The Advisors' Blog

– Broc Romanek, CompensationStandards.com

This overview from Audit Analytics – “The Stock-Option Backdating Scandal and its Minor Implication of Audit Firms” – provides a brief reminder of that exciting time…

– Broc Romanek, CompensationStandards.com

Here’s news from this Reuters article:

Abercrombie & Fitch Co’s board agreed to make governance changes to resolve a lawsuit objecting to its awarding longtime Chief Executive Officer Michael Jeffries more than $140 million of compensation since 2007. The negotiated settlement, which requires court approval and includes no monetary payment to shareholders, was disclosed on Friday, less than an hour after the underlying lawsuit was filed in the U.S. District Court in Columbus, Ohio.

Abercrombie agreed to appoint a chief ethics and compliance officer, tie executive pay more closely to performance, bolster anti-corruption compliance training, and limit access to nonpublic data to Jeffries’ partner and other third parties, among other provisions, court papers show. The accord would bind other shareholders with similar claims. It differs from most shareholder derivative litigation, in that settlements often occur months or years after lawsuits are filed. A Florida pension plan, the City of Plantation Police Officers’ Employees’ Retirement System, is the plaintiff.

“Many lawyers try to shoot first and ask questions later,” Mark Lebovitch, a partner at Bernstein, Litowitz, Berger & Grossmann representing the plaintiff, said in an interview. “The board deserves credit for recognizing the benefits that our settlement proposal would create for the company.” Abercrombie directors denied wrongdoing in agreeing to settle. A spokesman for the New Albany, Ohio-based company had no immediate comment on Tuesday.

The changes came after Abercrombie had this year added seven new independent directors, including four to resolve a proxy battle with hedge fund Engaged Capital, and reduced Jeffries’ power by splitting the roles of chairman and chief executive. Abercrombie has had 10 straight declines in quarterly same-store sales. It said on Aug. 28 it would reduce its logo-focused apparel business in North America to “practically nothing” while expanding other lines. Jeffries’ pay was less than $140 million from 2008 to 2013, according to court papers, because some awards did not vest or were not granted.

In the court papers, Lebovitch said the plaintiff chose an “atypical strategy” of negotiating changes quietly, rather than risk a long court battle with Abercrombie’s “famously aggressive counsel” at Skadden, Arps, Slate, Meagher & Flom. He also said the settlement was not collusive, and that courts in the federal circuit that includes Columbus have encouraged settlements in comparable cases. “I don’t see the incentive to settle as being any different before or after a lawsuit is actually filed,” said Robert Daines, a professor at Stanford Law School and co-director of its Rock Center for Corporate Governance.

The plaintiff’s lawyers could receive up to $2.78 million in fees and expenses if the settlement were approved. “We think the benefits are more significant than in virtually any derivative settlement you will find, and could justify a much larger award,” Lebovitch said.

The case is City of Plantation Police Officers’ Employees’ Retirement System v. Jefferies et al, U.S. District Court, Southern District of Ohio, No. 14-01380.

– Broc Romanek, CompensationStandards.com

Here’s this article from ThinkProgress.org:

David Dillon, the former CEO of the supermarket chain Kroger, told the audience of an Aspen Ideas festival that his pay in his last year on the job, which clocked in at nearly $13 million, “even seems ludicrous to me.”

He clarified that the package wasn’t ludicrous when it was first put together, but rose so high because the company’s stock has skyrocketed, and much of his compensation was tied to the stock price. “I don’t really defend that amount, that even seems ludicrous to me,” he said. And while he said that even before the large package, compared to his peers, “I generally hit the 25th percentile on the bottom side” for compensation, even that “was pretty damn high.” In a follow up interview with Quartz, he added that the use of the word ludicrous was in comparison “to what I thought was a more logical level of pay for the year.”

On the panel, he also defended the idea of designing executive compensation so that CEOs “have enough shareholder interest that they are mentally aligned with thinking about what should a long-term shareholder want out of an organization.” But he admitted things have gone pretty far. “I also think it’s gotten a little extreme, or maybe a lot extreme,” he said.

In speaking with Quartz, he added, “I personally believe that, generally speaking, executive pay has gotten too high, and it needs to be addressed in appropriate ways.” He added, “Anybody who looks at CEO pay, even if it was reasonably based, they would say that person is paid way too much.” “I don’t dispute that they ought to be paid really well,” he said. “It’s just that I think it’s gotten a little bit out of hand.”

The numbers back him up. Median CEO pay hit a record earlier this year, breaching the $10 million mark. It rose more than 50 percent over the last four years, while the average American saw her pay increase just 1.3 percent over the last year. Chief executive pay has risen 127 times faster than worker pay over the last three decades. The ratio of CEO pay to worker pay was 259.9-to-1 last year. That compares to a ratio of 20-to-1 in 1965 and even just 87.3-to-1 in the early 90s. Executive pay is even growing faster than pay for the top 1 percent.

And there is little evidence to suggest that these huge increases in CEO compensation are benefitting their companies. There is no evidence to suggest that paying CEOs top dollar means better performance in terms of profitability, revenue, or stock return. In fact, a study found that the companies that pay their chief executives the most see the worst results for shareholders. Despite the attempt to tie pay to company performance, companies routinely game those systems to ensure that the top executive gets his bonuses and payouts, even if they fail to meet targets. Worse, nearly four in ten of the highest-paid CEOs over the last two decades were fired, caught committing fraud, or oversaw a company bailout.

– Broc Romanek, CompensationStandards.com

What happens when you pay two monkeys unequally? Here’s an excerpt from the TED Talk with Frans de Waal that reveals this behavior:

– Broc Romanek, CompensationStandards.com

Here’s food for thought in this article – as well as in this article, repeated below:

Just because you run a large and sophisticated public corporation doesn’t mean you can’t be played for a fool when it comes to executive pay. It’s hard not to draw such a conclusion after reading a recently published study of CEO pay which cited extreme naiveté, confusion and knee-jerk decision-making. Academics Kelly Shue and Richard Townsend of the University of Chicago and Dartmouth College, respectively, studied executive pay at corporations in the S&P 500 between 1992 and 2010. What they found is somewhere between jaw dropping and staggering.

The central issue is the way many corporations treat the value of executive stock options. Stock options give the holder the right, but not the obligation, to purchase a predetermined number of shares at a predetermined price for a fixed period. As most people in finance know, the dollar value of an option is determined by a standard formula — the Black Scholes model. The value of an option grant is in large part determined by the price of the company shares. If a stock rises 40% in one year then a similar-sized option grant will be worth 40% more. Authors Shue and Townsend explain all this and more in their April paper “Growth through Rigidity: An Explanation for the Rise in CEO Pay.”

But apparently, the people doling out the options to the executives either didn’t understand or chose to ignore this. Typically that’s the board of directors headed by the chairman who is often also the CEO. The study found that by far the most common outcome was for corporate bigwigs to get exactly the same number of options as they did the previous year regardless of the dollar value, the report states. That meant that in the roaring 1990s as the stock market soared so did the value of the option awards — because the executives and the people governing them most commonly ignored the dollar value of those awards.

To avoid such occurrences, compensation experts (and I know because I was such an expert for years) determine the dollar value of options they want to award first and then derive the number of options from that. If the stock price falls or rises it should mean more or fewer options are awarded each year. Lucy Marcus, CEO of Marcus Venture Consulting, and an expert in corporate governance, puts her finger on it: “My question is why do you [the CEO] use common sense in everything else but throw that out of the window when it comes to your pay?”

The result of this practice was: “Option compensation [in dollars] grew more than sixfold over this period [1992 to 2001],” the authors say, while other executive pay remained “relatively flat.” Total pay jumped threefold in the same period. It’s remained pretty flat since, the authors found — in line with a relatively sideways market.

So how was it that people who generally consider themselves smart (CEOs and their boards) could be so off-target when it comes to compensation? The report’s summary nails it: ”we find suggestive evidence that number-rigidity in executive pay is generated by money illusion and rule-of-thumb decision-making.” Or to rephrase: The corporate staffs and their advisers don’t understand the difference between the number of options and their value, and they are making it up as they go along. “This is not right, the only way around it is to bring real transparency to it so everyone knows what’s going on,” says Marcus.

If you are looking for some Schadenfreude, you are in luck. The report authors also found that when the company had a 2-for-1 stock split, a surprisingly large number (more than 5%) of CEOs got the same number of options. In other words, those unlucky CEOs had their stock option pay cut in two. “These results suggest a rather extreme form of naiveté regarding options,” the authors wrote. Or more simply, naiveté can cost you big time.

– Broc Romanek, CompensationStandards.com

In this 15-second video, Cap’n Cashbags – a CEO – tries to avoid the ALS Ice Bucket Challenge:

– Broc Romanek, CompensationStandards.com

This recent piece from Pearl Meyer & Partners provides insights into shareholder engagement based on a survey of 212 respondents (162 executives and/or human resource professionals and 50 outside Directors; free download of the summary if you input your data). Don’t forget our horde of resources on this topic in our “Shareholder Engagement” Practice Area, including 5 checklists on this topic…

– Broc Romanek, CompensationStandards.com

Here’s a memo from Towers Watson about performance-based LTI. I’ve posted a number of pieces recently in our “LTIPs” Practice Area, including “How Top Companies Are Adapting Their LTI Awards to Say-on-Pay” by Jim Reda of Arthur J. Gallagher…

– Broc Romanek, CompensationStandards.com

We have posted the transcript for the recent webcast: “Executive Pay Basics: The In-House Perspective.” This was a tremendous program – perfect for anyone who needs some comfort if they are relatively new to being in-house or isn’t very well steeped in a wide scope of pay issues…

– Broc Romanek, CompensationStandards.com

Perhaps as a reaction to the SEC’s SLB 20 – or Commissioner Gallagher’s continuing war of words against the current state of proxy advisors – yesterday, ISS announced the upcoming launch of a new “data verification portal” for equity-based compensation plans up for shareholder approval. ISS also released a set of 19 FAQs to help explain this new portal (pet peeve: if you create a set of FAQs, please number them).

Here are 10 things to know:

1. Portal officially launches September 8th
2. Data verification only for equity comp plan approval (in other words, this is different than what S&P 500 companies now enjoy for their entire ballot; see FAQ #14)
3. All US companies can participate
4. Companies have to register for the portal before they can use it (do so soon since it takes 5-7 business days for ISS to process and you might forget if you procrastinate)
5. Only companies can use the portal; not their advisors
6. Can’t verify data until after proxy statement is filed with the SEC
7. After proxy filed, ISS will send an alert saying the data verification window is open (alert will come roughly within 12 business days after the proxy filing)
8. Once alert is sent, companies only have 2 business days to verify the data and request changes. Repeat: just two business days!
9. ISS will send responses to request for changes within 5 business days of the request
10. Review list of 27 questions in Appendix A of the FAQs to comprehend what ISS is looking for in equity comp plans