The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Tune in today for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.

– Broc Romanek, CommpensationStandards.com

Here’s news from this Reuters article (and here’s the complaint in the case):

Mark Zuckerberg and other members of Facebook Inc’s board have been sued by a shareholder who claimed a policy letting them annually award directors more than $150 million of stock each if they choose is unreasonably generous. In a complaint filed on Friday night in Delaware Chancery Court, Ernesto Espinoza said the board was “essentially free to grant itself whatever amount of compensation it chooses” under the social media company’s 2012 equity incentive plan, which also covers employees, officers and consultants.

He said the plan annually caps total awards at 25 million shares and individual awards at 2.5 million, and in theory lets the board annually award directors $156 million in stock each, based on Friday’s closing price of $62.50. The lawsuit does not contend that such large sums will be awarded. Espinoza also said last year’s average $461,000 payout to non-employee directors was too high, being 43 percent larger than typical payouts at “peer” companies such as Amazon.com Inc and Walt Disney Co that on average generated twice as much revenue and three times more profit.

Facebook spokeswoman Genevieve Grdina said in an email: “The lawsuit is without merit and we will defend ourselves vigorously.” A spokeswoman for Robbins Arroyo, a law firm representing the plaintiff, had no immediate comment.

The lawsuit alleges breach of fiduciary duty, waste of corporate assets and unjust enrichment. It seeks to force directors to repay Facebook for alleged damages sustained by the Menlo Park, California-based company, and to impose “meaningful limits” subject to shareholder approval about how much stock the board can award itself.

Among the other defendants is Facebook Chief Operating Officer Sheryl Sandberg, a director whose compensation was $16.15 million in 2013, according to a regulatory filing. She is worth $999 million, Forbes magazine said on Monday. Zuckerberg made $653,165 last year, a regulatory filing shows, and Forbes said his net worth is $27.7 billion. Espinoza was also a plaintiff in a 2010 shareholder case in Delaware against Hewlett-Packard Co concerning its handling of the resignation of Chief Executive Mark Hurd over his relationship with a former contractor. The case is Espinoza v. Zuckerberg et al, Delaware Chancery Court, No. 9745.

– Broc Romanek, CompensationStandards.com

This WSJ article entitled “Investors Close Golden Parachutes” reports that 4 companies recently lost say-on-golden parachute votes:

Golden parachutes are encountering a stiff wind. Shareholders at four companies have voted in recent weeks to prevent executives from cashing in on certain stock bonuses if their companies are sold, the latest sign that investors are pushing back on the generous pay packages in the event of a merger or sale.

The nonbinding votes at oil refiner Valero Energy Corp., media company Gannett Co., commercial landlord Boston Properties Inc. and Dean Foods Co. come as shareholders have pressured companies to curb severance perks over the past few years, experts say. Regulators, too, have forced companies to disclose more about these payouts. “The golden age of golden parachutes is over,” said Regina Olshan, a Skadden, Arps, Slate, Meagher & Flom LLP lawyer who advises companies on executive pay. Golden parachutes are falling out of favor amid investor and regulatory scrutiny of rising executive pay, especially perks that aren’t tied to a company’s performance. Those concerns can be heightened during merger-and-acquisition deals, when executives can pocket years’ worth of stock grants, options, salary and bonuses all at once.

Defenders of golden parachutes say they can create value for investors. Chief executives of acquired companies often expect to lose their jobs after a merger closes. If they know they will be compensated, they might be less likely to stand in the way of a deal that would pay shareholders a premium. “You want to get to the point where management, from a personal financial standpoint, is indifferent” about a deal getting done, said George Paulin, CEO of Frederic W. Cook & Co., an executive-compensation consulting firm.

Since 2011, shareholders have had a say in how much executives are paid, including golden-parachute payments. “Say on pay” votes are now required by the Securities and Exchange Commission. While they aren’t binding, boards are under pressure from regulators and shareholder-advisory firms to consider investor views when crafting executive-pay packages. As a result, “we’re certainly seeing a more conservative approach by companies” to change-of-control payments, said Dan Wetzel, a managing director at consulting firm Pearl Meyer & Partners.

