Much has been written about the scale of pay awards to CEOs at FTSE-listed companies over the last decade — and the potential consequences for pay inequality. Towers Watson’s research shows that total pay for CEOs of FTSE 350 firms increased by around 75% over the last decade and now stands at about 70 times median full-time earnings for the U.K. As a response to the public’s increasing sense of inequality and perceived lack of fairness in the area of pay, new U.K. regulations that came into force in 2013 specifically require more transparency about the relative rate of pay increases between senior executives and the wider workforce, along with increased disclosure regarding how pay and workforce conditions are taken into account when setting executive pay.
It seems likely that increased regulatory and public focus on pay differentials will drive companies to look again at the integration and alignment of senior executive pay strategy and arrangements with those for employees in other parts of the organization. As part of the process, companies will need to review the way in which pay for the broad executive cadre fits with arrangements for the most senior executives.
Several shareholder proposals this season ask boards to adopt clawback policies that would be triggered by any misconduct resulting in a violation of law or policy that causes significant financial or reputational harm, where a senior executive either committed the misconduct or failed to supervise subordinates. The proposals also ask those companies to disclose to shareholders the circumstances of any recoupment and any board decision not to pursue recoupment.
This type of clawback policy, particularly the disclosure component, is unusual. PwC’s study on clawbacks as disclosed in proxy statements found that 90% of clawback policies are triggered by a financial restatement. 73% of those require evidence that the employee caused or contributed to the false reporting. The clawback amount is usually the excess that was paid compared to the compensation if no restatement had occurred.
The study analyzes the clawback policies of 100 large public companies as disclosed between 2009 and 2013. Many companies had clawback policies that contained more than one trigger event. 83% included both financial and other misconduct as a reason to clawback. Other types of clawback triggers included any form of fraud, violation of non-compete or non-solicitation agreements, breach of corporate confidentiality or failure to supervise subordinates. In addition, financial services firms often addressed inappropriate risk-taking by executives, implicated when employees violate risk policies or risk thresholds.
In terms of individuals covered, 62% applied clawbacks only to senior executives, while 28% covered all employees or participants and 9% limited it to NEOs. 86% allowed companies to recover both cash and stock. Generally, there is no blanket discretion for determining whether an event triggers a clawback. However, 76% permitted discretion in determining the consequences, such as the extent of the recoupment.
As the terms of clawback provisions evolve, companies need to be aware of the possible accounting implications. PwC’s study noted that under existing accounting rules, a traditional clawback feature does not impact the equity award’s value and expense pattern, so that if the clawback were ever invoked, accounting recognition would only be needed at that time to reflect the recoupment.
However, if performance metrics that affect vesting or retention of the award are added, then those features could be considered performance conditions of the award and possibly complicate the accounting. In addition, having the flexibility or discretion to determine when or if a clawback has been triggered and the amount to be recouped may impair the need to meet the criteria for a grant date, if there is an assessment that the key terms and conditions of the grant are not established and understood.
A derivative suit filed in the United States District Court for the Western District of Washington alleges that Nordstrom violated securities laws in not fully disclosing aircraft-related costs in its proxy statements and that the board breached its fiduciary duties in approving the related party transactions without analyzing the actual expenses.
Nordstrom maintained an aviation department for its two company planes and eight personal planes owned by members of the Nordstrom family. According to the complaint, for many years the proxy statements have disclosed that the company charged the Nordstrom family market prices for these related party services, and that the payments received from the Nordstrom family exceed the estimated cost to the company of providing these services.
Plaintiff and counsel sought and obtained the company’s books and records, and now alleges that the board “has never conducted any analysis of the costs of providing the services to the Nordstrom family.” Specific costs figures that the plaintiff cites are redacted in the complaint, but it appears that there were perhaps 12 pilots and a team of maintenance, office and administrative staff to manage planes, schedule flights, and keep detailed records for tax reporting and other purposes.
The complaint alleges that the Governance Committee did not seek a full accounting of the costs prior to approving the transactions, and the Nordstrom family did not properly pay the proportion of the costs related to the time that the pilots and ground maintenance crew spent attending to the Nordstrom family and their personal planes, in addition to the administrative assistance. The 2014 proxy statement stated that the cost estimates were based on a survey conducted by a “leading independent aircraft research company of competitive market rates.”
In Liang v. Berger, the plaintiff in a derivative action alleged the officers and directors of ARAID Pharmaceuticals failed to disclose material negative information about a drug under development in a timely manner. Among other things, plaintiff claimed that a proxy statement which asked the company’s shareholders to approve executive compensation on an advisory basis failed to disclose:
– the FDA’s concerns about the drug’s safety;
– the agency’s demand that ARIAD continue to monitor and document safety data from a trial;
– ARIAD’s resulting monitoring efforts; and
– changes that ARIAD had made to the enrollment criteria for the trial.
The plaintiff further contended that disclosure “of the truth would have ended the shareholders’ support for compensation of the senior executives and reelection of directors.”
The court noted that to state a claim a proxy statement is false and misleading under Section 14(a) of the Exchange Act, a plaintiff must allege that:
– a proxy statement contained a material misrepresentation or omission;
– which caused the plaintiff injury; and
– that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction.
