Here’s news from Steve Seelig and Puneet Arora of Towers Watson:
As part of their alternative to the Republican agenda, House Democrats have dusted off last year’s proposal to limit the deductibility of executive pay to $1 million for companies that fail to increase their rank-and-file pay to keep pace with U.S. economic growth. (Here’s the version of the bill introduced in the last Congress by Rep. Chris Van Hollen (D-Md.). This bill is part of larger democratic “action plan” focusing on the middle class that also would provide tax breaks to workers earning under $100,000 per year.
The House previously voted down Van Hollen’s procedural motion to consider the bill, but he’s expected to reintroduce the bill later this year. The Democrats appear determined to keep the CEO-versus-worker-pay issue in the news pending the Securities and Exchange Commission (SEC) release of final CEO pay ratio regulations, as evidenced in the “dear colleague” letter released by House Minority Leader Nancy Pelosi (D-Calif.) on the opening day of the new session. (For more on the SEC rulemaking outlook, see “Updated SEC Calendar Pushes Dodd-Frank Pay Rules Back to 2015,” Executive Pay Matters, November 26, 2014.)
The Van Hollen bill would take a different approach than the California bill we blogged about last year, which would have limited state tax deductions for executive compensation on a sliding scale depending on the ratio of executive pay to rank-and-file pay. (For more on the California proposal that was defeated in the state legislature, see “California Legislation Would Limit Tax Deductions for Companies Where the CEO Pay Ratio Is Too High,” Executive Pay Matters, May 1, 2014.) Instead, it would add a new section to existing Section 162(m) of the tax code to limit to $1 million the deductibility of compensation (including performance-based compensation) paid to any current or former employee, officer or director if the average pay of all of the company’s U.S.-based non-highly-compensated employees (as defined under the qualified plan rules, i.e., those below $115,000 for 2015) does not keep pace with the growth of the U.S. economy. U.S. economic growth would be based on the average of productivity growth (based on Bureau of Labor Statistic measures) plus adjustments in the cost of living under the tax code.
The bill would also expand the reach of Section 162(m) to cover certain nonlisted, publicly traded companies, make sure the CFO is re-included as a “covered employee” and make it clear that income paid to beneficiaries is included in an executive’s remuneration for 162(m) purposes. Given the GOP’s wider majority in the House and control of the Senate in the new Congress, any democratic proposals are even more of a long shot than before. But, we’ll keep you up to date if there’s any movement.
Here’s a blog from Towers Watson’s Steve Seelig and Dave Suchsland (which summarizes this longer memo):
Summary Compensation Table (SCT) disclosures of changes in pension values are set to see the largest increase in recent memory in 2015 proxies, thanks to a confluence of two events that took place in 2014:
– In October, the Society of Actuaries (SOA) released updated mortality tables to be applied when retirement plan sponsors estimate the financial obligations associated with their plans. The new tables reflect that life expectancies have improved more than predicted under the existing tables, issued in 2000. This means many companies will use updated mortality assumptions for this fiscal year in accounting for their retirement obligations that, in turn, will apply to proxy values.
– Second, interest or discount rates for 2014 decreased markedly from 2013, which means pension liabilities increase because the plan will earn less interest on investments in the future.
These changes will directly increase the change in pension value reported in the SCT, even in situations where an executive may have a frozen pension benefit. For those executives still accruing additional benefits, the impact may be even more profound. This is because the SCT change-in-pension-value calculation is tied to the assumptions used to compile a company’s overall financial statement liability.
Tune in tomorrow for the webcast – “The Latest Developments: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to say-on-pay-including the latest SEC positions-and the other compensation components of Dodd-Frank, as well as how to handle the most difficult ongoing issues that many of us face.
One of the most common questions that we receive is “have you seen any good CD&As?” Of course, Mark Borges blogs about countless CD&As all the time, providing in-depth analysis. But I have posted a list of 10 good ones that Mark has put together in our “CD&A” Practice Area so you don’t have to dig around. Bear in mind that we don’t know all the facts – so we never “endorse” disclosure, nor does this list mean that there might not be other CD&As that are superior to those on our list…
Tune in on Thursday for the webcast – “The Latest Developments: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to say-on-pay-including the latest SEC positions-and the other compensation components of Dodd-Frank, as well as how to handle the most difficult ongoing issues that many of us face.
In this Winter 2015 issue of our Compensation Standards Newsletter, there are 22 pieces of news & analysis from the last month culled from the three blogs on this site. You can sign up to get any blog pushed out to you via email whenever there is a new entry by simply inputting your email address on the left side of that blog.
Here’s a new study authored by Organizational Capital Partners (and commissioned by the Investor Responsibility Research Center Institute (IRRCi)) that finds:
– Average Say-on-Pay support vote across the sample was 82% for 32 low performing companies (return on invested capital – or ROIC – less than the cost of capital and negative relative total shareholder return) and 84% for 32 high performing companies (ROIC greater than the cost of capital and positive relative total shareholder return).
– Median vote was 90% for the low performing companies and 96% for high performing companies.
– There was not a meaningful difference between the recommendations of the two major proxy advisor firms, ISS and Glass Lewis. ISS recommended for 84% Say on Pay approval at value destroying companies and for 81% of value creating companies. Glass Lewis recommended for votes at 72% of the value destroying companies and 81% of the value creating companies.
Does Politico suddenly have the inside track at the SEC? That would be a shocker. This excerpt from this article surprised me:
…the SEC’s commissioners are expected to vote on Dodd-Frank rules as soon as mid-January, sources said, with the most likely candidates being regulations concerning derivatives markets and the law’s controversial “pay ratio” requirement for executive compensation.
The article also handicaps the odds of crowdfunding and other Dodd-Frank rules. Personally, I would fall off my chair if the SEC adopted pay ratio rules next week – but we’ll find out soon enough whether Politico’s “sources” are real. Note that this article from the Washington Examiner notes that a source at the SEC said that finalizing the pay ratio rule was a “top priority” and that “while there is no timetable to finish the rule…it could be done soon.”
As an aside, here’s an article critical of some members of Congress that have asked the SEC to change its budget priorities…
In this podcast, Rich Fields of Tapestry Networks provides some insight into the role of directors in CD&As, including:
– What do directors see as the purpose of the CD&A?
– How involved are they in creating and finalizing the CD&A?
– Are there any particularly challenging CD&A drafting decisions directors are thinking about?
– Any practical tips for CD&A drafting season?
Right before Christmas, ISS issued 20 FAQs on its new “Equity Plan Scorecard.” Here’s some analysis from this excerpt of Steve Quinlivan’s blog:
The FAQs go a long way in adding some transparency to a complex new policy. Absent overriding factors, a score of 53 or higher (out of a total 100 possible points) generally results in a positive recommendation for the proposal. EPSC factors are not equally weighted. Each factor is assigned a maximum number of potential points, which may vary by model. Some are binary, but others may generate partial points. For all models, the total maximum points that may be accrued is 100. The FAQs include a useful chart showing factors scored and definitions, but it does not include the number of points allocated to the factors.
Proposals that only seek approval to ensure tax deductibility of awards pursuant to Section 162(m), and that do not seek additional shares for grants, will generally receive a favorable recommendation regardless of EPSC factors, provided the Board’s Compensation Committee (or other administrating committee) is 100 percent independent according to ISS standards. In the case of proposals that include additional plan amendments, such amendments will be analyzed to determine whether they are, on balance, positive or negative with respect to shareholders’ interests, and ISS will determine the appropriate evaluative framework and recommendation accordingly.