Cash severance payments, which once commonly exceeded three times an executive’s annual salary and bonus, have been trimmed, experts said. Other perks have all but disappeared. One such example are gross-ups, which obligate a company to pay the high taxes levied on corporate perks, in effect letting the executive take home the full amount. Just seven of the 50 largest U.S. companies allowed tax gross-ups in 2012, down from 21 companies in 2006, according to Pearl Meyer. Mr. Wetzel said the number is likely lower now. In recent months, mall company Taubman Centers Inc., auto-parts supplier Lear Corp. and others have removed gross-ups from their arrangements with senior executives, regulatory filings show. Mel Stephens, Lear’s head of investor relations, said the company’s board believed removing the gross-ups “was in shareholders’ best interests.”

Shareholders have also driven a shift to golden parachutes that only compensate executives who are fired after a merger, rather than agreements that pay out even if the executives keep their jobs. “The appearance of double-dipping” irked some investors, Mr. Paulin said.

Shareholders now appear to be ratcheting up the pressure against a perk that persists: stock awards. Companies often grant top executives shares that vest, or become available, at a future date, and often only if the company hits certain performance goals. But in an M&A deal, these shares can vest automatically when a deal closes, even if the executive keeps his or her job. That is the case at 44% of Russell 3000 companies, according to proxy adviser Institutional Shareholder Services Inc. For example, Matthew Shattock, CEO of liquor producer Beam Inc., received about $20.9 million from previously unvested stock options and awards in the company’s sale to Suntory Holdings Ltd., according to a regulatory filing. Mr. Shattock remains CEO of Beam, which was renamed Beam Suntory Inc. after the sale to Japan’s Suntory closed in April. C. Larry Pope, CEO of Smithfield Foods Inc., received about $18 million from similar perks that were cashed out when the pork producer was sold to a Chinese company last year. Mr. Pope is still the CEO of Smithfield, now a subsidiary of WH Group Ltd. Beam and WH Group declined to comment.

The proposals at Valero, Gannett, Boston Properties and Dean Foods, submitted by organized-labor groups, would prevent unvested stock awards tied to future performance from automatically vesting in a merger. They each received a majority of votes cast but aren’t binding on the companies. Valero, Boston Properties and Dean Foods declined to comment. Gannett didn’t respond to a request for comment.

Amalgamated Bank, the union-owned bank that sponsored the Valero ballot measure, has submitted at least 10 similar measures at other companies since 2010, according to regulatory filings. But none has passed until this year, said Scott Zdrazil, the bank’s head of corporate governance. Similar proposals have failed at other companies this year, including Honeywell International Inc. and Avon Products Inc. “We’re not opposed to some sort of severance, but we are concerned about the size of the cherry on top of the cake,” Mr. Zdrazil said.

– Broc Romanek, CompensationStandards.com

The US Chamber’s Center for Capital Markets Competitiveness recently issued this report entitled “The Egregious Costs of the SEC’s Pay Ratio Disclosure Regulations.” It’s a 10-page report that is quite different than the 34-page comment letter that the Center submitted on the pay ratio proposal. This new document seems designed for a broader audience, maybe in an effort to get Congress to repeal the Dodd-Frank provision that led to the SEC’s rulemaking? I’m not sure.

– Broc Romanek, CompensationStandards.com

I have posted the survey results regarding how companies are preparing now for the SEC’s upcoming pay disparity rulemaking (compare to the same poll from two years ago), repeated below:

1. At our company, the board:

– Does not consider internal pay equity when setting the CEO’s compensation – 64%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to all employees – 8%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to other senior executives – 36%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to a formula different than the two noted above – 3%

2. Ahead of the SEC’s mandated pay disparity disclosure rulemaking under Dodd-Frank, our company:
– Has not yet considered how we would comply with the rules – 74%
– Has begun considering the impact by assessing whether we could comply with the precise prescriptions in Dodd-Frank but we have not yet tested statistical sampling – 29%
– Has begun considering the impact by assessing whether we could comply with the precise prescriptions in Dodd-Frank including assessing whether we could use statistical sampling – 12%

