– Broc Romanek, CompensationStandards.com
With just two weeks to go, folks are rushing to join their 2000 other colleagues to be part of our “Annual Proxy Disclosure Conference” on September 29th-30th. Registrations for our popular pair of conferences (combined for one price)—in Las Vegas and via video webcast — are strong and for good reason. Act now!
The full agendas for the Conferences are posted — but the panels include:
– Keith Higgins Speaks: The Latest from the SEC
– Top Compensation Consultants: Survivor Edition
– Preparing for Pay Ratio Disclosures: How to Gather the Data
– Pay Ratio: What the Compensation Committee Needs to Do Now
– Case Studies: How to Draft Pay Ratio Disclosures
– Pay Ratio: Pointers from In-House
– Navigating ISS & Glass Lewis
– How to Improve Pay-for-Performance Disclosure
– Peer Group Disclosures: The In-House Perspective
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– Dealing with the Complexities of Perks
– The Art of Communication
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars
– Hot Topics: 50 Practical Nuggets in 75 Minutes
– Subodh Mishra, ISS Governance Exchange
More than three-quarters of FTSE 100 companies have modified remuneration practices in the past 12 months to meet shareholder expectations and respond to new rules on disclosure and voting, according to a report from Deloitte. The Sept. 4 report of FTSE 100 directors’ remuneration shows that “companies are seeking to better align the interests of directors and shareholders by focusing more on the longer term, increasing the shareholding requirements for directors and introducing simpler remuneration structures.”
According to Deloitte, 35 companies studied this year implemented new long-term incentive plans, “more than at any time in the last ten years.” Last year, almost half of FTSE 100 companies operated more than one long-term plan, the report notes, while bonus share matching plan were removed by 13 companies, “demonstrating a move towards simpler arrangements.” “A particularly striking finding from this year’s analysis is that in over a quarter of the performance share plans the participants will not receive any shares for five years,” said Stephen Cahill, a partner in Deloitte’s remuneration team. “Overall, almost half the long-term plans in place are now based on time periods longer than three years.”
Meanwhile, shareholder expectation for directors to hold a minimum number of shares are being met, the report finds, with most companies (96 percent) now having such guidelines in place. In a statement announcing key findings, Cahill said the past year has seen over a quarter of companies increase the minimum requirements, resulting in a median requirement to hold shares with a value of 200 percent of salary, compared with 150 percent last year. In the largest companies, he noted, this rises to 300 percent of salary.
Separately, there has been no change in the median potential bonus that may be paid in FTSE 100 companies generally, the report finds, but the median has decreased in the top 30 companies and actual bonus payout amounts continue to decrease. The median bonus payout across all FTSE 100 companies in 2013 was 70 percent of the maximum opportunity, compared with 87 percent four years ago. (There is a maximum bonus opportunity based on company performance. Depending on the extent to which the performance targets are met a proportion of the bonus will be paid, up to the maximum for outstanding/exceptional performance.)
In the top 30 companies, payouts were lower with a median of 58 percent of the maximum opportunity. In 11 companies, compared with only three last year, the level of the bonus payout was reduced by the remuneration committee to better reflect the overall company performance.
There has been no change in the potential size of the median long-term award. The vesting of awards relating to performance periods ending in 2013 has also been lower than the previous year with a median of 40 percent of the maximum that could have been earned, according to Deloitte. “The variability of these plans is demonstrated by the fact that over a quarter of recipients received no payout award and only one in five received the full award,” said Cahill.
– Broc Romanek, CompensationStandards.com
Here’s news from this Reuters article:
Abercrombie & Fitch Co’s board agreed to make governance changes to resolve a lawsuit objecting to its awarding longtime Chief Executive Officer Michael Jeffries more than $140 million of compensation since 2007. The negotiated settlement, which requires court approval and includes no monetary payment to shareholders, was disclosed on Friday, less than an hour after the underlying lawsuit was filed in the U.S. District Court in Columbus, Ohio.
Abercrombie agreed to appoint a chief ethics and compliance officer, tie executive pay more closely to performance, bolster anti-corruption compliance training, and limit access to nonpublic data to Jeffries’ partner and other third parties, among other provisions, court papers show. The accord would bind other shareholders with similar claims. It differs from most shareholder derivative litigation, in that settlements often occur months or years after lawsuits are filed. A Florida pension plan, the City of Plantation Police Officers’ Employees’ Retirement System, is the plaintiff.
