The Advisors' Blog

– Broc Romanek, CompensationStandards.com

As noted in its Form 8-K, a nano-cap company, CSP is the first company holding its annual meeting in 2014 to fail to gain majority support for its say-on-pay with only 42% voting in favor. Hat tip to Karla Bos for pointing this out!

– Broc Romanek, CompensationStandards.com

Recently, Equilar released its “2013 Consultant League Report,” which is the result of a review of proxy filings. Although many of the large consulting firms consistently stand atop the rankings, categorical breakdowns reveal some of the smaller shops’ unique market niches.

Below is a sample table from the report, detailing the market share of firms engaged by the Russell 3000 (in comparison, here are last year’s numbers):

1. Frederic W. Cook & Co. – 15.3%
2. Pearl Meyer & Partners – 11.7%
3. Towers Watson – 9.8%
4. Compensia – 6.8%
5. Meridian Compensation – 6.7%
6. Pay Governance – 6.5%
7. Radford – 5.5%
8. Mercer – 6.2%
9. Exequity – 3.3%
10. Hay Group – 2.9%

– Broc Romanek, CompensationStandards.com

In response to my recent blogs parsing comments received by the SEC in response to its pay ratio disclosure proposal, a member wrote in this:

In reading the comments to the SEC, there seem to be quite a few from investors, which might somewhat counter the arguments made by some that that investors have no interest in this rulemaking. My reading of the investor comments is that most discuss the cost/benefit tradeoff of the CEO pay ratios. Here is one that I found interesting from Railpen Investments which noted:

The calculation of the ratio could lead to identification of internal control weaknesses. We note that the Human Resources Policy Association has provided a response to the SEC which sets out the challenge for companies to produce the information; a survey of their members indicates that 84% of those surveyed are not able to provide the information to compute ‘cash compensation’.3 We question what other information is not available if the basic information is not available to compute the ratio.

And the Network for Sustainable Financial Markets wrote:

From the perspective of long-horizon investors (such as pension funds, sovereign wealth funds, endowments and foundations), these deficiencies are very likely to be seen as material “managerial control risks and weaknesses” that should be known to the company’s chief risk officer and accurately reported to the board. Where these material control weaknesses exist, we believe they should also be disclosed to investors along with a plan to remedy, in the same way that material weaknesses in internal
control over financial reporting are reported to audit committees and disclosed in periodic SEC filings. The Dodd-Frank pay ratio disclosure process could provide the vehicle for identifying and addressing these shortcomings.

We recognize that it might take a transitional period before most companies could develop robust information systems to solve for these material managerial control weaknesses. However, once developed and implemented by registrants, their C-Suites and boards will be able to use the process and analytics to more effectively manage these key organizational assets and minimize associated risks.

Since the Human Resource Policy Association noted in its comment letter: “To identify the median employee, registrants will need to determine all employees at all locations as of the end of the fiscal year. Obtaining a global employee headcount is time consuming and complex” and “The HRPA survey asked whether total annual cash compensation of all employees globally on an individualized basis was easily obtainable by the U.S. compensation staff, and 84% of respondents indicated that the information was not easily obtainable. Of that 84%, over 70% indicated that gathering that information would be very difficult,” maybe this is an opportunity for some CHRO’s to finally put in place the strategies, process and HR technologies needed to provide strategic insight about structural, human capital and compensation investments?

By the way, here’s a memo from Towers Watson handicapping the pay ratio comments…

– Broc Romanek, CompensationStandards.com

This Bloomberg article starts off with:

Ten years ago, Congress passed a law intended to penalize chief executive officers whose companies shift their legal addresses to tax havens.

It hasn’t worked out as planned. Companies have found ways around the law that create new rewards for executives. When Actavis Inc. (ACT) changed its incorporation to Ireland in October, the New Jersey-based drugmaker helped CEO Paul Bisaro avoid the law’s bite by handing him more than $40 million of stock as much as three years ahead of its schedule, then promising him an additional $5 million to remain with the company.

The payouts to executives highlight the ineffectiveness of the 2004 law, which contained a series of provisions aimed at reducing the tax benefits of reincorporating overseas. In the past two years, a fresh wave of companies has fled the U.S. system to avoid hundreds of millions of dollars in taxes.