3. As one of the companies that have assessed the impact of the SEC’s mandated pay disparity disclosure rulemaking, our company:
– Believes we could comply with the precise prescriptions in Dodd-Frank without too great a burden – 78%
– Believes we could comply with the precise prescriptions in Dodd-Frank but it would be too burdensome unless statistical sampling is allowed – 3%
– Believes we could comply with the precise prescriptions in Dodd-Frank but it would be burdensome even if statistical sampling is allowed – 25%
– Believes we wouldn’t be able to ever comply with the precise prescriptions in Dodd-Frank – 0%

4. In your own opinion, do you think that statistical sampling would have too high a potential for manipulation or material error:
– Yes – 84%
– No – 5%
– I don’t have an opinion – 19%

Please take a moment to participate in this “Quick Survey on CEO Succession Planning” – and this “Quick Survey on Distributing Proxy Materials Via E-mail to 401(k) Plan Participants.”

– Broc Romanek, CompensationStandards.com

In this opinion piece by Bethany McLean (to whom I have professed a crush), she tackles “lack of perk” disclosures and the unusual circumstance of “it’s highly unusual to have a corporate jet based where the directors are and not where the executives are”:

Men’s apparel retailer Jos. A. Bank may be best known for its incessant advertisements of all the merchandise it has on sale. “Could they advertise more? Could they sell less?” quipped Jerry Seinfeld. “We’ll give you three suits for $8! Just take it! Get it out of here!”

So in a twisted kind of way, it’s perfect that the company and its chairman of the board, Robert Wildrick, have recently pulled off a different kind of super sale. In March, competitor Men’s Wearhouse agreed to buy Jos. A. Bank — for $65 a share, about a 55 percent premium to its share price last fall. Wildrick served as the chief executive officer until 2008, and is often given credit for growing the business from a struggling retailer into a national brand. He now has a consulting agreement with the company that pays him $825,000 a year, and has earned over $200,000 a year in his role as chairman.

Seinfeld might be surprised to hear it, but there is a piece of merchandise that Jos. A. Bank doesn’t advertise. According to Federal Aviation Administration records, Jos. A. Bank leases a private plane, and not just any private plane — a high-end Dassault Falcon 2000EX. A reader of Jos. A. Bank’s financial statements would almost certainly not be aware of the existence of the plane.

What’s interesting is that despite all the furor about corporate jets, and the complaints about executive compensation, experts say this situation is not uncommon. “It’s entirely possible that a company could have a jet and not have it be disclosed in the proxy statements,” said Andrew Liazos, a partner at law firm McDermott Will and Emery, who heads the firm’s executive compensation group. Indeed, Jos. A. Bank is a perfect example of how a company can thread the needle of the disclosure rules about jets — without breaking any laws.

Jos. A. Bank’s plane is not identified in the company’s financial statements. I searched its proxy statements and 10Ks going back to 2003 for the terms “jet,” “personal use,” “aircraft,” and “airplane,” and found nothing related to this aircraft. And this is technically proper — if the plane is being used entirely for business purposes. If its executives or directors are allowed personal use, and that use exceeds a certain dollar value, it must be disclosed in the proxy statement. According to the SEC, a company is required to report as “’All Other Compensation’ perquisites and personal benefits if the total amount exceeds $10,000, and to identify each such item by type, regardless of the amount.” It wouldn’t take much flying on a Falcon 2000EX for the benefit to exceed $10,000. According to Jos. A. Bank spokesman Tom Davies, its plane is used entirely for business purposes, so no disclosure is necessary.

But here’s where things get a little more contorted. Jos. A. Bank is headquartered in Hampstead, Maryland. Yet the jet’s lease says the jet is hangared in West Palm Beach, Florida — which is where board chairman Wildrick lives. The company’s director of aviation, Jeff Michlowitz, also lives in Florida, according to property records. A now-expired advertisement for a second pilot included in its job description “some weekend flying and occasional Sunday relocations” and read “MUST LIVE WITHIN 1 HOUR FROM PALM BEACH INTERNATIONAL AIRPORT.”

If the chief executive officer of a company — which Wildrick was until 2008 — were using a jet to commute from home to the office, that would qualify as personal use. (According to the FAA, the first payment on the lease was due in May 2004.) In such circumstances, the jet should have been disclosed. Aha!

