The Advisors' Blog

– 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…

– Broc Romanek, CompensationStandards.com

As noted in this article, Senator Elizabeth Warren is leading the charge – along with other members of Congress and a group of unions and activists – to eliminate the Section 162(m) exemption. This bill – “Stop Subsidizing Multimillion Dollar Corporate Bonuses Act” (HR 2103) – was first introduced in the House last year. This is part of a new “Take on Wall Street” movement…

– Broc Romanek, CompensationStandards.com

Here’s articles about how pay levels look based on this season’s proxy statements:

– Willis Towers Watson’s “Total CEO pay in U.S. increased just 2.0% in 2015”
– Fortune’s “It Looks Like America’s CEOs Got a Bump in Pay Last Year”
– NY Times’ “BlackRock Wields Its Big Stick Like a Wet Noodle on C.E.O. Pay”
– ISS’ “U.S. CEO Pay Figures Show Lowest Median Increase since Financial Crisis”
– Equilar’s “CEO Pay Hits $14.5 million at the 100 Largest Companies by Revenue”
– WSJ’s “Companies Wind Up in the ‘Penalty Box’ on Executive Pay”
– Willis Towers Watson’s “Moderating growth in pay for U.S. CEOs reflects alignment with 2015 corporate performance”
– NY Times & Equilar’s “200 Highest Paid CEOs in 2016”
– NY Times’ “Top C.E.O. Pay Fell — Yes, Fell — in 2015”

– Broc Romanek, CompensationStandards.com

Recently, I blogged about a Harvard Business Review piece about a study that wasn’t wild about “pay-for-performance.” Here’s a rebuttal from Pay Governance…

Also check out this piece from Semler Brossy about “How Incentives for Long-Term Management Backfire”…

– Broc Romanek, CompensationStandards.com

Last week, I blogged about the Nasdaq has amended its re-proposal to elicit disclosure about third parties paying directors. The NYC Bar Association Securities Regulation Committee recently submitted a comment letter on the Nasdaq proposal, recommending that the Nasdaq proposal not be adopted and that it should be determined whether the SEC’s existing rules requiring disclosure of director compensation, including compensation paid by third parties, cover the disclosures in the Nasdaq proposal. The logic is that the SEC’s ongoing disclosure effectiveness project would be a more effective and appropriate way to address any new disclosure requirements – in order to promote comparable disclosures to investors, regardless of the exchange on which the company is listed.

The NYC Bar Association also argues it would be a way to obtain a wider range of comment from the public. There have only been three other comment letters submitted. That’s one reason why the comment period was extended to the 4th of July…

– Broc Romanek, CompensationStandards.com

Here’s an article from the USA Today:

Big paychecks and options grants are two ways that CEOs score. But there also are perks – worth millions or more in some cases – that continue to be paid despite greater scrutiny over such windfalls. There are 19 current CEOs, including Omar Ishrak of medical device company Medtronic (MDT), Dion Weisler of HP (HPQ) and Mark Zuckerberg of social networking giant Facebook (FB), who were awarded “other compensation” – or perks as they’re commonly called – valued at $1 million or more in the most recent fiscal year, according to a USA TODAY analysis of data from S&P Global Market Intelligence. “We rarely see perks over $1 million,” says Dan Marcec, director of content at executive pay tracker Equilar. “When you do, you can venture to say they are unusual.”

Perks such as the personal use of the corporate jet or membership dues to country clubs continue to be a controversial way to pay CEOs. Perks have been flat for several years as investors pay closer attention to them. Big perk packages largely fell out of favor around 2011 when new regulation shined a bright light on everything companies were paying executives, says Robert Newbury, director on executive compensation at Willis Towers Watson. Suddenly additional disclosures prompted many companies to cut these payments, Marcec says. From 2011 through 2012, the number of Fortune 100 CEOs that got aircraft perks, for instance, fell 3.9 percentage points to 38.9%, Marcec says.

Pricey perks are still around, but are mostly ones companies think are highly defensible, Marcec says. The biggest total perk award, valued at nearly $26 million, went to Medtronic’s Ishrak. The value of his perks amounts to 65% of the total $39.5 million he was paid in fiscal 2015. Nearly all those perks were associated with the company repaying a tax Ishrak was hit with following the company’s corporate inversion, which moved its headquarters to Ireland.

When Medtronic bought Ireland’s Covidien, that triggered a capital gains tax that all investors including Ishrak had to pay. It also triggered an excise tax from the federal government, which serves as a sort of penalty for such moves. The company repaid that excise tax back to Ishrak as well as other members of the management team. The “gross up” payment was made to allow management “to focus on what is in the best interests of the company, and not on their personal finances,” according to a statement from company spokesman Fernando Vivanco.

Payments to help CEOs pay big tax liabilities continue to be sources of big big perks. HP’s Dion Weisler pulled in perks of $12.1 million – coming from several key benefits. Weisler got a $9.1 million payment in order to cover additional taxes resulting from the fact Weisler moved to the U.S. But there other perks connected to his move. Weisler, who used to live in Singapore, was paid $2.4 million to pay for his permanent relocation to Palo Alto, Calif., where the company is based.

Seems like being a famous CEO comes with a cost – one that companies might help pay. Facebook’s Zuckerberg is paid $1 in salary and has been given no stock grants for years for his role as CEO. But he received $5 million in perks – of which $4.3 million is connected with costs of personal security at his home and during personal travel. Just showing how much more costly it’s getting to protect Zuckerberg, the cost of his personal security is up 61% from 2013.

Keeping Zuckerberg protected also costs nearly three times more than the $1.6 million Amazon has paid to secure its famous billionaire CEO, Jeff Bezos. Bezos’ security program had been one of the most costly for years, Marcec says, but has been easily surpassed by Zuckerberg’s. Facebook declined to comment. But Facebook’s regulatory filing states, “Because of the high visibility of our company, our compensation and governance committee has authorized an ‘overall security program’ for Mr. Zuckerberg to address safety concerns due to specific threats to his safety arising directly as a result of his position as our founder, Chairman, and CEO.”

Like Zuckerberg, Steven Kean, CEO of energy firm Kinder Morgan received $1 in salary and was paid no bonus or stock awards. His entire $1.1 million in compensation for 2015 came from “other compensation.” That payment represented dividend equivalents, or payments due on stock he has not yet vested. Kean requested “that he not receive dividend equivalent payments on his shares of restricted stock for the third and fourth quarters of 2015,” according to an email from spokesman Richard Wheatley. “His total compensation for 2015 consists of dividend equivalents on his shares of restricted stock for the fourth quarter of 2014 and the first and second quarters of 2015 and certain benefits available to our U.S. employees generally.”

So while companies are cutting back in perks overall, there are still big ones companies think are worth the price – and scrutiny. “Companies’ evaluation determines if (perks) satisfy a business need to help executives perform seven days a week,” Newbury says. “If companies can justify them, they leave them in.”