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from this Forbes article:

To put together their paper, “Beauty is Wealth: CEO Appearance and Shareholder Value,” Halford and Hsu used a website called Anaface.com, which measures facial geometry, prizing symmetry and particular ratios for nose and mouth width. They loaded photos of 677 chief executives into the site and then measured their companies’ share performance at various points, like the days immediately following a CEO’s appointment. They also looked at how company stock performed during the period following a CEO’s appearance on television and compared that with share performance after a corporate news announcement that didn’t include any video coverage.

They also analyzed 1,830 merger and acquisition deals between 1985 and 2012 and found that more attractive CEOs negotiated better terms for their companies than did average-looking CEOs. “The evidence thus suggests that more attractive CEOs receive more surpluses for their firms from M&A transactions, a finding consistent with the hypothesis that more attractive CEOs improve shareholder value through superior negotiating prowess,” says the paper.

In a New York Times piece today, Andrew Ross Sorkin writes that Yahoo chief Marissa Mayer is among the top 5% of good-looking executives, scoring 8.45 out of 10 on Anaface’s Facial Attractiveness Index (F.A.I.). By comparison Paul Jacobs, the average-looking CEO of Qualcomm scored 8.19. Angelina Jolie scored 8.5 and Brad Pitt, 8.46. Sorkin, who was in touch with Halford and Hsu via email, writes that the authors told him that the average CEO scored just 7.3.

Yahoo’s share price has soared since Mayer took over the top job, rising from $16 to $40. But how much does that have to do with Mayer’s good looks and how much is a result of the changes she has made at the company? The paper and the authors don’t say.

Sorkin also writes about a 2013 study showing that hedge fund managers whose photos people viewed as more trustworthy were able to bring in more funds. On the other hand, that study found that those same managers performed worse and generated lower returns than less-trustworthy-looking managers.

What are shareholders and boards of directors to conclude from the paper? It seems to verify all of those other studies that show that attractive people have advantages over plain or unattractive people. But the paper looks at short-term performance, like stock movements right after a CEO appointment and directly following a TV appearance, and terms negotiated in a merger or acquisition. But what about the long-term performance of companies run by good-looking bosses versus firms run by average or unattractive CEOs? While good-looking CEOs may make more money and send their company stocks higher following media appearances, it obviously takes a lot more than looks to maximize a company’s value.

– Broc Romanek, CompensationStandards.com

We are excited to announce that we have just posted the registration information for our popular conferences – “Tackling Your 2015 Compensation Disclosures: The Annual Proxy Disclosure Conference” & “Say-on-Pay Workshop: 11th Annual Executive Compensation Conference” – to be held September 29-30th in Las Vegas and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.

Early Bird Rates – Act by March 14th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by March 14th to take advantage of the 33% discount.

Here is a 45-second video to remind you of the special nature of our conferences…

– Broc Romanek, CompensationStandards.com

Over on TheCorporateCounsel.net, I have been blogging about the latest version of ISS’ corporate governance ratings project – QuickScore 2.0. In this blog, William Tysse of McGuire Woods lays out the compensation related factors:

A list of the compensation-related factors for the U.S. market is set forth below, with changes for 2014 marked by an asterisk (*):

*What is the degree of alignment between the company’s annualized Three-year pay percentile rank, relative to peers, and its Three-year annualized TSR rank, relative to peers?

*Did the most recent Say-on-Pay proposal receive shareholders’ support below the industry-index level?

What is the degree of alignment between the company’s cumulative 3-year pay percentile rank, relative to peers, and its 3-year cumulative TSR rank, relative to peers? (*informational purposes only)

What is the degree of alignment between the company’s cumulative one-year pay percentile rank, relative to peers, and its one-year cumulative TSR rank, relative to peers? (*informational purposes only)

What is the size of the CEO’s one-year total pay, as a multiple of the median total pay for company peers? (multiples greater than 2.33 get flagged)

What is the degree of alignment between the company’s TSR and change in CEO pay over the past five years? (measures below -30% get flagged)

What is the ratio of the CEO’s total compensation to the next highest paid executive?

Are any of the NEOs eligible for multiyear guaranteed bonuses?

What is the ratio of the CEO’s non-performance-based compensation (All Other Compensation) to Base Salary? (ratios greater than 75% get flagged)

Do the company’s active equity plans prohibit share recycling for options/SARS?

