The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Over the last few weeks, Fusion-io became the 71st failure in ’13 with 36% support (Form 8-K) with just 26% support – and RCM Technologies (Form 8-K) became the 72nd with 28% support.

Did you realize that the number of say-on-pay failures has risen 75% in two years? Here is my 45-second video about the success rates for say-on-pay over the past three years (that I made before the 72nd failure occurred):

– Broc Romanek, CompensationStandards.com

I thought that I should clarify my blog from last week – when Nasdaq filed the compensation committee independence proposed rule changes on November 26th, they were immediately effective. Two days ago, the SEC published the notice of filing and immediate effectiveness of the proposed rule change.

As noted in Section III of the notice (pp. 9-10), the rule change has a 30-day operative delay from the date of filing. That period will expire before companies are required to comply with Nasdaq’s compensation committee composition rules since the transition period for compliance is unchanged. Specifically, companies must comply by the earlier of: (i) their first annual meeting after January 15, 2014, or (ii) October 31, 2014.

In addition, at any time within 60 days of the filing of the proposed rule change, the SEC summarily may temporarily suspend such rule change if it appears to the SEC that such action is: (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Exchange Act. I have no expectation that they would take such action. I have posted memos on the Nasdaq’s changes in our “Compensation Committee” Practice Area.

– Subodh Mishra, ISS Governance Exchange

Top European company executives saw average overall pay increase by nearly 7 percent largely stemming from long-term incentives, according to a new Hay Group study. “Top Executive Compensation in Europe 2013,” which tracks trends in executive remuneration for more than 1,500 senior executives in 21 countries working for 332 of the continent’s 500 largest companies, finds base salaries increased just 2.5 percent, with overall gains due to more companies introducing long-term incentive (LTI) plans while also increasing the value of such plans. “Long-term incentive payments play a more important part than ever in the executive reward mix,” said Carl Sjostrom, Hay Group’s regional director for European reward services, in an Oct. 29 statement. “Not only are they more widespread, payments made under such plans are rising too.”

According to Sjostrom, both are symptoms of the current “conundrum” facing remuneration committees; namely, how companies can continue to keep a lid on pay increases for their most critical people and at the same time attract and retain top talent. Growth in LTI plans evidenced in 2013 is in keeping with recent trends, according to the study, which dates back to 2009. Of the 332 companies examined, 84 percent now utilize such plans compared with 78 percent in 2012. Moreover, the size of awards has also risen by 8.5 percent since 2012, according to study findings.

Meanwhile, though average basic pay across Europe fell in real terms (i.e., below regional levels for inflation), there were wide variations in reward between countries, industry sectors and job titles, the study finds. Executives in France, Germany, Italy and Spain, for example, all saw zero change in their basic pay, on average, while counterparts in Switzerland received a 1.7 percent increase and those in Sweden and the U.K. received 2.7 percent. At the sector level, differences were more marked. Executives in utilities and energy enjoyed a 10.5 percent rise in “total cash” while, at the other extreme, those in the automotive sector were paid 14 percent less than last year.

While pay rises for chief executives were kept well below inflation (their average total cash increase was 1.1 percent), heads of functions and divisional leaders have benefited from rises of around 5 percent. Other key findings of the study include:

– Pay rises for CEOs remain muted but other senior executive roles have seen a significant increase.
– Large variations were found between countries and industry sectors: Spain and Switzerland top the league of highest paying countries, while Nordic countries are the most restrained.
– The pharmaceutical sector continues to pay best, but the greatest increases in “total cash” (salary plus short-term incentive) were found in the insurance and utility sectors. In banking, total cash fell significantly below the overall average.
– Average total direct compensation for CEOs was just over Euro 3 million, whereas the average for other executive roles was Euro 1.5 million.

The study also finds a continuing rise in the use of compulsory deferred bonus plans, which in 2009 were employed by just 19 percent of companies, with the number growing to 41 percent this year after peaking at 43 percent in 2012. According to Sjostrom, post-crisis regulations imposed on the financial services sector not only hit banks but also influenced pay practices in other industries. “Extending deferral time periods with the mantra of ‘the longer the better’ has now been tested against economic realities and though deferrals are clearly working well for many companies, others have decided that alternative incentive combinations also have their place,” said Sjostrom.

Study authors also warn companies to resist the “urge to lower the targets that trigger incentives,” in a bid to recognize and reward top performers, suggesting they will break the link between pay and performance, and, potentially, “trigger another round of governance rules and regulations.” “As Europe’s economy recovers, and the talent market picks up, we expect to see greater discord between companies and investors-and also between different investors with different investment goals,” warned Sjostrom. “This, plus a continued increase in regulatory pressure, means companies will have to learn to better engage and assert themselves to explain the business case for reward.”

