The Advisors' Blog

– Broc Romanek, CompensationStandards.com

In this report, Semler Brossy covers equity plan proposal trends for current Russell 3000 companies, finding that companies that do not receive majority support for say-on-pay are 10x more likely to have their equity plan voted against by shareholders.

– Broc Romanek, CompensationStandards.com

Thanks to those that participated in this survey – a hot topic! Below are the results from my recent survey on currency fluctuations for incentive comp:

1. Does your company adjust incentive goals/results for currency rate fluctuations?
– Yes, as a policy consistently applied – 24%
– Occasionally, as ad hoc decisions made across years – 15%
– No, we never do – 42%
– Not sure, it hasn’t come up – 20%

2. If your answer to #1 above was “yes,” what is the percent of impact currency rate fluctuations must have for neutralization (i.e. what is the swing/change in the metric due to the currency fluctuation before things get adjusted)?
– Less than 5% – 62%
– 5% to 9% – 10%
– 10% to 14% – 14%
– 15% to 19% – 0%
– 20% to 24% – 14%
– 25% or more – 0%

3. If your answer to #1 was “occasionally” or “never,” are your incentive compensation performance measures predominantly return measures?
– Yes – 32%
– No – 66%
– Not applicable (we don’t use performance measures for our incentive compensation) – 2%

4. If your company makes ad hoc decisions, is the issue decided on whether management raises the issue & how large the impact is?
– Yes – 42%
– No – 8%
– Not sure, it hasn’t come up – 50%

5. If you do adjust your incentive goals/results for currency rate fluctuations, to which type of incentive programs are these adjustments made?
– Short-Term – 61%
– Long-Term – 6%
– Both Short-Term & Long-Term – 33%

Take a moment to participate in our “Quick Survey on Hedging Policies” and our “Quick Survey on Board Portals.”

– Broc Romanek, CompensationStandards.com

As I blogged yesterday, the SEC has calendared an open Commission meeting for Wednesday, April 29th to finally propose the pay-for-performance rules as required by Dodd-Frank. This rulemaking is important as it could become the new standard for measuring pay and performance.

We’ll have to see what exactly the SEC proposes when the proposing release is out – but if it comes out in a form as expected, here are my 8 points of analysis:

1. Companies can get the data and crunch the numbers. I don’t think that the actual implementation itself will be difficult.

2. But I think what could be particularly worrisome is having yet another metric to figure out what the CEO got paid and trying to explain all of it.

3. You know how companies have different schemes for granting equity, including type and timing. If the rules tend to try to fit everyone into a narrow bucket in order to try to line everyone up for comparability, and a company’s program doesn’t quite fit neatly into it, then the disclosure can get even more complicated.

4. There are two elements: compensation and financial performance. What is meant by “financial performance” for example? Maybe the SEC will just ask for stock price, maybe they’ll go broader.

5. A tricky part likely will be the explanation of what it all means – and how it works with the Summary Compensation Table.

6. I don’t think it will be difficult to produce the “math” showing the relationship of realized/realizable pay relative to TSR and other financial metrics, so long as:

– There’s a tight definition of realized pay

– We know what period to measure TSR (and if multiple periods can be used)

– We know what other performance measures can be included (if any) and if they can be as prominent in the disclosure as TSR

7. Another area of potential difficulty is explaining why there is not a tight or tighter correlation with TSR (“we use metrics other than TSR to drive our compensation; thus, the correlation is not very strong; on the other hand, our compensation is based on Revenue Growth and EBITDA Margin, and as Exhibit II demonstrates, the correlation is very significant”).

In addition, Dodd-Frank has no requirement for a relative ranking, and companies will need to decide if TSR and Pay should be put in some type of relative context (“relative to our peers, our realizable pay was well below the peers; so even though compensation is not tightly aligned with stock price performance the last 3 years, we did not pay our bums very much).

8. I think what may be the most difficult to address is a requirement to discuss what the Compensation Committee plans to change – and why is it now that it has performed the analysis?