Yet a 2001 amendment to Wildrick’s employment agreement established “additional executive offices at a location in the Palm Beach, Florida metropolitan area” and specifically allowed Wildrick to “conduct the affairs of the company from the Palm Beach office.” Given that, the travel between Florida and the company’s Hampstead, Maryland headquarters would be considered a business expense, and wouldn’t have had to have been disclosed — even when he was CEO. Now that he’s a director, travel between Palm Beach and Hampstead would still qualify as business use.

This strikes some corporate governance experts as odd. “It’s highly unusual to have a corporate jet based where the directors are, and not where the executives are,” says Lynn Turner, the former chief accountant of the SEC, and a former board member at both public companies and institutional investors. “It would be significant information for the investors in that company.” It also seems strange that a company would have a jet that was just for the use of the chairman of the board.

But Michlowitz, the company’s director of aviation, says the plane is not just for Wildrick’s use. He says that other executives also use the plane to visit the stores and scout out new real estate. He adds that Wildrick barely uses it at all anymore. Asked why, given those circumstances, the plane is still kept in Palm Beach, he responds that inclement weather and increased difficulty of maintenance at facilities near cold, snowy Hampstead make Palm Beach a sensible decision. He adds that the other executives fly commercially down to Palm Beach, and then use the plane from there. He also reiterated Davies’ point, which is that the plane is used entirely for business.

Putting all this aside, doesn’t the cost of a plane still have to show up somewhere in the financial statements? Well, yes, sort of. Many corporate aircraft are leased, rather than owned, and Davies confirms that this is the case with Jos. A. Bank’s plane. Since the plane is classified as an operating lease, the payments are a form of off-balance-sheet financing — which must be disclosed, according to the SEC, albeit not in granular enough detail to tell that they are for a plane.

In its financial statements for the year ending in January 2005, Jos. A. Bank says that its “principal commitments are non-cancelable operating leases in connection with its retail stores, certain tailoring spaces, and equipment.” The plane, according to Davies, is part of that “equipment.” Would you ever have guessed?

At the time of that first lease payment, Jos. A. Bank’s stock was selling for about $13 per share. In fiscal 2004, the company’s net income was just $24.5 million — less than the $24 million price of the plane! Back then, and even before the sale to Men’s Wearhouse, shareholders might have wanted to understand what benefit they were getting from the use of the plane. But given the deal — which means that anyone who bought at the time the company got its jet has just about quadrupled her money — it would be hard to find a shareholder who would complain now. (Calls to two Men’s Wearhouse spokespeople were not returned.)

Maybe the larger question is this: Would Jerry Seinfeld still call what Jos. A. Bank is selling “cr*p” if he knew it included a Falcon 2000EX?

– Broc Romanek, CompensationStandards.com

I have blogged about a California bill – California Senate Bill 1372 – that would tie the state’s tax code to a pay ratio formula as a way to tackle income inequality. Last week, the bill was narrowly voted down in the California Senate, 19-17. See this LA times article; AP article – and Towers Watson note.

Meanwhile, Keith Bishop weighed in with this blog entitled “An Epic Question: Is This Pay Ratio Too Large, Too Small or Just Right?” before the bill died last week…

– Broc Romanek, CompensationStandards.com

Here’s an article from Michael Bowie of Towers Watson:

Pay for non-employee directors at the largest U.S. companies grew modestly over the past year, consistent with the trends over the past several years. However, while last year’s review of the full Fortune 500 showed an emphasis on cash increases for directors, our early look at a subset of the Fortune 500 points to equity increases as the primary vehicle for pay increases in the most recent period. (For our most recent analysis of director pay in the full Fortune 500, see “Fortune 500 Outside Director Pay Shows Modest Growth, Emphasis on Cash,” Executive Compensation Bulletin, September 17, 2013.)