– Broc Romanek, CompensationStandards.com

Towers Watson’s recently completed annual salary planning survey of 910 U.S. companies found that executives can expect fairly modest salary increases in 2014, generally consistent with the levels in recent years. The survey participants granted a 2.7% average annual increase to their executives this year. For 2014, projected salary budgets put the average executive pay increase at 2.9%.

The survey also found that top performers are likely to do far better than the average as companies continue their recent efforts to better differentiate rewards based on performance. Retaining top performers and scarce leadership talent remains a significant challenge for many companies, even with the overall softness in the labor markets.

– Broc Romanek, CompensationStandards.com

Last week, I highlighted some of the comments that the SEC has received from investors. We are now up to 115,000 pay ratio comments overall, with many more posted from investors. Some comments continue to come in, even though we are a week past the December 2nd deadline.

So far, there are not too many comments submitted by companies – and some don’t provide specific cost data. I might have missed some – sometimes the comments are not labeled clearly – but my survey shows that only 5 out of the 20 comments submitted by companies provide cost data.

These are the ones I found that include cost data:

– General Mills
– Dover Corp
– Avery Dennison
– Hyster-Yale Materials Handling
– NACCO Industries

Here are the ones that I found that don’t include cost data:

– ExxonMobil
– Microsoft
– Eaton
– Johnson & Johnson
– Vectren
– PNC Financial
– Cummins
– Freeport-McMoRan Copper & Gold
– Bill Barrett Corp
– Semtech
– Emergent BioSolutions
– International Bancshares
– Tesoro
– Garmin
– FuelCell Energy

Thanks to Mercer’s Carol Silverman for help spotting these! And here’s a analytical comment letter from “Anonymous”…

– Broc Romanek, CompensationStandards.com

In this memo, Pay Governance provides some interesting commentary on the ISS process…

– Broc Romanek, CompensationStandards.com

Recently, NYSE Governance Services, Corporate Board Member and Pay Governance collaborated to survey the opinions of compensation committee members over the state of executive pay. This report highlights the key findings and summary analysis from this study, which comprises 323 compensation committee member survey responses.

– Broc Romanek, CompensationStandards.com

After my blog got pushed out a few days ago, I tweaked it to note that the form of certification that I linked to was merely just a preview of what Nasdaq will require. Nasdaq expects to release the final form in early January, which will be changed somewhat from the preview to accommodate the proposals that the Nasdaq filed last week, etc.

Also note that listed companies will not file a paper certification with Nasdaq – but rather will certify electronically through Nasdaq’s “Listing Center” website, similar to the process companies (and applicants) use to submit listing applications and forms such as this one…

I’m posting memos on the Nasdaq’s proposal in our “Compensation Committee” Practice Area…

– Broc Romanek, CompensationStandards.com

Wow. The SEC has received over 105,000 pay ratio comments by its December 2nd deadline. Some interesting contributions, such as this joint letter from a bunch of Congress folks. And Sen. Menendez – the dude who inserted Section 953(b) into Dodd-Frank – got other Senators to sign onto his comment letter. In a cursory perusal, Dover Corp. is the only company I found to submit a comment letter with the math about its costs. Do you see others?

Here are some from institutional investors, most of which support the SEC’s rulemaking:

– CII
– ICCR
– Illinois Teachers Retirement System
– Hermes Equity Ownership Services
– Walden Asset Management
– Meketa Investment Group
– RPMI Railpen Investments
– Trillium Asset Management
– AFSCME
– PIRC, the largest proxy adviser in Europe:

Here’s a rebuttal of NIRI’s comment letter posted on the Huffington Post…

– Broc Romanek, CompensationStandards.com

In this memo, Cleary Gottlieb gives us this news:

On November 26, 2013, the Nasdaq Stock Market filed a proposal to amend its listing rules implementing Rule 10C-1 of the Securities Exchange Act of 1934, governing the independence of compensation committee members. Currently, Nasdaq Listing Rule 5605(d)(2)(A) and IM-5605-6 employ a bright line test for independence that prohibits compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fees from the company or any subsidiary subject to certain exceptions.

Based on the potential burden the bright line approach places on companies’ ability to recruit eligible directors, Nasdaq has proposed to replace this rule and its exceptions with a requirement that all compensation received from a company be considered in the independence determination. Separately, Nasdaq has also proposed some minor revisions to the affiliation prong of the compensation committee independence test under Rule 10C-1, which requires that consideration be given in independence determinations to whether a compensation committee member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer. All of these changes would align Nasdaq’s approach to compensation committee independence with that employed by the NYSE.

Yesterday, Mike Melbinger blogged a reminder that the Nasdaq has provided a preview of its form of certification (see pg. 16) for listed companies to use when it complies with Nasdaq Rule 5605(d) next year; the Nasdaq will be releasing the final form sometime in early January…