Love the title of this piece by Towers Watson’s Steve Kline. Here’s an excerpt:
As we reported last month, the third quarter began to show real signs of recovery and growth. (See “Pay-for-Performance Update: Third-Quarter Checkpoint,” Executive Pay Matters, December 22, 2014.) Mild optimism was beginning to form for 2015. But, some cracks in the ice appeared as the year drew to a close and 2015 got under way. Oil and other commodity prices continue to slide, putting a damper on a number of industrial sectors. Concerns in Europe have led to a strengthening of the dollar, which constrains U.S. exports and cuts into foreign profits as sales abroad are converted into fewer U.S. dollars. Other sectors face a range of issues. For example, some retailers’ sales were soft in December, while insurance companies are fretting over capital markets challenges. The bottom line: some earnings disappointments are being announced and/or forewarned.
In the coming weeks, many companies will finalize their incentive plan goals for 2015. As always, this will be no slam dunk. Will the 2015 numbers be an extension of 2014 results? Given the softer start for the new year, perhaps not. Will 2015 reflect the optimism that emerged with third-quarter results? For most sectors and companies, that would seem a bit optimistic today. However, given some of the sharp swings we’ve seen in the global economy and markets in recent years, who knows about tomorrow? Will the range of performance goals that surround target be stretched to accommodate the emerging uncertainties? In many cases, perhaps yes. Will potential rewards be modified in concert with shifting performance goals? Perhaps in extreme cases, although proxy advisors and shareholders may hope for larger modifications to pay opportunities.
In this environment, companies clearly have a tough call in deciding how far to venture out on the ice in their 2015 performance targets. To set rigorous targets, Towers Watson’s Principles and Elements of Effective Executive Compensation Design suggests that companies should consider a number of inputs, including:
– The organization’s long-term strategic plan
– Enduring standards reflecting historical norms of financial performance for the organization, industry and relevant peer organizations
– Analyst/economic forecasts
– The organization’s budget.
A month ago, I blogged about how I would be shocked if this Politico article was correct when it predicted that the SEC would finalize its pay ratio rules by mid-January. I’m still laughing about that one! Anyways, check out this online petition from Credo Action, which has hit 36,000 so far…
Speaking of petitions, over a million folks have written in to the SEC in support of the agency conducting rulemaking in the “disclosure of corporate political spending” area. It’s remarkable because no one ever writes in about a mere petition of rulemaking. The SEC is not obligated to consider – or act – on a rulemaking petition…
Since a number of members have recently asked about currency fluctuations and FX strategies in the incentive compensation context, I just posted this “Quick Survey on Currency Fluctuations for Incentive Compensation.” Please participate in this short – and anonymous – poll…
Glass Lewis is pleased to announce enhancements to the performance metrics used in its US and Canadian pay-for-performance (P4P) models, as well as its US equity plan model. These changes will go live on February 2, 2015. Glass Lewis’ P4P models evaluate the linkage between pay and performance at companies versus their peers. Weighted-average executive compensation percentiles and weighted-average performance percentiles are reviewed to determine how well a company aligns its executive pay with its corporate performance. When calculating the performance percentiles, the current models evaluate the following five metrics: Change in Operating Cash Flow, Change in Earnings Per Share, Total Shareholder Return, Return on Equity, and Return on Assets.
Glass Lewis has determined that changing some of the performance metrics for certain industries will better reflect how the operating performance of companies in these industries is measured and evaluated by management, boards, and industry analysts. Along those lines, Glass Lewis will:
– Replace Change in Operating Cash Flow with Tangible Book Value Per Share Growth for companies in the Bank, Diversified Financials, and Insurance sectors
– Replace Change in Operating Cash Flow with Growth in Funds From Operations for REITs, with the exception of Mortgage and Specialized REITs.
In order to be consistent with these updates, Glass Lewis will also make the same changes to the performance metrics used in its US equity plan model. Glass Lewis has back-tested these changes in the P4P and equity plan models. The results indicate that there will be minimal impact on the grades generated by the P4P models, as well as minimal impact on the pass/fail assessments generated by the equity plan model.
Last week, the “Burdensome Data Collection Relief Act” (HR 414) was introduced to repeal Dodd Frank’s Section 953(b), the pay ratio disclosure requirement. The bill is real simple – a single paragraph. This same bill was introduced in 2013 and went nowhere. Not sure what will happen this time around…
Here’s an excerpt from this article from Accounting Today:
The clawbacks on executive compensation mandated by the Dodd-Frank Act may discourage one type of accounting manipulation only to encourage another, according to a new study. Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act contained a provision requiring all publicly listed companies to recover from executives any incentive compensation that was paid to them on the basis of erroneous financial statements. The Securities and Exchange Commission has still not determined exactly how the clawback provision will be enforced and it is not yet mandatory. But many companies have voluntarily enabled or required themselves to implement them.
While previous research has found that such provisions reduce the number of corporate financial restatements and increase investor confidence in financial reports, the new research suggests that the gains implied by those findings may be more illusory than initially thought. The study appears in the January/February issue of The Accounting Review, a scholarly journal from the American Accounting Association, and was written by Kevin C. W. Chen and Tai-Yuan Chen of the Hong Kong University of Science and Technology, Lillian H. Chan of the University of Hong Kong, and Yangxin Yu of the City University of Hong Kong.
The new paper found that the clawback provision reduces the incidence of one kind of earnings manipulation—”accruals management”—only to increase the incidence of another that is equally, if not more, adverse to investors—that is, “real-transactions management.” Accruals are particularly subject to manipulation because they often entail some element of guesswork, such as predictions of future write-offs for bad debts or estimates of inventory valuations. Real-transactions management, in contrast, involves altering actual expenditures to achieve a temporary earnings boost, such as by cutting research and development or by slashing prices or easing credit terms to accelerate sales.
Clawback provisions “deter managers from using accruals management because high accounting accruals tend to attract more scrutiny from the SEC and auditors,” according to the study, increasing the likelihood of clawback-triggering financial restatements. But “real-transactions management, such as cutting back on R&D or on selling, general, and administrative (SG&A) expenses, is considered less risky.” Even though it “represents a deviation from optimal business practices…it is unlikely to be deemed improper by auditors and regulators.”
Here’s a teaser of this longer piece from Equilar about personal use of corporate jets:
In 2014, over two-thirds of Fortune 100 CEOs received a perquisite relating to personal use of corporate aircraft. Although scrutiny of aircraft perquisites has declined since 2008, the high degree of variability and intricacy surrounding the disclosure of how aircraft perquisites are calculated and justified remains a topic of discussion. Equilar’s latest analysis summarizes aircraft perquisite practices across the Fortune 100 and provides relevant disclosure examples.
Tune in tomorrow for the webcast – “Executive Compensation Litigation: Proxy Disclosures” – to hear Pillsbury’s Sarah Good, Shearman & Sterling’s Doreen Lilienfeld and Winston & Strawn’s Mike Melbinger as they drill down on how proxy disclosure-related lawsuits are faring and what you can do to avoid them. Please print these two sets of course materials in advance:
Here’s the final tally of say-on-pay votes from this Semler Brossy report. The report notes that a majority of companies continued to pass say-on-pay with substantial shareholder support: approximately 92% of companies passed with over 70% shareholder approval – and 60 companies failed out of the Russell 3000 (2.4%).
And from a while back, as noted in this WSJ article (in which I am quoted), Oracle lost their say-on-pay vote for the third year in a row…
Aon has seen an uptick in the use of mandatory post-vest holding periods as a design trend in the past year – so they recently launched a new web portal – HoldAfterVest.com – which currently has these articles: