The Advisors' Blog

– Broc Romanek, CompensationStandards.com

In his myStockOptions.com blog, Bruce Brumberg analyzes how Twitter will utilize RSUs as a public company…

Here’s more Twitter analysis from Mark Poerio entitled “Delay of All Expense? Possible through CIC or IPO Contingency.”

– Broc Romanek, CompensationStandards.com

On Wednesday, ISS posted its draft 2014 Policy Updates, with a comment deadline of November 4th. That’s just two weeks – so no time to procrastinate. There are two proposed changes – changes to the pay-for-performance quantitative screen and board responsiveness to majority-supported shareholder proposals, as noted in Ning Chiu’s blog and Gibson Dunn’s blog. And here’s an excerpt from this Sullivan & Cromwell memo:

Board Responsiveness to Shareholder Proposals

– In determining whether to recommend withhold votes against directors, ISS would take a case-by-case approach in assessing whether a company has adequately implemented a shareholder proposal that received majority support in a prior year. ISS would take into consideration (among other things) the company’s disclosure on shareholder outreach efforts and the rationale for its level of implementation, as well as the level of support the proposal received.

– This potential broadening of what it means for a board to be “responsive” should be viewed together with last year’s change to lower the threshold for when the board needs to be responsive – beginning in 2014, the ISS responsiveness analysis will be triggered for directors if a proposal received the support of a majority of votes cast (not majority of shares outstanding) in the prior year.

Elimination of One-Year TSR from Pay-for-Performance Analysis

– The second proposed change relates to the pay-for-performance assessment used by ISS to formulate a say-on-pay recommendation. The ISS assessment begins with a quantitative analysis with three components, one of which measures the difference between (a) the percentile rank within the ISS-selected peer group of a company’s total shareholder return (or TSR) and (b) the percentile rank within that peer group of a company’s CEO pay.

– Under current policies, this metric is calculated on both one-year and three-year bases, weighed 40% and 60%, respectively. The proposed change would eliminate the one-year measurement, and base this aspect of the component solely on three-year TSR, on the theory that this removes volatility and improves comparability of sustained long-term performance.

– Broc Romanek, CompensationStandards.com

Tune in today, Thursday, October 24th for the webcast – “Drilling Down: Statistical Sampling for Pay Ratios” – so you can hear Pearl Meyer’s Jan Koors, Towers Watson’s Rich Luss and Frederic Cook’s Mike Marino get into the nitty gritty about how to conduct statistical sampling under the SEC’s pay ratio proposal.

This program will not be an overview of the SEC’s new proposal on pay ratio disclosures; we have posted plenty of memos to get you up-to-speed. Among other topics, this program will cover:

1. When sampling makes sense (large dispersed workforce, multiple pay databases, etc.)

2. What might be unintended consequences of identifying a “median employee” using pay definition different than ultimate SCT-based calculation of that person’s compensation for use in ratio

3. Selecting a sampling technique, which is best
– Random sampling? Stratified sampling? Other?
– Ability to provide explanation of process chosen and implications of decisions (eg. stratified sampling may produce more reliable or valid answers but may also involve quite a few decisions of where/who to oversample)

4. Determining sample size, how much precision is required
– The square root of n+1? Other?
– Data availability or comparability issues for global firms?

5. Reliability & validity, how are they relevant
– Constant results
– Accurate results

– Broc Romanek, CompensationStandards.com

I have posted the transcript for the recent webcast: “Doing Your Pay Ratio Homework Now: A Roadmap.”

Tune in tomorrow, Thursday, October 24th for the webcast – “Drilling Down: Statistical Sampling for Pay Ratios” – so you can hear Pearl Meyer’s Jan Koors, Towers Watson’s Rich Luss and Frederic Cook’s Mike Marino get into the nitty gritty about how to conduct statistical sampling under the SEC’s pay ratio proposal.

This program will not be an overview of the SEC’s new proposal on pay ratio disclosures; we have posted plenty of memos to get you up-to-speed. Among other topics, this program will cover:

1. When sampling makes sense (large dispersed workforce, multiple pay databases, etc.)

2. What might be unintended consequences of identifying a “median employee” using pay definition different than ultimate SCT-based calculation of that person’s compensation for use in ratio

3. Selecting a sampling technique, which is best
– Random sampling? Stratified sampling? Other?
– Ability to provide explanation of process chosen and implications of decisions (eg. stratified sampling may produce more reliable or valid answers but may also involve quite a few decisions of where/who to oversample)

4. Determining sample size, how much precision is required
– The square root of n+1? Other?
– Data availability or comparability issues for global firms?

5. Reliability & validity, how are they relevant
– Constant results
– Accurate results

– Broc Romanek, CompensationStandards.com

Last week, Andrea Electronics became the 62nd company to fail its say-on-pay in ’13 – see the Form 8-K – with 41% support. Hemispherx Biopharma became the 63rd with just 43% support (Form 8-K), a microcap that voluntarily put up its SOP for a vote the past 3 years (failing in both 2010 and 2011 but passing last year).

And the 64th failure is LookSmart, which received ZERO votes in support of its say-on-pay. You say “bull”? Take a look at the company’s Form 8-K. The company is a former search engine from the dot.com era that is now an online ad enterprise. As gleaned from the company’s proxy statement, the NEOs don’t own any stock in the company. Here’s the analysis

Apparently, there was a complete board turnover in early 2013 (following a tender offer takeover), with the proxy explicitly stating that the former directors and executives were “terminated for cause or removed for cause or otherwise ceased to hold any office or position with the Company” (wow) – and the new board actually recommended AGAINST the company’s say on pay proposal. The proxy actually states “The current directors of the Company and the current compensation committee members believe that the executive compensation and the related practices of the former directors and former executive officers were ineffective and inappropriate and that the former directors and former executive officers consistently awarded themselves excessive compensation without regard to performance or what was in the best interests of the stockholders.” (double wow)

With 64 failures, this year now surpasses last year’s 61 failures. And we had three failures later in the year than at this time in 2012, so stay tuned. Thanks to Karla Bos of ING for the heads up on these!

– Broc Romanek, CompensationStandards.com

Two Sundays ago, the NY Times ran this column about the overreliance on stock prices when setting executive pay levels. Here’s a quote from Nell Minow: “A statistic I’ve seen that makes sense to me is that 70% of executives’ stock option gains are attributable to the market’s movement as a whole.”

Mark Van Clieaf, an organizational & pay-for-performance consultant and partner in the newly formed “Organizational Capital Partners,” contributed the analytics for the article. Among the disturbing findings by Mark and the OCP team is that 18 Fortune 300 sample companies lost $134 billion – but yet they paid the top 90 officers a whopping $3.1 billion in executive pay. And the proxy advisors – ISS and Glass Lewis – only recommended against three of the 18 companies! Here’s Mark’s support for the stats shared in the NY Times piece – and here’s a related article…

As I blogged a few days ago on TheCorporateCounsel.net, SEC Chair White gave a huge speech this week about her desire to overhaul the disclosure regime to reduce information overhaul and provide more meaningful disclosures to investors. Here is an excerpt that deals with executive pay disclosures:

We see a similar phenomenon in the area of executive compensation disclosure – where the disclosures in some cases can amount to more than 40 detailed pages. The rules for such disclosure have been revised, perhaps, more times than any other set of disclosure rules as we have tried to keep pace with changing trends in compensation.

Part of this increase is not from new disclosure mandates, but from companies trying to do a better job of explaining the rationale for the compensation packages they pay executives because they now must provide investors with an advisory vote on executive compensation – a “say-on-pay” vote. The Dodd-Frank Act mandated such a vote, which most companies are providing annually. And, as a result, companies have decided to more fully explain to their shareholders the rationale and considerations for these compensation decisions. And we think these additional disclosures are a good thing, but we should be careful not to have too much of a good thing.

Does this mean that Item 402 of Regulation S-K will be revisited? The answer is “we don’t really know, but that a broad disclosure reform project – particularly one that would change the way information is delivered (eg. framework with “core” company document that is supplemented) would likely change all of S-K.”

The scope of this project looks to be humongous. But history shows that those types of projects tend to not get far off the ground (egs. Aircraft Carrier; proxy plumbing) – so maybe the SEC will learn from past experience and try to conduct disclosure reform in a piecemeal fashion. Of course, there are drawbacks to that approach too as the agency would want all the pieces to fit together, which is more easily accomplished in one stroke. Plus I imagine there would be a goal to finish the project within the span of SEC Chair White’s (and the Staffers doing the real work) tenure at the SEC.

It will be interesting to see where this goes, with the first step being the SEC’s Regulation S-K study required by the JOBS Act, which should be coming out pretty soon…

– Broc Romanek, CompensationStandards.com

Here’s news from a Skadden alert:

In a rare piece of good news relating to Section 409A of the Internal Revenue Code, on October 4, 2013, California reduced its additional state tax on income failing to comply with Section 409A from 20 percent to 5 percent. This reduction is effective for taxable years beginning January 1, 2013 and later.

Section 409A was added to the Internal Revenue Code by the American Jobs Creation Act of 2004, and was intended to regulate deferred compensation — that is, compensation in which the right to payment arises in one year but the amounts are to be paid in a future year. Section 409A can apply to compensation arrangements as diverse as employment agreements, severance arrangements and equity awards, as well as to traditional deferred compensation plans. Violation of the provisions of Section 409A generally causes the amounts in question to be subject to accelerated income taxation and an additional 20 percent federal income tax under Section 409A.
California’s Revenue and Taxation Code incorporates a parallel income tax of 20 percent, thereby increasing the total additional income tax imposed on California taxpayers for violating Section 409A to 40 percent, double the rate applicable to taxpayers in other states. This newly announced rate change reduces the 409A income tax applicable to California taxpayers to a level much closer to that applicable to non-California taxpayers.

We encourage any companies that have experienced Section 409A violations giving rise to Section 409A income taxes in 2013 and later years to revisit their calculations to reflect the revised rates. We are available to discuss any questions you may have relating to this new development and to any general Section 409A compliance of your compensation arrangements.

– Broc Romanek, CompensationStandards.com

Recently, Masimo Corporation became the 61st company to fail its say-on-pay in ’13 – see the Form 8-K – with 48% support (the company failed last year with only 37% support). And then we have Capstone Turbine, which was the 60th company with only 48% support – see the company’s Form 8-K. Note that both 8-Ks for these companies don’t quite characterize the votes as failures, as they just provide the share data. However, the proxy statements state that abstentions have the effect of an “against” vote – so when the math is done, they received less than majority support.

With 61 failures, this year now ties last year with the number of failures. Thanks to Karla Bos of ING for the heads up on these!

– Broc Romanek, CompensationStandards.com

A few days ago, the Chamber of Commerce and 13 other organizations sent this letter to the SEC requesting a 60 day extension of the pay ratio comment deadline. A little early in the comment process in my opinion to seek an extension – but it’s not a surprise given how outspoken some of these groups have been about this provision of Dodd-Frank…

Meanwhile, Towers Watson has these survey results about how respondents felt would be the biggest challenges if the SEC adopted a pay ratio rule (56% concerned with complying; 31% concerned about where ratio stands compared to peers; 21% concerned about explaining process of determination).