The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Sarah Good reports that her firm – Pillsbury – has finally came out with what they believe to be their final report on proxy disclosure litigation with updated metrics. Although it appears that things are drawing to a close, it is interesting to see the latest stats. Also see this piece from Mintz Levin…

– Broc Romanek, CompensationStandards.com

Tune in tomorrow for the webcast – “Executive Pay Basics: The In-House Perspective” – during which Winston & Strawn’s Erik Lundgren, Motorola Solutions’ Kristin Kruska and KAR Auction Services’ Becca Polak provide analysis about how a struggling in-house practitioner might best keep up with executive pay practices & disclosures, including an overview of fundamental securities law issues, stock exchange requirements, proxy advisor policies.

– Broc Romanek, CompensationStandards.com

Hat tip to the Society of Corporate Secretaries for this info: The Delaware Court of Chancery granted in part and denied in part a motion to dismiss a derivative suit claiming breach of fiduciary duty and corporate waste concerning compensation paid to the non-executive directors. In Cambridge Retirement System v. Slavko James Joseph Bosnjak, et al. and Unilife Corp., C.A., plaintiff Cambridge challenged two components of compensation awarded to Unilife directors: (1) equity awards the directors granted to themselves which were approved by stockholders; and (2) cash compensation the directors paid to themselves without obtaining stockholder approval. The entire compensation awarded directors (all directors and both cash and equity) was “$1,356,040 in fiscal year 2012, or approximately 25% of the Company’s revenues that year, and a total of $668,240 in fiscal year 2013, or approximately 24% of the Company’s revenues that year,” an amount the plaintiff alleged was excessive compared to total revenues and to other companies in Unilife’s sector.

The defendants moved to dismiss both claims for failure to make demand. The court excused demand given the directors were not disinterested. The defendants also moved to dismiss the claim relating to the equity component under Rule 12(b)(6). They did not move to dismiss the allegations regarding most of the cash compensation, but did move to dismiss the claims made against cash compensation awarded to one director because it included amounts paid to a consulting entity of which the director was a principal.

With respect to the fiduciary duty claim on the equity component of the compensation, the court granted the motion to dismiss:

[D]efendants argue that they are protected by the business judgment rule because each of those awards was approved by a disinterested majority of Unilife’s stockholders. I agree and dismiss this aspect of the fiduciary duty claim because plaintiff has failed to plead facts to legitimately call into question the validity of the stockholders’ approval or to rebut the presumption of the business judgment rule.

The court also granted the motion to dismiss the waste claim, noting:

These allegations raise questions concerning the fairness of the outside directors’ compensation, but they do not rise to the level necessary to establish a complete failure of consideration or that the director defendants authorized an exchange that was so onesided that no reasonable business person could conclude that Unilife received adequate consideration.

The Court did not dismiss the fiduciary duty claim related to the cash compensation.

– Chan Pedris, ISS Corporate Services

Plans featuring fungible or flexible ratios continue to gain ground. Fungible plans often add flexibility to the way a company can deliver its equity awards; these plans employ a “fungible ratio” that, in many cases, makes shareholders indifferent between a company granting appreciation awards, such as options or SARs, and full-value awards.

A fungible ratio provides that appreciation awards will deplete the equity plan’s share reserve by one share for each appreciation award issued, and that full value awards will deplete the share reserve by some greater number. That number is generally tied to the relative value of appreciation and full value awards at time of grant; using this ratio, at the time of grant, shareholders should be indifferent whether the company grants appreciation awards or full value awards.

Fungible plan adoption rates vary by size of company, but they are rising among companies across all market indices. In 2013, 44.2 percent of S&P 500 companies proposing an equity plan adopted fungible share plans vs. 29.3 percent of small cap companies that make up the S&P 600 index. Even among the smallest companies, nearly one in five equity plan proposals contained fungible features.

Companies across all indices are becoming more sophisticated in the way that they employ equity compensation. Firms today have a much richer broad based equity strategy that encompasses their Short term/Long term compensation plan design needs, inducement and retention grants, and the overall metrics around percentage of employees eligible to receive grants. And, they have increased their appetite for flexibility in granting full value versus appreciation awards from the same pool – and for delivering those awards efficiently.

On the other hand, many companies have sound rationale for choosing to adopt a more conventional monolithic or limit-based plan. In numerous cases, the costs associated with fungible plan administration are higher, and there is more complexity involved in maintaining a plan – and these factors can be especially material for smaller companies. However, technology has significantly lowered the cost and administrative burden associated with managing and tracking award types, making fungible plan designs accessible to more and more firms.

Some of the non-adopters consciously continue to practice liberal share recycling. Under this provision, which is generally frowned upon by institutional investors, shares tendered from option exercise or for tax withholding can replenish the plan reserve in perpetuity. The benefit of such a provision is that companies receive more utilization for their shares – using option proceeds to repurchase shares to increase the plan reserve has the effect of increasing the share reserve continuously. Proxy advisory firms generally require plans with fungible designs to prohibit liberal share recycling provisions or be faced with the prospect of a higher award valuation.

We expect the adoption rates of fungible plans to continue to rise.

– Broc Romanek, CompensationStandards.com

Glad to see this memo from Aon Hewitt that drills down on the PCAOB’s new Standard #12 and it’s impact on the executive pay process…

– Broc Romanek, CompensationStandards.com

Register by this Friday, July 11th or lose your last chance for phased-in pricing for our combined “Annual Proxy Disclosure/Executive Compensation Conferences” on September 29th-30th. Join 2000 of your peers in Las Vegas and via video webcast for fantastic networking and over 50 panels. Act now for phased-in pricing – which expires July 11th – to get as much as 15% off!

The full agendas for the Conferences are posted — but the panels include:

– Keith Higgins Speaks: The Latest from the SEC
– 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
– In-House Perspective: Strategies for Effective Solicitations
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Supplemental Materials
– 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

– Broc Romanek, CompensationStandards.com

To be honest, I don’t give the time of day to the claims by Professor Steven Kaplan because he is so far out there with his views about CEO pay. CEO pay has fallen 40% since 2000? Gimme a break. Anyways, this blog by Francine McKenna does a nice job of laying out some of Kaplan’s ideas – and then she cites to other studies that refute each of them…

– Broc Romanek, CompensationStandards.com

Here’s a blog from Towers Watson on the tenuous start for pay-for-performance so far this year…

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from the latest by Semler Brossy:

We have collected Say on Pay vote results for 97 additional Russell 3000 companies, bringing our total to 2,123. The average vote result for all companies in 2014 is 91%. One additional company failed since last week’s report; 48 companies (2.3%) have failed so far this year. Of companies with four years of Say on Pay votes, 1,462 (92.1%) have passed all four years, 105 (6.6%) have passed in three years and failed in one year, 15 companies (0.9%) have passed in two years and failed in two years, three companies (0.2%) have passed in one year and failed in three years, and two companies (0.1%) have failed all four years. Proxy advisory firm ISS is recommending ‘against’ Say on Pay proposals at 13% of companies in 2014.

– Broc Romanek, CompensationStandards.com

Four years after the SEC released its proxy plumbing concept release, the SEC Staff issued Staff Legal Bulletin #20 last night, which is in the format of 13 Q&As. The IM piece (Q&A #1-5) deals with the responsibilities of investment advisers to vote and hire proxy advisors. The Corp Fin piece (Q&A #6-13) deals with two exemptions from the proxy rules relied upon by proxy advisors. More to come tomorrow after the firm memos start rolling in. Thought this was gonna be a light week! And apparently so did everyone else because I haven’t seen any blog or law firm write this one up yet…