Today’s the day that the SEC votes on adopting its pay ratio rules – it’s top of the front page news for the Washington Post! Take a moment to participate in this anonymous poll:
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Pay Ratio Workshop: Discounted Rates End at End of This Friday, August 7th! – We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
With the SEC Commissioners gathering for an open Commission meeting at 10 am tomorrow morning to consider adopting final pay ratio rules, you may ask yourself: “Might the Commissioners actually not vote in favor of adoption?” Based on historical evidence, the answer is simply “no.”
Over three decades of observing the SEC, I can’t recall a rule not being adopted when brought to a vote at an open Commission meeting. Any SEC Chair worth her salt would save herself the embarrassment of not getting a desired rule over the finish line by not bringing it up for a vote at a public meeting. Bear in mind that there are plenty of proposed rules that never get adopted – but none of those were brought up for a final vote at an open Commission meeting.
And even proposals don’t get shot down at open Commission meetings. At least not since the ’80s. Former SEC Secretary Jack Katz notes a few instances way back when proposals were shot down in a public forum. One was when the SEC’s Chief Accountant proposed new accounting treatment for oil production that was rejected unanimously by all the Commissioners in the early ’80s. And another one followed the ’87 market break, when Market Reg proposed a series of legislative changes to be forwarded Congress – some of which were blessed by the Commissioners and some were not.
Note that there are rules that die during the seriatim process – not because they got explicitly rejected, but because a Commissioner’s office “sits” on it (often for years) and refuses to advance the seriatim to the next Commissioner’s office. The Chair then has to decide whether it’s worth it to take the languishing rule to an open meeting – and typically will not do so for fear of a public rejection. So the seriatim just withers on the vine. So we don’t even know that a final rule has essentially been rejected because all of this plays out behind closed doors (see this blog about whether an open Commission meeting is necessary). Thanks to Hunton & Williams’ Scott Kimpel for his help!
Also note that enforcement matters get voted down at closed Commission meetings periodically…
Pay Ratio Workshop: Discounted Rates End at End of This Friday, August 7th! – We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
Recently, I blogged on DealLawyers.com about how nearly 60% of Rite Aid shareholders supported a non-binding shareholder proposal at the company’s annual meeting that asks that the company to limit the CEO’s golden parachute. This was a rare case of a rebuke of a golden parachute as similar measures at other companies only garnered an average of 33% support this proxy season.
Then I read this piece from Paul Hodgson about how Humana’s shareholders look likely to approve a merger – but not approve the company’s golden parachute (albeit that would be just a nonbinding disapproval)…
In this podcast, Sharon Podstupka of Pearl Meyer & Partners provides some insight into how to draft more effective CD&As (here’s the related report findings), including:
– What are the benefits of having a non-lawyer involved in drafting the CD&A?
– What are arguments that can “win the day” at companies who have senior management not interested in drafting user-friendly CD&As?
– How does creating more usable disclosure impact the timeframe for drafting proxy disclosure?
– Do you see companies planning in advance for the pay ratio rules? And if so, in what ways?
The SEC just posted its Sunshine Act notice to adopt the pay ratio rules next Wednesday, August 5th. This blog from a few days ago gives a guess as to some of the rule’s final parameters.
We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast.
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership).
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live.
Last week, I blogged about Mark Borges’ blog about a comprehensive pay ratio disclosure – and then Mark followed up by blogging about some more samples. And now thanks to Simpson Thacher, we have this survey on pay ratio disclosures that they prepared in late March. The survey also includes some examples of companies that provide a comparison of compensation increases/decreases among the CEO and average employee.
To prepare this survey, Simpson Thacher searched all SEC filings since 2010 for companies that have disclosed the ratio of CEO to employee pay and found 16 examples. In reviewing these 16 examples, they noted the following data points for their disclosure:
1. Employees Included in Comparator Group
– Three (19%) note that the employee comparator group includes all employees, including part-time or temporary employees.
– Three (19%) note that the employee comparator group is limited to full-time employees.
– Three (19%) impose geographic restrictions on which employees are included in the comparator group (e.g., limiting to strictly U.S. or UK employees).
– Seven (44%) did not specify which employees are included in the comparator group.
2. Compensation Included
– Nine (56%) compare the CEO’s total compensation to the average total compensation for the company’s employees.
– Three (19%) compare the salary of the CEO to the average salary for the company’s employees.
– Three (19%) have two separate ratios: one based on salary, and one based on both salary and bonus.
– One (6%) has two separate ratios: one based on salary, and one based on total compensation.
3. Basis of Employee Comparison (Average vs. Median Salary)
– Three (19%) use the average salary for employees as the basis of comparison.
– Five (31%) use the median salary for employees as the basis of comparison.
– Eight (50%) use both the median and average salary for employees as a basis of comparison.
The first section, titled “Examples of Pay Ratio Disclosure”, includes the disclosure of the 16 companies discussed above, as well as information regarding the data points. Among these 16 examples, five companies (31%) have a market cap under $100 million; four companies (25%) have a market cap between $100 million and $1 billion; and seven companies (44%) have a market cap of over $1 billion. In addition, of these 16 companies, nine (56%) employ fewer than 1,000 employees, while only Whole Foods and Israel Chemical employ more than 5,000 employees. Further, seven companies (44%) are incorporated in Israel, as such disclosure appears to be encouraged under Israeli corporate law.