Towers Watson’s Executive Compensation Resources (ECR) unit analyzed director pay data disclosed in the most recent proxy for 260 Fortune 500 companies and compared those results against data for the same companies as reported in 2013 to identify early trends in 2014 director compensation. Here are the highlights:

– Total pay: The median value of total direct compensation for directors in this sample is approximately $246,250, up 3% from the previous year. The pay increase was primarily driven by equity values that increased 5% at the median over 2013 levels; median total cash figures did not change. The increase in equity values caused a slight shift in the overall pay mix for directors, with 56% of compensation delivered in equity and 44% in cash, compared with 55% equity and 45% cash at the same group last year. Thirty-eight percent of these companies made a change to their pay program, which includes their core annual cash (e.g., annual board/committee retainer, meeting fees) or annual equity compensation.

– Cash compensation: Just over a fifth (22%) of the companies in our sample increased their annual cash retainer for board service, with a median increase of $10,000. The median value of the cash per-meeting fee for board and committee meeting attendance did not change over the last year, remaining at $2,000 and $1,750, respectively. However, the prevalence of cash per-meeting fees continued to decline, dropping by 3% for board and 4% for committee meeting attendance.

– Stock compensation: The movement toward issuing stock grants based on a fixed-dollar amount as opposed to a fixed number of shares continues. Eighty-seven percent of all annual equity awards are granted based on a fixed-dollar amount, compared with 85% of grants at the same companies last year. Equity compensation delivered through full-value share grants remained far more prevalent than stock options, as 95% of the companies studied grant one or more forms of full-value shares. The prevalence of annual stock option grants for the same group fell from 12% to 10%. The use of one-time equity grants to new directors has also declined slightly this year. Just 11% of the sample provided a sign-on award upon appointment or election to the board in the most recent period, compared with 12% making these grants in the prior year.

– Board leadership: Twenty-nine percent of companies report having a non-executive chairman as the board leader, up from 26% of the same group in the prior year. Conversely, the prevalence of companies that have an independent lead or presiding director position fell from 77% to 75%. Additional compensation for serving in board leadership positions is primarily delivered in the form of a cash retainer. Incremental pay did not change significantly for either leadership position (chair or lead/presiding director).

– Stock ownership guidelines: Stock ownership and retention guidelines remain a common practice among almost all Fortune 500 companies, as 93% of those in our sample have one or both policies in place. The most common type of stock ownership guideline continues to be a multiple of the annual board retainer. One in ten of these companies either made an adjustment to their existing guidelines or established a new guideline since last year, and 44% of our sample have an ownership guideline of five times the retainer, compared with 38% in the prior year.

We continue to dig deeper into director pay trends as more companies file their 2014 proxies. Watch Executive Pay Matters for ECR’s annual update on the full Fortune 500, providing a comprehensive analysis of pay trends and insights on the landscape of director compensation and board governance.

– Broc Romanek, CompensationStandards.com

A few months ago, I blogged about some remarks from Corp Fin Director Keith Higgins that included a status update on the Four Horsemen rulemakings from Dodd-Frank. Last Friday, the SEC issued its semi-annual Reg Flex Agenda indicating that the pay ratio rules would be adopted by October – and that the three other rulemakings would be proposed by that same month. Does this really mean anything? No, not really – as Reg Flex Agendas tend to be “aspirational” as I’ve blogged about a few times recently.

That doesn’t mean that I don’t believe those actions will be accomplished by that date. In fact, SEC Chair White has continued to express a desire to get all the Dodd-Frank rulemakings behind her – so I would be surprised if we didn’t see final pay ratio rules sooner, as well as proposals on at least some of the other three before then too. But you never know, particularly as the five Commissioners seem to be more polarized than ever…

A potential wild card here is that the House Financial Services Committee recently passed 9 capital formation bills – some with strong bipartisan support and some that would require the SEC to adopt new rules within a short timeframe (eg. 180 days). A new spate of required rulemakings could hinder any plans to act on some or all of the Four Horsemen…

– Broc Romanek, CompensationStandards.com

As the number of annual meetings peaks – and thus so do the failures to obtain majority support on say-on-pay – it’s worth noting a company who just failed say-on-pay with a new CEO (Endurance Specialty Holdings) was the CEO at a different company last year (AXIS Capital Holdings Limited), whose say-on-pay failed in 2013 (but passed this year after he left). Also noteworthy is that the head of HR moved companies with the CEO. I don’t believe there any other cases where the CEO and CHRO were affiliated with two different say-on-pay failed companies in back-to-back years…