“Many lawyers try to shoot first and ask questions later,” Mark Lebovitch, a partner at Bernstein, Litowitz, Berger & Grossmann representing the plaintiff, said in an interview. “The board deserves credit for recognizing the benefits that our settlement proposal would create for the company.” Abercrombie directors denied wrongdoing in agreeing to settle. A spokesman for the New Albany, Ohio-based company had no immediate comment on Tuesday.
The changes came after Abercrombie had this year added seven new independent directors, including four to resolve a proxy battle with hedge fund Engaged Capital, and reduced Jeffries’ power by splitting the roles of chairman and chief executive. Abercrombie has had 10 straight declines in quarterly same-store sales. It said on Aug. 28 it would reduce its logo-focused apparel business in North America to “practically nothing” while expanding other lines. Jeffries’ pay was less than $140 million from 2008 to 2013, according to court papers, because some awards did not vest or were not granted.
In the court papers, Lebovitch said the plaintiff chose an “atypical strategy” of negotiating changes quietly, rather than risk a long court battle with Abercrombie’s “famously aggressive counsel” at Skadden, Arps, Slate, Meagher & Flom. He also said the settlement was not collusive, and that courts in the federal circuit that includes Columbus have encouraged settlements in comparable cases. “I don’t see the incentive to settle as being any different before or after a lawsuit is actually filed,” said Robert Daines, a professor at Stanford Law School and co-director of its Rock Center for Corporate Governance.
The plaintiff’s lawyers could receive up to $2.78 million in fees and expenses if the settlement were approved. “We think the benefits are more significant than in virtually any derivative settlement you will find, and could justify a much larger award,” Lebovitch said.
The case is City of Plantation Police Officers’ Employees’ Retirement System v. Jefferies et al, U.S. District Court, Southern District of Ohio, No. 14-01380.
– Broc Romanek, CompensationStandards.com
Here’s this article from ThinkProgress.org:
David Dillon, the former CEO of the supermarket chain Kroger, told the audience of an Aspen Ideas festival that his pay in his last year on the job, which clocked in at nearly $13 million, “even seems ludicrous to me.”
He clarified that the package wasn’t ludicrous when it was first put together, but rose so high because the company’s stock has skyrocketed, and much of his compensation was tied to the stock price. “I don’t really defend that amount, that even seems ludicrous to me,” he said. And while he said that even before the large package, compared to his peers, “I generally hit the 25th percentile on the bottom side” for compensation, even that “was pretty damn high.” In a follow up interview with Quartz, he added that the use of the word ludicrous was in comparison “to what I thought was a more logical level of pay for the year.”
On the panel, he also defended the idea of designing executive compensation so that CEOs “have enough shareholder interest that they are mentally aligned with thinking about what should a long-term shareholder want out of an organization.” But he admitted things have gone pretty far. “I also think it’s gotten a little extreme, or maybe a lot extreme,” he said.
In speaking with Quartz, he added, “I personally believe that, generally speaking, executive pay has gotten too high, and it needs to be addressed in appropriate ways.” He added, “Anybody who looks at CEO pay, even if it was reasonably based, they would say that person is paid way too much.” “I don’t dispute that they ought to be paid really well,” he said. “It’s just that I think it’s gotten a little bit out of hand.”
The numbers back him up. Median CEO pay hit a record earlier this year, breaching the $10 million mark. It rose more than 50 percent over the last four years, while the average American saw her pay increase just 1.3 percent over the last year. Chief executive pay has risen 127 times faster than worker pay over the last three decades. The ratio of CEO pay to worker pay was 259.9-to-1 last year. That compares to a ratio of 20-to-1 in 1965 and even just 87.3-to-1 in the early 90s. Executive pay is even growing faster than pay for the top 1 percent.
And there is little evidence to suggest that these huge increases in CEO compensation are benefitting their companies. There is no evidence to suggest that paying CEOs top dollar means better performance in terms of profitability, revenue, or stock return. In fact, a study found that the companies that pay their chief executives the most see the worst results for shareholders. Despite the attempt to tie pay to company performance, companies routinely game those systems to ensure that the top executive gets his bonuses and payouts, even if they fail to meet targets. Worse, nearly four in ten of the highest-paid CEOs over the last two decades were fired, caught committing fraud, or oversaw a company bailout.