Early bird expires at the end of today. These proposed rules will be among many topics that Corp Fin Director Keith Higgins & other experts will be talking about at our popular Conferences – “Tackling Your 2016 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 12th Annual Executive Compensation Conference” – to be held October 27-28th in San Diego and via Live Nationwide Video Webcast. Register now. Here are the agendas – 20 panels over two days, including:

– Keith Higgins Speaks: The Latest from the SEC
– The SEC’s New Pay-for-Performance Proposal
– Proxy Access: Tackling the Challenges
– Disclosure Effectiveness: What Investors Really Want to See
– Pay Ratio: What Now
– Peer Group Disclosures: The In-House Perspective
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Communication
– Dave & Marty: Smashmouth
– Dealing with the Complexities of Perks
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Investors Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 75 Minutes

Early Bird Rates – Act by the end of Friday, April 24th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by the end of Friday, April 24th to take advantage of the 33% discount.

– Broc Romanek, CompensationStandards.com

The SEC just calendared an open Commission meeting to finally propose the pay-for-performance rules as required by Dodd-Frank on Wednesday, April 29.

Early bird expires tomorrow. These proposed rules will be among many topics that Corp Fin Director Keith Higgins & other experts will be talking to at our popular Conferences – “Tackling Your 2016 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 12th Annual Executive Compensation Conference” – to be held October 27-28th in San Diego and via Live Nationwide Video Webcast. Register now. Here are the agendas – 20 panels over two days, including:

– Keith Higgins Speaks: The Latest from the SEC
– Proxy Access: Tackling the Challenges
– Disclosure Effectiveness: What Investors Really Want to See
– Pay Ratio: What Now
– Peer Group Disclosures: The In-House Perspective
– How to Improve Pay-for-Performance Disclosure
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Communication
– Dave & Marty: Smashmouth
– Dealing with the Complexities of Perks
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Investors Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 75 Minutes

Early Bird Rates – Act by April 24th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 24th to take advantage of the 33% discount.

– Broc Romanek, CompensationStandards.com

Last October, I blogged it was coming – and now it’s here (albeit a bit late for this proxy season). The CFA Institute has updated its CD&A Template, last issued in 2011. Here’s a blog from Matt Orsagh explaining the changes – particularly focusing on how the updated Template supports better pay-for-performance storytelling…

– Broc Romanek, CompensationStandards.com

As noted in this Morris Nichols memo, in an order issued on March 6, 2015 in Friedman v. Khosrowshahi, the Delaware Supreme Court affirmed the Court of Chancery’s dismissal of a breach of fiduciary claim relating to an alleged violation of Expedia’s stock incentive plan. The Supreme Court upheld the Court of Chancery’s finding that the complaint failed to allege any violation of the Plan because (1) the board acted on a reasonable interpretation of the Plan’s terms and (2) to the extent the terms of the Plan were ambiguous, the Plan expressly gave the board authority to resolve any ambiguity.

– Broc Romanek, CompensationStandards.com

Here’s news from this Bloomberg article:

Jarden Corp.’s Executive Chairman Martin Franklin is poised to become one of the highest-paid U.S. executives for 2014 thanks to a $74 million performance award that the consumer-brands company granted him last year and recorded as having no value. The grant includes 1.8 million restricted shares that are deemed “improbable” to vest in full because the underlying performance criteria — annual net sales of $10.5 billion and adjusted earnings-per-share of $4 by Dec. 31, 2018 — are unlikely to be achieved, the board’s compensation committee wrote in a March 30 preliminary proxy filing.

The shares, worth $73.9 million on the day they were granted, are listed with Franklin’s other equity awards in the summary compensation table with no value. In a footnote, Jarden cites a Financial Accounting Standards Board rule that advises companies to value performance-based equity grants based on the probability that the targets will be met. “This grant-approach appears to allow a company to skirt the summary compensation table disclosure,” Ron Bottano, a vice president at compensation consultant Farient Advisors LLC, said in an e-mail. “It does not strike me as best practice.” Jarden, based in Boca Raton, Florida, declined to comment on specific questions about its treatment of the grant.

The company, which owns a collection of brands including Yankee Candle, Rawlings baseball gear and Bicycle playing cards, granted Franklin a similar award in 2010 that it also deemed improbable to vest due to its performance criteria, according to filings. It vested in full when the target was met in 2013.