Do the company’s active equity plans prohibit option/ SAR repricing?

Does the company’s active equity plans prohibit option/ SAR cash buyouts?

Do the company’s active equity plans have an evergreen provision?

Do the company’s active equity plans have a liberal CIC definition?

Has the company repriced options or exchanged them for shares, options or cash without shareholder approval?

Does the company grant equity awards at an excessive rate, according to ISS policy?

Did the company disclose a claw back or malus provision?

What are the minimum vesting periods mandated in the plan documents for executives’ stock options or SARS in the equity plans adopted/amended in the last three years?

What are the minimum vesting periods mandated in the plan documents, adopted/amended in the last three years, for executives’ restricted stock?

What is the holding period for stock options (for executives)?

What is the holding period for restricted shares (for executives)?

What proportion of the salary is subject to stock ownership requirements/guidelines for the CEO? (less than 3x gets flagged)

Does the company disclose a performance measure for the short term incentive plan (for executives)?

What is the level of disclosure on performance measures for the latest active or proposed long-term incentive plan?

What’s the trigger under the change-in-control agreements?

Do equity based plans or long-term cash plans vest completely on change in control?

What is the multiple of salary plus bonus in the severance agreements for the CEO (upon a change-in-control)? (more than 3x gets flagged)

What is the basis for the change-in-control or severance payment for the CEO?

Does the company provide excise tax gross-ups for change-in-control payments?

What is the length of employment agreement with the CEO?

Has ISS’ qualitative review identified a pay-for-performance misalignment?

Has ISS identified a problematic pay practice or policy that raises concerns?

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from this blog by Glass Lewis:

Glass Lewis recognizes that unequal compensation arrangements–like that proposed by the Hess shareholder–among directors can harm shareholders by impeding board cohesion and by creating conflicts of interests for directors who have received supplemental pay from a shareholder in consideration for their board service. However, given that a proxy contest can require an extensive time commitment from a dissident director nominee–and expose him or her to public criticism and negative attacks–these restrictive bylaws could hamper the ability of shareholders to recruit attractive candidates for board service.

We believe that shareholder board nominations can provide an important mechanism for shareholders to effect change at a company that suffers from poor management or where the board has acted contrary to shareholder interests. Thus, in some cases, these restrictions on compensation for dissident board nominees may deter beneficial shareholder activism. Further, many companies’ bylaws already require disclosure of any compensation arrangements maintained by director nominees. So if a nominee is party to a problematic deal, shareholders can render judgment on it by voting against the nominee in the director election.

In light of these considerations, we think the best governance practice for boards wishing to implement a restriction on dissident nominee pay is to allow shareholders to vote upon the ratification of such a bylaw. As such, we will recommend that shareholders vote against members of the corporate governance committee at annual meetings if the board has adopted a bylaw that disqualifies director nominees with outside compensation arrangements and has done so without seeking shareholder approval.

To date, no board has put such a proposal to the shareholders. However, at least two companies that have adopted these bylaws appear to have had second thoughts, as the boards of both International Game Technology (which held a contested election at its last shareholder meeting) and Schnitzer Steel Industries have repealed similar provisions just months after inserting them into their bylaws. IGT stated that its deletion of the bylaw was motivated by concerns voiced by shareholders that it could promote board entrenchment.

More evidence that shareholders don’t like these provisions occurred last week when the board at Rockwell Automation, following conversations with shareholders regarding their version of the bylaw–and perhaps in anticipation of a significant level of negative votes at its shareholder meeting held February 4-stated that it would put the provision up for vote at the 2015 annual meeting.

Glass Lewis also wrote this blog about the wild & woolly proxy season on tap for us…

– Broc Romanek, CompensationStandards.com

Here’s a WSJ article entitled “Intel Unveils New Compensation Structure“:

Intel Corp. unveiled a series of changes to its executive compensation structure Monday, including boosting the number of management employees required to own stock. The chip giant, whose new chief executive has been trying to more closely align the financial interests of employees and shareholders, said 350 senior leaders will be required to own Intel shares beginning in 2014. Only 50 managers were previously required to hold company stock.

Intel said there will no longer be a “floor” to protect the value of performance-based equity awards for its senior executives, which can now fall to zero. It added that 50% of the company’s annual cash bonus payout for all employees will be based on performance, up from 33% in 2013. The company’s profit-sharing plan now will pay out quarterly as opposed to semiannually, allowing for incentive-based compensation to be paid out more frequently.