The court held the complaint did not sufficiently allege a causal link between the proxy statement and ARIAD’s alleged injury. Insofar as plaintiff claims that ARIAD was injured by the payment of compensation to officers, the claim fails to allege that the underlying corporate transaction (between ARIAD and the compensated executives) required shareholder approval. The proxy statement told the shareholders that their votes were sought on “an advisory basis” with respect to executive compensation but told them that “[b]ecause your vote is advisory, it will not be binding on our Compensation Committee or our Board of Directors.”
The amended complaint also failed insofar as plaintiff claimed that ARIAD was injured because a full disclosure in the proxy statement “would have ended the shareholders’ support for . . . reelection of directors.” Although shareholders’ votes were binding on this issue, the reelection of directors does “not create any cognizable harm [for purposes of the Exchange Act] because the shareholders’ votes did not authorize the transactions that caused the losses.”
– Robbert Gerritsen & Kevin De Pril, ISS Benelux Research
A mandate to cap variable remuneration at 20 percent of base salary for all persons working for a financial institution in the Netherlands was adopted on Jan. 27, 2015, by the Dutch Senate, despite some opposition at the end of 2014. In October 2014, the Dutch Parliament approved the bill and also added additional requirements. The bonus restrictions would not only be applicable to banks and insurers, but also to investment companies, investment managers, and UCTIS. Furthermore, half of the variable remuneration should be based on non-financial performance criteria, and severance pay cannot amount to more than 100 percent of the fixed base salary. The bill now also includes additional publication requirements on the payment of variable remuneration.
The approved bill then received considerable opposition in the Senate where various questions were raised concerning the ineffectiveness of the current regulation, whether circumstances have changed since the implementation, how this bill relates to European-wide regulations, and how the bill fits in the framework of labor laws.
Certain parties were not satisfied with the finance minister’s answers from early January. The bill was nevertheless adopted and will become effective on a date to be determined. Consequently, this new law might affect some of the Dutch AGM agendas.
Here’s a Reuters article on the SEC Staff allowing exclusion of shareholder proposals about government service golden parachutes at Wall Street banks:
Three major Wall Street banks this week lost their bid to block a union-backed shareholder proposal calling for the banks to disclose so-called “golden parachutes” that executives can earn if they leave to work for the government. The Securities and Exchange Commission told Citigroup, Goldman Sachs and Morgan Stanley they cannot exclude the AFL-CIO’s shareholder proposal from their corporate ballots, according to copies of the letters seen by Reuters.
Spokesmen for Morgan Stanley and Goldman Sachs declined to comment on the SEC’s decision. A Citigroup representative was not immediately available for comment.
“Citigroup, Goldman Sachs and Morgan Stanley fought hard to prevent shareholders from having a vote on more transparency around government service golden parachutes,” Heather Slavkin-Corzo, the AFL-CIO’s investment office director, said in an email. “We are pleased that the SEC did not yield to pressure from the big banks on this important issue.”
The AFL-CIO’s shareholder proposal calls for requiring the banks to prepare a report disclosing the vesting of equity-based awards for senior executives that voluntarily leave to go be public servants. The report would have to identify which executives are eligible for government service golden parachutes and the estimated value of their packages. In the labor federation’s petition supporting the measure, it says such disclosure is important because equity-based rewards that vest over time are meant to serve as a powerful incentive for people to remain employed with a company. Those who choose to resign sooner, the union said, typically forfeit any unvested awards. The AFL-CIO also cites examples of people who have left the banks to work in government and were paid handsomely, including Treasury Secretary Jack Lew, who previously worked for Citigroup.
The banks made various arguments to the SEC in their efforts to exclude the measure, including claims that they already disclose most of the compensation arrangements at issue. They also argued that the AFL-CIO’s shareholder proposal was materially misleading. But in letters responding to their arguments, the SEC said the banks’ public disclosures do not appear to “compare favorably with the guidelines of the proposal.” The AFL-CIO has been aggressively lobbying to get its measure on the ballots of the banks. Last month, its president, Richard Trumka, wrote an opinion piece in the Wall Street Journal titled “The Paratroopers of Crony Capitalism: Why give golden parachutes to executives who leave to enter government service?”
Last month, I posted a “Quick Survey on Currency Fluctuations for Incentive Compensation” – for which I still seek more responses. Yonat Assayag of ClearBridge Compensation Group notes that I ask whether companies make adjustments to incentive goals/results based on the percent to which currency exchange rates fluctuate – and that this is certainly one way of dealing with the issue. Another way that he has seen it dealt with is by locking in an exchange rate when setting budget/goals at the beginning of the year, then at the end of the year, actual results are compared to budget/goals based on this “fixed” exchange rate (i.e., neutralizing the effect of exchange rate fluctuations). Yonat is curious how many companies take this approach – if you have any insight, please shoot me an email as many companies are grappling with this issue right now…
By the way, this topic was covered in yesterday’s webcast (audio archive is posted; transcript will be up in 10 days or so)…
With Ira Kay speaking on today’s “The Top Compensation Consultants Speak” webcast, I thought I would highlight this new interesting memo from Pay Governance entitled “Are ISS and Glass Lewis Say on Pay Voting Policies Correlated with Improved Total Shareholder Returns?”…
Tune in tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be.”