The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s a blog from Davis Polk’s Ning Chiu:

Shareholders were asked to vote on almost 1,200 equity plan proposals in the first half of 2014, according to the ISS U.S. Proxy Season Review Report, with an average approval rate of 89%. Slightly more than half of the proposals amended existing plans, while 150 proposals were made solely to comply with Section 162(m) tax deductibility and did not ask for any increased shares.

While it appears that ISS did not support at least a quarter of the proposals, only eight failed to pass, including two that ISS recommended that shareholder vote in favor. Two failures were at S&P 500 companies.

High shareholder value transfer was the primary concern for ISS, cited in 237 out of 301 “against” recommendations, although usually more than one issue was cited, including option repricing permissiveness and excessive burn rates. The ability to reprice options without shareholder approval is increasingly rare, present in only 7% of the plans ISS reviewed.

Other, less common, causes of negative recommendations include liberal change-in-control vesting provisions and pay for performance or poor pay practice related to equity-based compensation. A pay-for-performance disconnect was listed as the reason ISS recommended against the equity plan at Chipotle Mexican Grill, where both the say-on-pay vote and the plan proposal did not pass.

We again remind companies with equity plan proposals up for vote at the next annual meeting about ISS’ new data verification site, which we previously discussed here. Given that ISS cannot input the information into its database until after proxy statements are filed, but also faces the challenge of needing to release voting reports a few weeks before the meeting, there is only the briefest window of time for companies to verify the information in that database. The binding nature of the vote makes it crucial that plans pass and companies have the opportunity to help ISS ensure that its analysis is based on accurate materials.

– Broc Romanek, CompensationStandards.com

Here’s an article from The Motley Fool’s Paul Hodgson:

2014’s shareholder spring turned into a shareholder summer. Was it all given carte blanche by business secretary Vince Cable? In a speech in March, he announced that he would introduce tougher measures unless remuneration committee behaviour improved. Then, in a letter in April sent to the remuneration chairmen of the 100 biggest UK-listed companies, he warned about the damage big pay deals can have on their image. “At a time when every part of the economy is striving to get more from less, I hope you find yourselves animated by the same spirit…. Unless business is seen to act responsibly, pressure for further action will inevitably result,” Cable wrote.

It started with Barclays, whose CEO later admitted that “a lot more needs to be done” to rein in bankers’ bonuses. The bank withstood four hours of criticism of its bonuses at its AGM, culminating in a rare institutional shareholder rebuke when a representative of Standard Life stood up to announce that it was voting against the remuneration report because “(w)e are unconvinced that the amount of the 2013 bonus pool was in the best interests of shareholders”. Barclays’ pay plans were eventually approved with a small margin.

Shareholder rebellions over directors’ pay continued at Pearson, AstraZeneca, National Express, Standard Chartered, Reckitt Benckiser and online grocer Ocado. Nearly one-third of Reckitt’s shareholders opposed its annual pay report. A fifth rejected the separate pay policy vote; a new, second opportunity to vote on pay policy for the next three years. A fifth of Ocado shareholders also voted against the online grocer’s pay report, objecting to a matching share plan that was due to award chief executive Tim Steiner shares worth more than £12m.

Opposition was often due to criticism by the shareholder body the Association of British Insurers, but most often shareholder advisor PIRC was behind the protests. PIRC encouraged protest against M&S, Sainsbury’s and Sports Direct bonuses and pay plans, as well as at oil firm Afren, G4S, WPP and HSBC. Investec’s pay plan was also opposed, by 44% of shareholders, amid criticism that awards were “excessive”. In the end, most of these plans passed. For example, HSBC had only around 20% of investors voting against the directors’ pay report. But it is widely recognised that even if you have a fifth of shareholders disapproving of pay, you had better start talking to them about it. FirstGroup’s pay approval actually went up this year, from 71% to 80%, but the chief executive still promised a “deep review” of pay.

On the other hand, Kentz was the first company to have its pay plan rejected under the revised rules this year. Luckily, the company has since been acquired by SNC-Lavalin, so it doesn’t have to worry about it anymore. Then in August, another company, Burberry, saw 52% vote against its pay report.

As I said here, the key to most of these votes is performance. Shareholders don’t like high pay and low performance. On the other hand, they will accept low pay and low performance, as at Marks & Spencer, where CEO Marc Bolland declined a pay increase for a fourth year running after the company missed sales and profitability targets. No shareholder revolt there.

So, did Vince Cable sanction these revolts? He certainly was responsible for putting the mechanisms in place for protest to happen. But by lining companies up for a warning at the beginning of the AGM season, he gave shareholders a mandate to object if they felt that companies were not heeding prior warnings.

As High Pay Centre director Deborah Hargreaves has said, the new regulations are not enough to bring top pay down. The Centre’s figures show that pay for a FTSE 100 CEO has gone from being 60 times the average UK worker to 160 times over the last 15 years. Where this level of increase is justified, shareholders are quiet; where it is not, they will protest.

– Broc Romanek, CompensationStandards.com

Wonder what NFL’s Roger Goodell’s severance package will look like? Me too. Anyways, here’s a Bloomberg article entitled “Does Roger Goodell Truly Deserve $74 Million?”…

– Broc Romanek, CompensationStandards.com

Yesterday, Rep. Chris Van Hollen – the ranking democrat on the House Budget Committee – introduced “The CEO-Employee Pay Fairness Act.” The bill would prevent companies from obtaining Section 162(m) tax deductions for CEO bonuses unless certain employee salaries were raised. The bill’s goal is for companies to reward all workers — not just top executives and major shareholders — for the company’s gains in productivity. Here’s a Washington Post article – and here’s an article from The Hill…

– Broc Romanek, CompensationStandards.com

Here’s an article from “The Globe and Mail”:

When Oxford University economics professor Simon Wren-Lewis recently mused about introducing a maximum wage, I cringed. While minimum wages are widely accepted, the idea of a maximum wage is hard for many people, me included, to swallow. Prof. Wren-Lewis said it’s high time for a real debate on introducing a maximum wage to tackle growing inequality.

