The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Last week, the Council of Institutional Investors approved a policy opposing automatic accelerated vesting of unearned equity in the event of a merger or other change-in-control. The recommended best-practice policy states that boards should have discretion to permit full, partial or no accelerated vesting of equity awards not yet awarded, paid or vested.

– Broc Romanek, CompensationStandards.com

Last week, the IRS issued final Section 162(m) regulations that address both IPO transitions and individual award limitations for the “performance-based” compensation exemption. These memos discuss the changes…

– Broc Romanek, CompensationStandards.com

Here’s a teaser of this new Towers Watson survey of pay-for-performance disclosure trends:

A new analysis of pay-for-performance disclosures among Fortune 500 companies by Towers Watson’s Executive Compensation Resources team reveals that company explanations of how pay is linked to performance vary widely — when they’re offered at all.

While the prevalence of pay-for-performance discussions in proxy statements increased steadily since Dodd-Frank was enacted in 2010, it appears to have plateaued in the last year. Just over a quarter (27%) of Fortune 500 companies provided some type of pay-for-performance discussion in 2014, which was down slightly from the 28% of companies that included such a summary in 2013.

– Broc Romanek, CompensationStandards.com

Last week, the SEC brought this enforcement action against Polycom’s former CEO (who was fired in 2013). The company was charged with inadequate proxy disclosure from 2010 to 2013 and improper internal controls. The SEC complaint is filled with striking details (if true) of how the CEO at Polycom created false expense reports so the company would pay for his personal expenses, such as this example:

On July 7, 2012, Miller directed his administrative assistant to buy him two tickets to an August 3, 2012 performance of the Broadway musical Jersey Boys in New York City. On July 24, 2012, Miller emailed his administrative assistant to ask if she had the tickets, and during that exchange he represented, “I am giving the JB tickets as a prize in a NYC PLCM office sales contest…. On PCARD place NYC PLCM Q3 Sales Incentive Contest[.]” At Miller’s direction, his assistant charged $576.20 to her P-Card for two tickets to the show, and submitted the expense for reimbursement with the description that Miller had provided. But Miller’s description of the expense was false, as he again used the tickets to attend the theatre with his girlfriend, and did not give them away to Polycom’s New York sales team or anyone else. Indeed, Miller’s August 3, 2012 night out with his girlfriend in New York cost Polycom more than $1,000. In addition to the tickets, Miller charged more than $275 to his Polycom credit card for post-theatre dinner and later, although he had eaten alone with his girlfriend, emailed his administrative assistant a bogus business description for the meal, including the names of purported attendees from a Polycom customer. Miller also directed his administrative assistant to book a limousine service to take him to the theatre and dinner, for which she charged more than $160 on her P-Card, at his direction, and obtained reimbursement from Polycom.

There are plenty of other examples to pique anyone’s interest. It’s another sad tale of what would seem to be, entitlement and fraud.

The SEC also penalized Polycom $750,000 and issued a cease and desist. The company’s proxy statement said: “No Excessive Perquisites” (emphasis in original) and explaining that “[a] small amount of perquisites are provided to our executives, consistent with the practices of our peer companies.” False and misleading statements, books and records violations, internal accounting controls failure, etc.

And in the complaint, the SEC stated: “Polycom employees discovered that Miller had expensed more than $800 worth of spa gift cards as purported gifts to Polycom employees, but that Miller had actually used the gift cards, at least in part, for himself. In response, Polycom’s CFO raised the issue directly with Miller and suggested a system for further review of Miller’s expense reports to avoid problems in the future. Miller reacted angrily at being second-guessed. On June 26, 2011, the CFO sent Miller an email emphasizing the importance of Miller’s and the company’s disclosure obligations, including a detailed description of the relationship between Miller’s expenses, rules requiring that Polycom disclose all perks he received, and the company’s proxy statements. Notwithstanding the clear instructions provided in Polycom’s annual financial reporting questionnaires, which Miller signed, and the CFO’s personal explanation in June 2011, Miller continued to charge and hide personal expenses from Polycom.”

– by Randi Val Morrison

This new Equilar article identifies key compensation trends for CEO-to-executive chair transitions based on a sample of 18 S&P 500 CEOs who made this transition within the past five years.

Here are the key findings:

– Cash remained relatively stable – Cash constituted only 35.7% of the median CEO’s total compensation. The median former CEO could reasonably expect a 30.6% decrease in cash compensation as a result of their transition.
– Equity represented the majority of this decline – Stocks, units, options and stock appreciation rights (SARs) collectively represented 64.3% of the median CEO’s pay. This portion was subject to a median decrease of 72.5%, perhaps due to the waning importance of retention and incentives
– Overall compensation fell as a result of these transitions – A majority (72.2%) of CEOs experienced reductions in overall pay as they made the transition to executive chairman.

Though limited by the sample, the information is helpful, as virtually all benchmarking information publicly available addresses compensation for incoming CEOs rather than newly transitioning executive chairs.

– Broc Romanek, CompensationStandards.com

Here’s news from this Towers Watson blog; here’s the intro:

As part of a series of hearings on tax reform, the Senate Finance Committee recently held a hearing on the issue of fairness in the tax code. In connection with the hearing, the committee’s ranking Democrat, Sen. Ron Wyden (D-OR), released a report on tax avoidance strategies that outlines possible recommendations for reforming nonqualified deferred compensation (NQDC) as part of an expected tax reform proposal. In his opening statement, Sen. Wyden noted that the report is intended to “shed some light on some of the most egregious tax loopholes around.”

– Broc Romanek, CompensationStandards.com

We have posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.”

– Broc Romanek, CompensationStandards.com

Ed Hauder of Exequity has posted his 2015 ISS Burn Rate Calculator (and here is Ed’s six-year comparison of the burn rate caps).

– Broc Romanek, CompensationStandards.com

Hat tip to Jim Hamilton’s blog & the Society of Corporate Secretaries for pointing out that 58 Democratic members of Congress sent this letter last week to SEC Chair White urging the agency to finalize the CEO/employee pay ratio rules in early 2015. As noted on this press release, the letter cites research that purportedly correlates higher pay ratios with CEO risk-taking, and suggests that lower ratios equate to long-term investment:

Research shows the higher the CEO to median worker pay ratio, the more likely that CEO is to pursue the kind of risky investments that brought on the global financial crisis. The Institute for Policy Studies found that nearly 40 percent of the highest-paid CEOs were fired, sought a bailout, or forced to pay fraud-related fines. Furthermore, a lower ratio of CFO to median worker pay implies more investment in human capital and a longer-term outlook. According to the Center for Audit Quality’s annual investor survey, 46 percent of investors say they consider CEO compensation in their decision making.

– Broc Romanek, CompensationStandards.com

As noted in this Semler Brossy report, to date, 134 Russell 3000 companies have had their say-on-pay votes – and 92% are passing with above 70% support. Two companies (1.5%) have failed say-on-pay thus far: Nuance Communications and Schnitzer Steel Industries. Of companies with five years of say-on-pay votes, 104 (94%) have passed all five years, six companies (5%) have passed in three years and failed in one year, and one company (1%) has passed in three years and failed in two years. Proxy advisory firm ISS is recommending ‘against’ say-on-pay proposals at 11% of companies thus far in 2015.