Intel made the disclosures in a letter to shareholders that was part of a filing with the Securities and Exchange Commission. It attributed the moves to new compensation policies of Brian Krzanich, who became Intel’s chief executive last May 2013 after predecessor Paul Otellini announced plans to step down in November 2012.

The surprise shift, Intel has said, caused the company to issue retention grants to Mr. Krzanich and other senior staff members to remain at Intel during the transition. The grants, in the form of restricted stock units, were valued by the company last year at about $10 million each. Mr. Krzanich’s total compensation for 2012 was about $15.7 million, but declined to about $9,139,597 in 2013, according to the Intel filing. His 2013 compensation included a base salary of $887,500 and a $1.75 million bonus, with the rest composed of equity compensation.

Intel, which said Monday it doesn’t see the need for other retention grants for the foreseeable future, reiterated that Mr. Krzanich’s is roughly the 25th percentile relative to CEOs at peer companies.

Intel, known for supplying chips that serve as calculating engines in personal computers, has suffered as customer dollars have shifted from those devices to tablets and smartphones. The company said last month that sales of chips for the ailing personal-computer market improved in the fourth quarter, but demand for larger systems was weaker than expected. Intel forecast flat revenue for 2014, while analysts had been expecting slight growth.

– Subodh Mishra, ISS Governance Exchange

Corporate board members and institutional investors are divided on the state of executive pay in the U.S., according to a survey by Towers Watson and proxy solicitor Alliance Advisors. The survey, released Jan. 16, finds a stark divergence of opinion between the two groups on what has given rise to “excessive” CEO pay and whether pay is closely linked to company strategy. Indeed, just 20 percent of directors said the executive pay model in the U.S. has led to excessive CEO pay levels, while 72 percent of investors surveyed say the model has led to excessive pay levels. The figure for directors represents a sharp drop over the past five years, moreover, Towers noted in a statement.

Meanwhile, 70 percent of directors surveyed said the executive pay model at most companies is closely linked to company strategy, compared with just 34 percent of investors. Additionally, roughly one-fourth of directors say executive pay is “overly influenced” by management, compared with just under two-thirds of investors surveyed.
“These disconnects may stem from the fact that many investors aren’t fully informed about what goes into the pay decision-making process at many companies,” said Reid Pearson, executive vice president at Alliance Advisors, in a Jan. 16 statement. “This suggests that companies need to do more to help investors understand the challenges boards face in aligning pay with performance and setting appropriate pay levels, reinforcing the need for greater transparency and engagement.” The survey, conducted in October and November 2013, gauged responses of more than 120 corporate directors and 30 institutional investors with combined assets under management exceeding $12 trillion.

Other areas where an incongruence of opinion is evidenced include the value of engagement, with more than two-thirds of investors believing more frequent shareholder engagement would enhance the pay-setting process, compared with just 13 percent of directors. More than twice as many investors as directors say enhanced pay disclosure would help, as would more restraint in pay setting by boards and management, according to survey findings. Notably, the poll of both groups found neither directors nor investors think the Dodd-Frank CEO pay ratio disclosure rule “will help improve the [pay] model,” according to a statement announcing the findings.

With regard to say-on-pay, the survey found a significant variance in how directors and investors view the efficacy of say-on-pay votes, first adopted marketwide in 2011. Just one-fourth of directors believe such votes have been a “key driver” of pay decisions by boards, compared with 63 percent of investors.

Meanwhile, seven in 10 directors believe say-on-pay has “affirmed the alignment” of executive pay and company performance, compared with just four in 10 investors. Finally, 35 percent of surveyed directors say they view say-on-pay “as a waste of time and resources,” compared with 13 percent of investors.

The study did find noteworthy areas of agreement between the respondent groups. A majority of both groups “see the need for more disciplined target setting” and for greater consideration of strategic, nonfinancial performance measures in annual and long-term incentives. The survey found that more than 90 percent of both directors and shareholders believe the executive pay model “has either stayed the same or changed for the better” since say-on-pay votes were required. Additionally, the percentage of directors (89 percent) and investors (59 percent) who believe executive pay is sensitive to corporate performance has increased by roughly 50 percent since 2008, when a similar survey was conducted.