The Advisors' Blog

– Broc Romanek, CompensationStandards.com

We have posted the transcript for our popular webcast: “Clawbacks – What Now After the SEC’s Proposal.”

– Broc Romanek, CompensationStandards.com

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

– Broc Romanek, CompensationStandards.com

It’s been 9 years since we ran our popular “Quick Survey on “What is a Perk?” (here’s those old results) – so it’s time to do it again. Please take a moment to participate in our new “Quick Survey on “What is a Perk?”…

Proxy Disclosure Awards: Last Chance to Vote!

It’s time to vote! Please take a moment to vote for these 12 categories of awards. Voting is anonymous – and ends this Friday, July 24th. Here’s the FAQs…

– Broc Romanek, CompensationStandards.com

Get ready to ramp up by registering now for our upcoming “Proxy Disclosure Conference“! Last night, Mark Borges blogged about NorthWestern’s pay ratio disclosure that bears reviewing. In addition, check out this study entitled “Consumers Prefer Firms with Lower CEO-to-Worker Pay Ratios” – and this WSJ article entitled “CFOs Prep for Pay-Ratio Rules“:

Finance chiefs at public companies are looking for clarification from the Securities and Exchange Commission as they prepare to comply with coming regulations on how they must disclose the boss’s pay compared to a typical worker. The SEC earlier this month accepted public comments on a proposed rule that soon could force thousands of companies to disclose annually the ratio of CEO-to-typical worker pay. The agency first proposed the rule two years ago to comply with the Dodd-Frank Act of 2010 and SEC Chairman Mary Jo White has said she wants the SEC to issue a final rule by this fall.

Among the issues that companies are expecting to get further guidance is how they should define a “median employee”—and what types of pay to include as compensation. The clarifications also will impact the cost to companies of preparing for the ratio. The SEC is “going to have to provide some degree of guidance” to clarify which employees that companies will have to include when they crunch the numbers, said Joseph Grundfest, a Stanford law professor and former SEC commissioner.
Related

Companies can use different sampling methods in their calculations, which gives them “a lot of latitude to choose what they want those estimates to be,” said Michael Ohlrogge, a Stanford University law and engineering doctoral student, who wrote to the SEC earlier this month.

Some companies including Noble Energy Inc. are testing the waters. In March, the Houston-based oil and gas exploration and production company disclosed that former Chief Executive Charles Davidson made 82 times more than the median employee, who took home $103,500 in direct compensation in 2014. Mr. Davidson made $8.5 million in direct compensation, it said. Neither that figure nor its ratio calculation included the roughly $1 million increase in the value of his pension, employer retirement contributions and perquisites like club-membership dues the company provided. “If the SEC adopts rules on compensation ratio, we will conform the methodology by which we calculate that ratio to align with the SEC requirements,” a Noble spokeswoman said in a statement. “Until rules are adopted, we expect to continue with the current methodology in our future disclosures.”

In all, the SEC expects the 3,800 public companies affected to spend a combined $72.8 million to comply, according to its 2013 proposal. That comes to about $19,000 apiece. One “global technology company” the agency consulted estimated that the cost of crunching the numbers could amount to $350,000 plus $100,000 a year for compliance, it said. James Flaws, Corning Inc. ’s finance chief, said he expects the specialty glass and ceramics maker will lay out less than $250,000 to tally a ratio between the compensation of its CEO Wendell Weeks—$13 million in 2014—and its average worker. The Corning, N.Y. business employs 34,600 people full-time, with two-thirds of them working in more than 100 foreign countries.

At ingredients maker Ingredion Inc., based in Westchester, Ill., about 83% of the company’s full- and part-time workforce of 11,400 people is employed outside the U.S., which means that determining a pay ratio could be “resource intense,” said CFO Jack Fortnum. “There are many potential variables in the calculation of the compensation ratio, including how employees are paid around the world, and how to consider various pensions and other benefits,” he said.

A lobbyist for a S&P 500 technology company said that the company objects to including foreign employees in the calculation, because the average per capita income in places like the Philippines are a fraction of those in the U.S. and thus would skew the results.

As much as 95% of the cost and effort the company expects to face in calculating a pay ratio would arise from tallying the pay of overseas workers, he said. “If this was domestic employees only, it wouldn’t be worth my time” to fight against the rule in its current form, the lobbyist added.

The National Association of Manufacturers, a trade group, cited a member company that said it would face $18 million in costs related to implementing the rule. That unnamed company, it said, must scour 500 separate payroll systems around the world to hammer out compensation details for its 130,000 employees and build a centralized network to capture the information, according to its comment letter to the SEC. The SEC’s Division of Economic and Risk Analysis last month said the figures that companies use to calculate their pay ratios could vary between 3.4% and 15%, based on the percentage of workers the companies exclude from their sampling.

CEOs and CFOs must attest, under penalty of law, that the information is accurate, since the disclosures will be included in SEC filings, according to Timothy J. Bartl, president of the Center on Executive Compensation, a Washington, D.C., advocacy group of human-resources chiefs.

Some shareholders say they’re eager to see the new statistics. “I think the pay ratio is going to be a data point in the conversation,” said Jonas Kron, senior vice president and director of shareholder advocacy at Boston-based Trillium Asset Management LLC, with $2.2 billion in assets under management. Trillium generally votes against any executive compensation package exceeding $7 million. “We’re going to be able to have more sophisticated conversations with companies and internally when making investment determinations,” he added.

