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.
Here’s news from this blog by Davis Polk’s Ning Chiu & Alan Denenberg:
At the recent Securities Regulation Institute, Keith Higgins, the head of the SEC Division of Corporation Finance, indicated that the SEC staff will be looking for less detailed disclosure in the S-1 regarding a company’s historical practice and grant by grant valuation description for establishing the fair value of the company’s common stock in connection with stock-based compensation in IPO registration statements.
Currently, companies provide lengthy discussions of how stock was valued and ultimately the difference between the estimated IPO price and the historical fair value of stock at various points in time as private companies. Companies disclose in MD&A the analysis to support their judgments and estimates regarding the valuations. Staff comments often request a description of significant intervening events within the company and changes in assumptions as well as weighting and selection of valuation methodologies employed that explain the changes in the fair value of common stock up to the filing of the registration statement. The questionable value of the disclosure was raised in the SEC’s own report examining its disclosure requirement, which we discussed here, noting that commenters recommended eliminating or reducing this disclosure, arguing the information is not significant to investors.
It appears that going forward, the SEC staff will no longer require or expect the level of detail that companies have been providing, and instead a few paragraphs describing the historical valuation methodology and what it will be post-IPO will be considered sufficient. However, the SEC staff will still expect a more thorough discussion in the comment letter in order to help the staff ensure that it agrees that the accounting is correct.
With income inequality in the news due to last night’s State of the Union address, I thought I would note some of the reactions to this WSJ op-ed by Tom Perkins, co-founder of top Silicon Valley VC firm Kleiner Perkins (his former firm has disavowed the remarks). One reaction is captured beautifully in this blog by Mark Suster – and here’s a another one from NY Times’ Paul Krugman. Comparing the woes of the top 1% earners to the killing of Jews by the Nazis? I can’t believe the WSJ ran that tone deaf piece.
In fact, Perkins himself can’t believe it as he apologized afterwards (for his Nazi comparison, not his”don’t vilify the 1%” remarks). As this article notes, Perkins is no stranger to drama – he supported Murdoch as a director on News Corp’s board during the UK phone-hacking scandal.
In comparison, this NY Times op-ed by a former Wall Street banker is great. Here’s the opening paragraph:
In my last year on Wall Street my bonus was $3.6 million — and I was angry because it wasn’t big enough. I was 30 years old, had no children to raise, no debts to pay, no philanthropic goal in mind. I wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted.
But then the NY Times ran this column about a bankrupt NYC law firm partner who ‘only’ makes $375k per year. I can’t imagine a whole lot of people shed tears over that one…
Last week, there were numerous front page articles about how JPMorgan CEO Jamie Dimon’s pay went up after a tough year for the company. Perhaps most interesting is the description of how the compensation committee meetings have gone down – pretty wild that this type of information is being leaked to the press! How does that happen?
This NY Times article notes “hashing out the pay package after a series of meetings that turned heated at times, according to several executives briefed on the matter.” The article also noted: “The debate pitted a vocal minority of directors who wanted to keep his compensation largely flat, citing the approximately $20 billion in penalties JPMorgan has paid in the last year to federal authorities, against directors who argued that Mr. Dimon should be rewarded for his stewardship of the bank during such a difficult period. During the meetings, some board members left the conference room to pace up and down the 50th-floor corridor.”
Also check out the video on Sallie Krawcheck on JPMorgan’s billions in fines: “A Real Cost of Doing Business.”
Since last year’s Apple court decision on unbundling, litigation spilled over into the employee plan context including the Groupon class action described in this Cooley news brief. In addition, Corp Fin has focused more on this tricky topic through the comment process. On Friday, Corp Fin issued these three CDIs to clarify its unbundling positions under Rule 14a-4(a)(3) including this one in the plan context:
– Question 101.03: omnibus plan amendment increasing shares reserved for issuance, increasing max amount payable to a single employee, adding restricted stock to types of award eligible to be granted and extending plan’s term
Seeing this CDI was great – and coincidental – timing as a question along these lines had just been posted in the Q&A Forum!
Last month, I blogged about an academic study on international say-on-pay. Now the CFA Institute’s Matt Orsagh has written this summary about another study on international say-on-pay (this one written by two guys from the Fed)…