Switzerland took up the charge last year, holding a referendum on the idea of capping salaries for top executives at 12 times the company’s lowest salary, something the good professor cited. The measure was defeated by slightly less than two-thirds of voters. It’s a bad idea, full stop. For one thing, it would give companies an incentive to outsource their lowest-paid jobs, so they wouldn’t count in any wage comparison. And it’s too rigid.

There are other ways to ensure that executive compensation doesn’t get out of hand when compared with average pay packages, and Canadian companies would be wise to take some pro-active measures because Canada won’t be immune to the growing pressure to cap wages. Wall Street occupiers are long gone and the financial crisis is fading into the recesses of our minds, but the spotlight on pay packages is only beginning. Regulators and policy makers in the U.S. and U.K. have gone furthest to rein in swollen salaries. That’s fitting, because they have bigger problems with inequality and outlandish pay. But Canada is far from perfect.

This summer, the Organization for Economic Co-operation and Development noted that disposable income inequality has increased by considerably more in Canada since 1995 than in other OECD countries, and is now the 12th highest. The financial crisis barely put a dent in that. The total compensation of Canada’s top 100 CEOs has risen for four years in a row now, and is approaching the level it was at before the crisis hit, according to consulting firm Global Governance Advisors. A study by Dr. Michael Wolfson of the University of Ottawa and professors Mike Veall of McMaster University and Neil Brooks of York University found that the top one per cent of Canadian income earners accounted for 13.3 per cent of all reported individual income in 2011, up from 12 per cent a decade earlier. “There is growing evidence that relative equality is good for growth,” Bank of England governor Mark Carney said recently. In the U.S., the Securities and Exchange Commission has proposed a rule that would require public companies to disclose the ratio of CEO compensation to the median employee pay.

Expect more noise in Canada, where shareholders are becoming increasingly vocal about compensation. “We actually right now are trying to design a proxy voting guideline that is a maximum pay guideline,” says Michelle de Cordova, director of corporate engagement at Toronto-based NEI Ethical Funds. “It’s something that a couple of our colleagues in the U.S. in the socially responsible space have got, but I’m not sure it’s something that anyone’s been doing in the fund space in Canada yet.”

There have been some Canadian executive pay packages in recent years where shareholders “looked at the number and said ‘no,’” she says, adding that NEI is looking for a quantitative way to back up that instinct.That would be in addition to guidelines it has linking pay to performance. Already some of Canada’s biggest banks have been looking at vertical pay ratios. That means instead of comparing compensation of executives at similar companies, they consider how much people lower down their own firm are earning. Ms. de Cordova suggests that that’s just a drop in the bucket. “We’re going to see more changes on this,” she says. “As things that people never would have imagined would be implemented in the past gradually do get implemented in various jurisdictions, I think we will see change in Canada.”

There are lots of possibilities. A number of British companies publish a metric comparing the rise in executive pay to the rise in pay for general employees. Other possibilities include comparing the top compensation within a company to an archetypal position, such as a teller at a bank, or creating a pay band that defines how much more a CEO should be paid than the next senior executive and carrying that down, Ms. de Cordova says. She prefers comparing executive pay to median household income, and setting a cap that would be a multiple of that. “If the situation of the median household in Canada is deteriorating, that kind of suggests that the situation as a whole is probably deteriorating, and maybe the titans of corporate Canada are not somehow driving benefit in the economy as a whole,” she says.

Whatever the case, change is coming. And the more steps that Canadian companies voluntarily take down this path now, the less chance of calls for a rigid cap.

– Broc Romanek, CompensationStandards.com

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

We have collected Say on Pay vote results for 125 additional Russell 3000 companies, bringing our total to 2,332. The average vote result for all companies in 2014 is 91%. Two additional companies failed since last week’s report; 55 companies (2.4%) have failed so far this year. Of companies with four years of Say on Pay votes, 1,601 (92.2%) have passed all four years, 113 (6.5%) have passed in three years and failed in one year, 18 companies (1.0%) 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.

Meanwhile, check out this infographic from Towers Watson about say-on-pay in ’14…

– Broc Romanek, CompensationStandards.com

Here’s a blog from McGuireWoods’ William Tysse:

A suggestion from John Kelsh at Sidley Austin which makes a lot of sense: “For many years, a stand-alone section on “Tax Considerations” has been a standard feature of the CD&A. These sections typically focus on Section 162(m) considerations and contain generic statements regarding the desire to maximize tax efficiency while also retaining the need for flexibility. In 2014, some companies omitted these sections. Deletion seems advisable in many instances, particularly given that these sections (i) have sometimes been targeted by plaintiff’s firms, (ii) are generally little more than boilerplate and (iii) rarely contain any material information (and thus are not required to be disclosed under Item 402(b)(2)). Companies wishing to streamline and focus their CD&A on meaningful disclosures may wish to consider doing the same.”

– Broc Romanek, CompensationStandards.com

Last month, social activist As You Sow announced its new “Executive Compensation Initiative,” which provides tools to help others get active as well as getting more active itself. As You Sow just filed its 1st shareholder proposal on pay issues. Here is their set of FAQs about CEO Pay…

– Broc Romanek, CompensationStandards.com

Cap’n Cashbags – a CEO – doesn’t try to avoid the ALS Ice Bucket Challenge in this trailer for the full feature film (here’s his 1st attempt):

– 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