– Broc Romanek, CompensationStandards.com

Last week I blogged about the roughly 60 comment letters have been submitted to the SEC on its pay-for-performance proposal. In addition, there are dozens of memos about the SEC’s proposal in our “Pay-for-Performance” Practice Area – including this one from Pay Governance entitled “Does the SEC’s New “Compensation Actually Paid” (“CAP”) Help Shareholders Accurately Assess Pay-for-Performance?“…

– Broc Romanek, CompensationStandards.com

As noted in this press release, a group consisting of AFL-CIO, CREDO Action, MoveOn.org, Americans for Financial Reform and Public Citizen delivered a petition to the SEC yesterday that numbered 165k signatures. Not sure whether that will influence the SEC to act any sooner since other petitions have not resulted in any action – although the rumor is that these rules will be adopted on August 5th.

There have been false starts before – this poll of the community as to when the pay ratio rules would be adopted fared well as the “winners” were those that guessed that the pay ratio rules would be adopted later than any of the offered poll choices. Here’s a new poll for you to make a prediction:

– Broc Romanek, CompensationStandards.com

Here’s a blog by Steve Quinlivan about Friedman v. Dolan:

Members of the Dolan family hold 73% of the voting power of Cablevision Systems Corporation’s stock. A shareholder commenced a derivative action regarding the executive compensation paid to Dolan family members serving as Executive Chairman and Chief Executive Officer and the Delaware Court of Chancery dismissed the claims.

In setting the compensation for the two family members that serve as Executive Chairman and Chief Executive Officer of Cablevision, the compensation committee used a peer group of 14 publicly traded companies. The court, in analyzing the case, also looked to additional companies in Cablevision’s ISS peer group, for a total peer group of 26 companies. 18 members of the peer group had market capitalizations of over $10 billion and the average total revenue was $30.87 billion. By comparison, Cablevision had a market capitalization of $4.39 billion and $19.58 billion in revenue.

Of the 17 peer companies with less than $30 billion in market capitalization, only two paid their CEO more than Cablevision paid its CEO. The Executive Chairman earned more than 14 (of 17) CEOs at peer companies with a market capitalization below $30 billion.

The plaintiff claimed that the entire fairness standard should apply to review of the executive compensation rather than the business judgment rule. The rational that was advanced was that transactions between controllers and a controlled company are reviewed under the entire fairness standard regardless of whether the transaction is approved by a committee or whether challenged in a merger or non-merger.

The Court agreed with the defendants’ analysis about the need to distinguish an independent committee’s compensation decisions from other matters warranting default entire fairness review. For example, major concerns in applying entire fairness review are informational advantages and coercion. The Court noted the complaint does not support its allegations of leveraging control over the compensation committee with a factual basis to make that inference, and the Court did not believe the Executive Chairman and the CEO had a material informational advantage over the compensation committee about the value of their services. Additionally, the Court would not endorse the principle that every controlled company, regardless of use of an independent committee, must demonstrate the entire fairness of its executive compensation in court whenever questioned by a shareholder. Finally, the Court stated it was especially undesirable to make such a pronouncement here, where annual compensation is not a “transformative” or major decision.

The Court found the compensation committee was independent and rejected the plaintiff’s allegations of non-independence based on long-term board service, service at other Dolan controlled entities, age, retirement status, a sibling’s employment, and continued self-nomination with board approval. The Court stated it was not reasonable to infer that age and retirement defeated independence — the plaintiff did not make fact-based allegations suggesting that the compensation committee defendants had infirmities or were dependent on their compensation. In addition, there were no allegations of how a compensation committee member’s decision were tied to his brother’s general employment by a Dolan entity that would lead the Court to deem the director’s decisions were discretion sterilized. According to the Court, the totality of the complaint did not make a reasonably conceivable case that the directors wanted to remain on the board so much that they sacrificed their professional integrity.

– Broc Romanek, CompensationStandards.com

It’s time to vote! Thanks to the many who submitted nominations – it was hard to pare those down (& apologies to those that didn’t get their candidates onto our final slate). I tried to limit the number of nominees to three for each category – but sometimes that was challenging because we had so many candidates submitted for certain categories. Folks are proud of their executive summaries! Please take a moment to vote for these 12 categories of awards. Voting is anonymous – and ends on Friday, July 24th. Here’s the FAQs…

Don’t forget to tune into today’s webcast – “Clawbacks: What Now After the SEC’s Proposal” – to hear Compensia’s Mark Borges, Semler Brossy’s Blair Jones and Morrison & Foerster’s Dave Lynn discuss the SEC’s latest proposal…

– Broc Romanek, CompensationStandards.com

Tune in tomorrow, July 15th, for the webcast – “Clawbacks: What Now After the SEC’s Proposal” – to hear Compensia’s Mark Borges, Semler Brossy’s Blair Jones and Morrison & Foerster’s Dave Lynn discuss the SEC’s latest proposal…

Check out this blog by Keith Bishop entitled “What The SEC Pretermitted In Proposing A Clawback Policy Rule” – and this one entitled “The SEC’s Clawback Proposal: An Unconstitutional Taking?“…

– Broc Romanek, CompensationStandards.com

With the July 6th deadline behind us, roughly 60 comment letters have been submitted to the SEC on its pay-for-performance proposal. The commentators are from all walks of our community, including investors, issuers, comp consultants, law firms and others (like this one from the Aspen Institute, a broad-based nonpartisan group).

Meanwhile, the SEC’s hedging & pledging proposal drew about 20 comment letters.

Don’t forget to tune in for Wednesday’s webcast – “Clawbacks: What Now After the SEC’s Proposal” – to hear Compensia’s Mark Borges, Semler Brossy’s Blair Jones and Morrison & Foerster’s Dave Lynn discuss the SEC’s latest proposal…