– Broc Romanek, CompensationStandards.com
What happens when you pay two monkeys unequally? Here’s an excerpt from the TED Talk with Frans de Waal that reveals this behavior:
– Broc Romanek, CompensationStandards.com
Here’s food for thought in this article – as well as in this article, repeated below:
Just because you run a large and sophisticated public corporation doesn’t mean you can’t be played for a fool when it comes to executive pay. It’s hard not to draw such a conclusion after reading a recently published study of CEO pay which cited extreme naiveté, confusion and knee-jerk decision-making. Academics Kelly Shue and Richard Townsend of the University of Chicago and Dartmouth College, respectively, studied executive pay at corporations in the S&P 500 between 1992 and 2010. What they found is somewhere between jaw dropping and staggering.
The central issue is the way many corporations treat the value of executive stock options. Stock options give the holder the right, but not the obligation, to purchase a predetermined number of shares at a predetermined price for a fixed period. As most people in finance know, the dollar value of an option is determined by a standard formula — the Black Scholes model. The value of an option grant is in large part determined by the price of the company shares. If a stock rises 40% in one year then a similar-sized option grant will be worth 40% more. Authors Shue and Townsend explain all this and more in their April paper “Growth through Rigidity: An Explanation for the Rise in CEO Pay.”
But apparently, the people doling out the options to the executives either didn’t understand or chose to ignore this. Typically that’s the board of directors headed by the chairman who is often also the CEO. The study found that by far the most common outcome was for corporate bigwigs to get exactly the same number of options as they did the previous year regardless of the dollar value, the report states. That meant that in the roaring 1990s as the stock market soared so did the value of the option awards — because the executives and the people governing them most commonly ignored the dollar value of those awards.
To avoid such occurrences, compensation experts (and I know because I was such an expert for years) determine the dollar value of options they want to award first and then derive the number of options from that. If the stock price falls or rises it should mean more or fewer options are awarded each year. Lucy Marcus, CEO of Marcus Venture Consulting, and an expert in corporate governance, puts her finger on it: “My question is why do you [the CEO] use common sense in everything else but throw that out of the window when it comes to your pay?”
The result of this practice was: “Option compensation [in dollars] grew more than sixfold over this period [1992 to 2001],” the authors say, while other executive pay remained “relatively flat.” Total pay jumped threefold in the same period. It’s remained pretty flat since, the authors found — in line with a relatively sideways market.
So how was it that people who generally consider themselves smart (CEOs and their boards) could be so off-target when it comes to compensation? The report’s summary nails it: ”we find suggestive evidence that number-rigidity in executive pay is generated by money illusion and rule-of-thumb decision-making.” Or to rephrase: The corporate staffs and their advisers don’t understand the difference between the number of options and their value, and they are making it up as they go along. “This is not right, the only way around it is to bring real transparency to it so everyone knows what’s going on,” says Marcus.
If you are looking for some Schadenfreude, you are in luck. The report authors also found that when the company had a 2-for-1 stock split, a surprisingly large number (more than 5%) of CEOs got the same number of options. In other words, those unlucky CEOs had their stock option pay cut in two. “These results suggest a rather extreme form of naiveté regarding options,” the authors wrote. Or more simply, naiveté can cost you big time.
– Broc Romanek, CompensationStandards.com
In this 15-second video, Cap’n Cashbags – a CEO – tries to avoid the ALS Ice Bucket Challenge:
– Broc Romanek, CompensationStandards.com
This recent piece from Pearl Meyer & Partners provides insights into shareholder engagement based on a survey of 212 respondents (162 executives and/or human resource professionals and 50 outside Directors; free download of the summary if you input your data). Don’t forget our horde of resources on this topic in our “Shareholder Engagement” Practice Area, including 5 checklists on this topic…
– Broc Romanek, CompensationStandards.com
Here’s a memo from Towers Watson about performance-based LTI. I’ve posted a number of pieces recently in our “LTIPs” Practice Area, including “How Top Companies Are Adapting Their LTI Awards to Say-on-Pay” by Jim Reda of Arthur J. Gallagher…