‘Aspirational Targets’

The award was paid out last year and allowed Franklin to take home 2.25 million shares valued at $120 million as of Monday’s close in New York. The company recorded a $33.6 million expense for the 2010 grant, which also included shares for Vice Chairman Ian Ashken and Chief Executive Officer James Lillie, in its 2012 annual report. That’s because the likelihood of achieving the performance goals “was deemed probable” in the fourth quarter of that year, according to a footnote in Jarden’s April 15, 2013 proxy filing. The grant never appeared in any summary compensation tables with a value larger than zero. “Jarden has consistently set long-term aspirational targets to drive performance,” the company said in an e-mailed statement. “The compensation that Mr. Franklin, Mr. Ashken and Mr. Lillie received in 2014 reflects the achievement of this long-term goal.”

‘Relatively Uncommon’

Jarden posted revenue of $8.29 billion and adjusted earnings-per-share of $2.70 last year, according to a regulatory filing. For the new grant to vest in full, the company must meet the revenue and EPS goals detailed in the preliminary proxy. Achieving those goals was considered “improbable” for reporting purposes, according to the March 30 preliminary proxy filing, enabling the company to assign no fair value to the 1.8 million shares in the summary compensation table. “This is relatively uncommon,” Ken Shaw, a professor of accounting at the University of Missouri’s Robert J. Trulaske Sr. College of Business, said by phone. “I would think that a CEO or CFO, all else equal, prefers targets that may be challenging but achievable.” Per-share earnings excluding some items are projected to be $4.14 in fiscal year 2018, according to the average estimate of four analysts surveyed by Bloomberg. Jarden’s brands also include Coleman camping gear, Breville kitchen appliances and Crock-Pot slow cookers.

‘Very Reasonable’

The company’s history of buying well-known consumer brands and quickly improving their profitability makes the revenue and earnings targets seem “very reasonable,” Stephanie Wissink, senior analyst at Piper Jaffray & Co. in Minneapolis, said in a telephone interview. “The interest rate favorability allows them to stretch up into bigger acquisitions,” Wissink said. “They’re actually probably pacing ahead of 2018.”

Jarden is on track to meet both targets even without making any additional deals, Charles Strauzer, senior managing director at White Plains, New York-based CJS Securities Inc., said by phone. CJS has received banking fees from Jarden. “If this kind of growth rate continues, you could easily get there,” Strauzer, who owns shares in the company, said. “If they can find an acquisition or two along the way, you could see that accelerate.” The $73.9 million grant would put Franklin’s total reported pay for 2014 at about $96 million, according to the proxy.

Yankee Candle

Between 2010 and 2014, Jarden’s annual revenue grew by 37 percent, or $2.26 billion, as the company spent more than $3.39 billion of its cash on at least one dozen acquisitions including Rexair Holdings Inc., which makes Rainbow vacuum cleaners, and Yankee Candle Investments LLC. The company has struggled in the past to persuade investors about its executive pay practices. More than 40 percent of voting shareholders have rejected its executive compensation program in two out of its three most recent Say-on-Pay votes held at annual meetings. Approval rates below 70 percent are generally considered “problematic” and should prompt directors to talk with shareholders to understand their concerns with the company’s pay program, said Ann Yerger, executive director at the Council of Institutional Investors.

– Broc Romanek, CompensationStandards.com

Here’s the intro to this NY Times article that everyone is talking about:

The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.

His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000. “Is anyone else freaking out right now?” Mr. Price asked after the clapping and whooping died down into a few moments of stunned silence. “I’m kind of freaking out.”

If it’s a publicity stunt, it’s a costly one. Mr. Price, who started the Seattle-based credit-card payment processing firm in 2004 at the age of 19, said he would pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit this year. The paychecks of about 70 employees will grow, with 30 ultimately doubling their salaries, according to Ryan Pirkle, a company spokesman. The average salary at Gravity is $48,000 a year.

– Broc Romanek, CompensationStandards.com

Here’s news from this Reuters article:

Hillary Clinton, under pressure from the left wing of her Democratic Party to aggressively campaign against income inequality, voiced concern about the hefty paychecks of some corporate executives in an email to supporters. Striking a populist note, Clinton, who announced on Sunday she was running for president in 2016, said American families were still facing financial hardship at a time “when the average CEO makes about 300 times what the average worker makes.”

In a tightly scripted campaign launch in which there were few surprises, the comments were unexpected, at least by progressives, who saw them as an early sign she may shift away from the centrist economic policies pursued by her husband, former President Bill Clinton. “I definitely see the push from the left wing, which I think is great,” said Jared Milrad, a Clinton supporter who appeared in a video launching her campaign for the presidency.

Milrad said he saw the populist rhetoric as a sign that Clinton “has been listening” to backers such as himself who want her to embrace some of the economic policies pushed by Senator Elizabeth Warren, a hero of liberal Democrats. Warren favors tighter regulation of big banks and a bolstering of the social safety net.

PAY GAP WIDENING

The enthusiasm of some progressives was tempered by the fact that they have yet to see the details of Clinton’s policy proposals. “So far we don’t know very much,” said Zephyr Teachout, a one-time New York gubernatorial candidate. “I hope Clinton clarifies where she stands on these issues.” Leo Gerard, international president for the United Steelworkers union, was also guarded. “I think it’s too early to make any judgments on what I would call the very short opening statement, and we’ll see what happens as we go forward,” Gerard told reporters at a conference of the BlueGreen Alliance, a coalition of large labor unions and environmental groups.

The gap between the pay of chief executives from major corporations has skyrocketed over the past several decades. In 1965, CEOs earned about 20 times what a typical worker brought home, according to research by the Economic Policy Institute, a liberal think tank. In 2013, CEO compensation was nearly 300 times the pay of the average worker, the EPI study said.

Economic inequality has been a top campaign theme for Democrats for the past several years, including for President Barack Obama. While he often talks about the need to address economic inequality, he is frequently cautious about appearing to lash out at corporations and their executives.

In 2009, for example, he bashed “fat cat” Wall Street bankers for accepting big pay packages in the aftermath of the 2007-2009 financial crisis at a time when many Americans were suffering hardship. Faced with a barrage of criticism from Republicans, Obama stressed he was not anti-business.

Obama’s efforts to walk a fine line on economic populism highlight the balancing act that Clinton will face. While such rhetoric stirs enthusiasm on the left, she risks irking wealthy donors, including her backers on Wall Street.

Clinton supporters on Wall Street reacted with equanimity on Monday when asked about her vow to level the playing field for the middle class. “She will address inequality. The mistake would be to just assume that that’s populist,” said Lynn Forester de Rothschild, the CEO of the family investment company E.L. Rothschild and a Clinton supporter. “If rich people are not worried about today’s levels of income inequality, then they are stupid,” she said. Paul Beirne, a principal at Bernstein Global Wealth Management who supports Clinton, said there had been some movement toward better accountability in CEO pay, but more work was needed.

Meanwhile, this article notes how Barney Frank is disappointed in how say-on-pay has not had more influence on changing executive pay, particularly citing fund managers…

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from this Reuters article:

CEOs at large U.S. companies collectively realized at least $6 billion more in compensation than initially estimated in annual disclosures in the five years after the financial crisis first hit, according to a Reuters analysis. The reason for the windfall: the soaring value of their stock awards. About 300 CEOs who served throughout the 2009-2013 period at S&P 500 companies together realized about $22 billion in compensation in the form of pay, bonuses and share and option grants, or an average of $73 million each, figures provided by executive compensation data firm Equilar show. That compares to about $16 billion initially reported in annual company summary compensation tables, which include estimates for the value of stock grants based on the price of shares at the time of awards.

The comparison does not include pensions and perks such as country club memberships and use of corporate jets for private use. The study also excludes rewards reaped by other top executives, such as chief financial officers and chief operating officers, and compensation for CEOs who did not serve the full five years.

Further gains in share prices in 2014 and so far this year will only have increased the gap between the annual disclosures and the amount actually derived from the awards, with the full picture for last year only becoming clear over the next couple of months. The S&P 500’s total return, including dividends, was 166 percent from the end of 2008 through Monday of this week, according to S&P Dow Jones Indices.