– Broc Romanek, CompensationStandards.com
Thanks to those that participated in this survey – a hot topic! Below are the results from our recent survey on hedging policies:
1. Does your hedging policy cover?
– Only officers? – 3%
– Only officers & directors? – 43%
– Officers, directors & employees? – 54%
2. Does the hedging policy cover?
– Only company securities granted by the company as compensation? – 3%
– All company securities without regard to how acquired? – 97%
3. If your company doesn’t currently cover all employees under a hedging policy, do you expect to expand it now to all employees?
– Yes – 27%
– No – 73%
4. Do you think there is a way to effectively enforce a broad hedging policy?
– Yes – 8%
– No – 61%
– Not sure – 31%
Take a moment to participate in our “Quick Survey on Board Portals” and our “Quick Survey on Annual Meeting Conduct.”
Don’t forget to send your nominations for our “Annual Proxy Disclosure Awards.” Here’s how that works. Deadline for nominations is Wednesday, July 1st…
– Broc Romanek, CompensationStandards.com
In this blog, IRRC Institute’s Jon Lukomnik discusses the two studies it recently conducted with Organizational Capital Partners. Here’s a blog on the first study – and here’s an excerpt from this new blog about the second study:
Of course, we also need to recognize that companies don’t exist in a vacuum. Investors and proxy advisory firms also over-rely on TSR. A second Organizational Capital Partners/IRRC Institute study reveals that there is no material difference in say-on-pay advisor recommendations or institutional investor voting based on a company’s economic value creation (or destruction) history. While there are historical reasons for this, the positive is that the disconnect between the desire for long-term value creation and how we compensate senior executives is starting to hit home. Since the reports were published, investors representing more than $1 trillion have told us that they are considering how to refocus on economic fundamentals.
However, the institutional voting pattern does mean that companies need to add a fourth bullet point to the action plan above. A coherent, energetic communications program to explain how the LTIP will henceforth measure the right things over the right periods of time, so as to create sustainable value, is an absolute necessity. While being forced to explain why a company is doing the right thing is annoying, in the end, everyone, from investors to Boards to CEOs, will benefit.
Don’t forget to send your nominations for our “Annual Proxy Disclosure Awards.” Here’s how that works. Deadline for nominations is Wednesday, July 1st…
– Broc Romanek, CompensationStandards.com
This Harvard Business Review piece entitled “The Factors That Lead to High CEO Pay” includes a graphic illustrating the pay ratio variance among 16 countries that is jarring. Here’s an excerpt:
The reasons why the disparities vary country-to-country are complex, according to a recently accepted paper for the Strategic Management Journal by LSU E.J. Ourso College of Business professor Thomas Greckhamer. A social scientist, Greckhamer attempts to identify combinations of factors on a country-by-country basis that either widen or narrow the pay gap between CEOs and workers. Using data from the IMD World Competitiveness Yearbook from 2001, 2005, and 2009 for 54 countries, he also configured a model featuring power structures he expected to influence compensation, based on prior research of determinants of executive pay.
His conclusions aren’t neat and tidy, but a few things stand out: A country’s level of development matters for workers’ compensation, but not so much for CEOs’. A country that has a high deference for power will probably have higher-paid executives. And the political strength of the labor movement matters. But you also can’t isolate a single one of these factors as the determinant of income inequality.
To better understand how he got these findings, it’s worth laying out the eight compensation-influencing factors used by Greckhamer in his analysis:
1) A country’s level of development. This is important for a variety of reasons he describes in-depth, though the basic point is that high development should result in less income inequality, with both CEOs and workers making more.
2) The development of equity markets. The more developed markets increase ownership “dispersion,” or the number of people who own shares in a company. Greater dispersion, writes Greckhamer, “implies reduced owner-control, which should increase CEOs’ power to allocate more compensation for themselves.”
3) The development of the banking sector. The more concentrated the sector is, the more that should “monitor and control firms and thus constrain CEO power and pay.”
4) Its dependence on foreign capital. When foreign investors have influence over a company’s stock, it can boost income inequality.
5) Its collective rights empowering labor. This is basically collective bargaining rights, which are “a vital determinant of worker compensation” according to Greckhamer, and can also potentially limit CEO pay.
6) The strength of its welfare institutions. Their job, of course, is to “intervene in social arrangements to partially equalize the distribution of economic welfare,” which generally means lowering CEO pay and increasing that of regular workers.
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7) Employment market forces. In other words, the supply and demand for executives’ and workers’ skills.
8) Social order and authority relations. Greckhamer describes this as “power distance,” which basically means “the extent to which society accepts inequality and hierarchical authority.” A high power distance tends to lead to high CEO pay and low worker pay.
Don’t forget to send your nominations for our “Annual Proxy Disclosure Awards.” Here’s how that works. Deadline for nominations is Wednesday, July 1st…
– Broc Romanek, CompensationStandards.com
With so many companies now improving their proxy disclosures (& gearing up for today’s webcast on proxy season disclosures), I’ve decided to hold an annual contest for proxy disclosures. The winners will be decided by you – via anonymous popular voting. In three weeks, I will post the nominees to be voted upon in the following 14 categories – in the meantime, please submit your nominations by emailing them to me.
