary proxy statement – which includes two different pay ratios for 2016 – one based on how they’ve previously calculated the ratio (the ‘NorthWestern Calculation’) – and another which they believe will meet the future SEC requirements (the ‘Dodd-Frank Calculation’). The company also disclosed a pay ratio last year.
Interestingly, the pay ratio actually dropped considerably using the Dodd-Frank Calculation: Dodd-Frank = 19:1. NorthWestern = 26:1 (it was 24:1 last year). I think the primary reason for the difference is that their officers receive the same benefits as employees. The NorthWestern Calculation doesn’t include the value of benefits, which will be required to be included by the SEC’s rules. When you add approximately $20k of benefits onto compensation for the CEO and the median employee, the denominator gets considerably larger. All of this is spelled out in narrative & numerical detail on pages 24 and 25 of the preliminary proxy statement…