The survey also includes an additional chart at the end, titled “Examples of Compensation Increase Disclosure,” which includes seven examples of companies that disclose percentage pay changes (i.e., the annual percentage increase in pay of the CEO and other top executives, and the comparable percentage increase for all other employees). This disclosure, although it does not provide pay ratios, was provided by companies that all employed more than 1,000 employees (or, with respect to Aon, Astrazeneca, Avery Dennison and Reed Elsevier, employed more than 25,000 employees), and indicates the type of compensation used and the employees considered for the disclosure.
Last night, Joann Lublin & Andrew Ackerman ran this WSJ article:
Securities regulators are poised to complete rules requiring companies to disclose the pay gap between chief executives and employees, putting in place a measure without broad exclusions sought by companies, people familiar with the deliberations said Monday. In a setback to corporations and their trade groups, the Securities and Exchange Commission is expected to allow companies to exclude 5% of their overseas workers from the pay-ratio calculation, these people said. Companies had pressed to exclude a much larger percentage of foreign workers, which likely would have narrowed the pay gap some businesses report.
Under the rule, which the SEC could vote on as early as the first week of August, companies would have to disclose median worker pay—the point on the income scale at which half their employees earn more and half earn less—and compare it with CEO compensation. A mandate of the 2010 Dodd-Frank financial law, the pay-ratio rule could put added pressure on corporate boards to slow pay increases for chief executives at companies with significant or growing gaps, proponents have said. SEC Chairman Mary Jo White is under pressure from Sen. Elizabeth Warren (D., Mass.) and other Democratic lawmakers to complete the measure as well as other unfinished portions of the Dodd-Frank law.
Yet the pay-ratio rule has come under fire from corporations, Republican lawmakers and some regulators who warn it will be costly to compile across multiple jurisdictions and won’t provide investors with meaningful information about a company’s financial health. As with a 2013 proposal, the rule is expected to draw dissents from the SEC’s two Republicans, who say the commission has more urgent rules to tackle and the pay-ratio rule is designed to shame chief executives.
Economists at the SEC believe allowing companies to exclude 5% of their workforce will only have a small effect of the pay ratio, according to an analysis the commission released in June. The analysis found a 5% carve out changed a company’s pay ratio up or down by about 3.5%. An SEC spokeswoman declined to comment. Ms. White has repeatedly said she hopes to complete the measure by fall. People familiar with the matter said the vote date and the contours of the rule could still change.
Letting companies exclude up to 5% of their workforce if they are overseas will benefit some businesses with a minor presence abroad, said Mark Borges, a principal at Compensia Inc., an executive-pay boutique. “For a lot of companies, I don’t think that (exclusion) goes far enough.’’ The SEC should exclude all foreign employees from companies’ pay-ratio calculations, suggested Timothy J. Bartl, president of the Center on Executive Compensation, a Washington advocacy group for corporate human-resources chiefs. “That’s the most effective way to remove the most burdens.”
An AFL-CIO study of CEO pay across a broad sample of S&P 500 firms showed the average CEO earned 373 times more than the typical U.S. worker in 2014. In 1980, that multiple was 42. The 5% carve out is also likely to encounter opposition from supporters of the rule, including the big labor federation, who have pressed the SEC against carve outs. Brandon Rees, deputy director of the AFL-CIO’s Office of Investment, said Congress intended for companies to count all employees, not some of them. “The SEC doesn’t have statutory authority to exclude workers from the ratio,’’ Mr. Rees said.
EY Center for Board Matters reviewed the proxy statements of S&P 500 companies and found a dramatic increase in the number of companies that disclose shareholder engagement from five years ago. Based on 444 proxy statements available as of the middle of June, 56% discussed talking to shareholders, compared to 6% in 2010.
Eighteen percent disclose that board members were involved in the engagement, usually the compensation committee chair or members, lead director, board chair or the nominating and governance chair or members. Slightly less than half indicate that changes were made as a result of the conversations with investors. Not surprisingly, 82% of those changes relate to executive pay, as it has been clear by now that the say-on-pay vote has essentially required companies with approval ratings of 75% or below to reach out to shareholders due to the policies of the proxy advisory firms. However, companies also disclosed that changes were made to governance practices 33% of the time; 12% focused on modifications to environmental or social matters and 7% affected proxy disclosures.
All this engagement may be affecting the low numbers of investors actually opposing director elections. EY reports that only 3.5% of all director nominees received more than 20% negative votes, an all-time low in the seven years since 2009. That year, nearly 10% of directors faced opposition levels of over 20%.
Engagement may also be contributing to the continued support for say-on-pay, which averaged around 92% in the fourth year of the vote being held. Only 2% of companies with say-on-pay proposals (a total of 30 companies) received less than 50% support, compared to 59 companies in 2014.
In this report, Semler Brossy analyzes how say-on-pay vote outcomes impact ISS recommendations and director election voting results in subsequent years including:
– In the year following a failed (<50%) say-on-pay vote, Compensation Committee members are 4x as likely, and Compensation Committee chairs are over 5x as likely, to receive an ISS "withhold" or "against" recommendation
- Say-on-pay failures result in declines in voting support the following year of 5% for non-Compensation Committee members, 10% for Compensation Committee members, and 14% for Compensation Committee chairs
- Say-on-pay voting results in the 50% - 70% range result in declines in voting support the following year of 2% for non-Compensation Committee members and 6% for Compensation Committee members and chairs
- Shareholder support for say-on-pay was 32% lower at companies with an ISS "against" recommendation in 2015