Here are three things to note (see our full set of FAQs):
– Self-nominations permitted
– Max of 3 nominations per company
– No need to explain why you’re nominating a proxy for a category(ies). Just let me know the company name and the category(ies) for which it is being submitted.
Here’s the categories:
1. Best Overall Proxy (Combined Online & Print)
2. Best Print Proxy – Large Cap
3. Best Print Proxy – Mid-to-Small Cap
4. Best Online Proxy – Large Cap
5. Best Online Proxy – Mid-to-Small Cap
6. Most Improved Print Proxy
7. Most Improved Online Proxy
8. Most Persuasive Supplemental Letter/Additional Soliciting Materials
9. Best Executive Summary
10. Best CD&A
11. Best CD&A Summary
12. Best Shareholder Engagement Disclosure
13. Best Director Bios Disclosure
14. Best Shareholders Letter
– Broc Romanek, CompensationStandards.com
Tune in tomorrow for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Ken Bertsch of CamberView, Alan Dye of Hogan Lovells, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
– by Randi Val Morrison
In this blog, Latham & Watkins’ Jim Barrall discusses the implications of the Delaware Chancery Court’s recent decision in Calma v. Templeton, and provides associated practical recommendations for companies further to the firm’s recent case analysis. Among other welcome tips, he advises that companies that are not now in the process of adopting new plans or submitting amended plans for shareholder approval may likely comfortably defer seeking shareholder approval of their director compensation pending decisions on the merits on Calma and similar cases.
Access additional resources in our “Director Compensation Practices” and “Director Compensation Disclosures” Practice Areas.
– Broc Romanek, CompensationStandards.com
I try not to duplicate what Mark Borges and Mike Melbinger write on their blogs because I figure that y’all are reading all three of the blogs on this site. But I just loved the recap that Mark provided in this blog about how Chipotle leveraged its proxy disclosure to really give shareholders a full understanding of the efforts they made over the last year in the face of a well-publicized campaign against the company’s executive compensation practices by one of its shareholders. A great example of usable disclosure about shareholder engagement…
– Broc Romanek, CompensationStandards.com
Here’s a blog by Davis Polk’s Ning Chiu:
Twenty-one comment letters have been submitted about the SEC’s proposed rules on disclosure of hedging by employees, officers and directors, including ours.
The Council of Institutional Investors (CII) states that 54% of Russell 3000 companies and 84% of the S&P 500 companies prohibit employees from hedging shares. CII supports the proposed requirement that the disclosure should cover all employees, not just officers, in order to obtain information about whether employees are “allowed to effectively avoid restrictions on long-term compensation through hedging.” While acknowledging that the disclosure about employees’ equity holdings below the executive level may not be as relevant for investors, CII believes that it may still have implications for a company’s “bottom line.” The Florida State Board of Administration (the SBA) is similarly supportive of requiring companies to disclose the hedging status of all incentive-based compensation, regardless of whether it is given to directors, officers or other employees.
In contrast, the Business Roundtable (the BRT) agrees with the importance of disclosing whether hedging by executive officers is banned, but argues that whether employees are permitted to hedge is not material to investors. The BRT notes that nearly 95% of the 60 publicly traded companies whose CEOs are members of the Business Roundtable prohibit hedging by executive officers and 85% extend that prohibition to directors. The Society of Corporate Secretaries and Governance Professionals (the Society) also endorses limiting the disclosure requirement. In addition, the Society asks the SEC to clarify the difference between hedging and general portfolio diversification, so that the rules would distinguish between instruments that provide exposure to a broad range of issuers or securities, such as broad-based indices, exchange-traded funds, baskets, and those that are principally designed to hedge particular securities or have that effect.
– Broc Romanek, CompensationStandards.com
Check out this article by Semler Brossy’s Greg Arnold and Barry Sullivan about TSR…
Also see this Semler Brossy Say-on-Pay Update for analysis of the reasons of failed SOPs this year…
– Broc Romanek, CompensationStandards.com
Here’s an excerpt from this piece by Semler Brossy’s Seymour Burchman and Blair Jones:
Compensation committees are often tempted to follow conventional wisdom and follow how other companies, especially peers, have traditionally structured their payouts, using either a symmetric payout curve, or a payout curve with equal ranges above and below target. Two practices are common: using 90 percent of target for threshold and 110 percent of target for maximum or using 80 percent of target for threshold and 120 percent of target for maximum. Executives then usually get 50 percent of their target bonuses if they achieve the lower level and 150 or 200 percent if they achieve the higher one. A cap of 200 percent helps compensation committees avoid encouraging unacceptable risk-taking and paying too much for windfalls.
Because thresholds and maximum payout levels need to take into account many factors, particularly the relative predictability and volatility of performance outcomes as well as investor expectations, compensation committees need to move beyond conventional practices. They should instead use analyses that are tailored to their company.
For example, consider the case of a branded food company with stable revenues. This company has launched several high-growth, albeit unproven, initiatives to develop innovative products in new categories in addition to expanding geographically. For years, executives have delivered predictable results which were rewarded by payouts fitting a narrow symmetric payout curve, one with a 95 percent threshold and 105 percent maximum. (See Figure 1.) As a result, the compensation committee considers whether, and how, to adjust the range in light of the shift to a strategy with less predictable outcomes.