The Advisors' Blog

– Broc Romanek, CompensationStandards.com

We felt that the keynote remarks of Gibson Dunn’s John Olson at our recent conference were so important for all practitioners to hear that we transcribed them and are making them freely available among other important remarks made at our conferences over the years…

– Broc Romanek, CompensationStandards.com

It’s still early – as most comment letters don’t get submitted until right before the deadline, which is December 2nd for this rulemaking – but the SEC already has received more than 32,000 comment letters on its pay ratio proposal, including roughly 20k using one form letter and another 8k using a second form, 3k using a third form and 1k using a fourth. Most of the form letters simply say they support Dodd-Frank’s Section 953(b). The others express more explicit support for the actual SEC proposal. So far, there haven’t been too many meetings with SEC Commissioners on this rulemaking – here’s that list.

My favorite one so far comes from a woman who claims she is with “Baker Schonchin Holdings Corporation,” a company that I couldn’t find via an online search:

We, at Baker Schonchin Holdings Corporation, believe it in our best interest, and that of our shareholders, employees, business partners, government affiliates, and customers, to willingly disclose payroll statistics, which include, but are not limited, to the following information: Name of Employee, Job Title, Yearly Salary, Department, City, State, Country, and any related pertinent details.

We strive towards a more transparent, ethical, and accountable business entity, so that we may present a more favorable corporate philosophy, but more importantly, that we are the # 1 leader, in moving forward, as a corporation, that refuses to do those practices, that are illegal, secret, or otherwise unsavory in nature. We strongly encourage our peers, to ensure that disclosure of salaries of all employees, is done so in a way that affirms the fair practices that are already in place, with respect to the vision, mission, and values of said company. Thank you.

I hope you noticed the initials of the company cited: “BS Holdings”…

– Broc Romanek, CompensationStandards.com

In this podcast, Juan Monteverde of Faruqi & Faruqi provides some insight into how he determines which disclosure lawsuits to pursue, including:

– What types of disclosure lawsuits are you pursuing these days?
– How do you determine which particular company’s disclosure to target?
– Have you been discouraged by some of the court’s rulings?
– Do you think you might use pay ratio disclosures as fodder for lawsuits once the SEC adopts a final rule?

Check out Mike Melbinger’s blog about “something benignly calling itself the “Shareholder Foundation,” which is a front group (or “shill”) for strike suit lawyers seems to be getting in on the game, presumably based on the [limited] success and [very wide] publicity achieve by Faruqi.”

– Broc Romanek, CompensationStandards.com

After a year of study by The Conference Board to define “realizable pay” and “realized pay,” this 19-page report has emerged recommending consistent definitions and laying out principles for linking pay to performance.

– Broc Romanek, CompensationStandards.com

This Paul Weiss memo brings us the latest in the American Airlines bankruptcy saga…

–Subodh Mishra, ISS Governance Exchange

A Sept. 16 report by the National Association of Pension Funds identifies U.K. companies that bucked a 2013 trend for “quiet diplomacy” by failing to respond effectively to shareholder concerns about remuneration. The NAPF analysis shows that while most companies who faced significant rebellions by their shareholders in the “shareholder spring” of 2012 “have listened and learned,” there are a few who have not. Afren, Immarsat, and Babcock are among 10 FTSE companies highlighted which, having received a warning from shareholders last year, received more than 15 percent dissent (votes against and abstentions) on their remuneration report in 2013, the NAPF said in a statement. The report details where the three companies fell short of investor expectations, as well as those which saw significant increases in support this year, such as Aviva, Tullow Oil, and Quintain Estates.

Most companies acted to avoid the reputational damage inflicted by 2012’s high profile shareholder rebellions by engaging more and earlier with shareholders, says the NAPF, and also appear to be cautious about introducing change ahead of the remuneration disclosure regulations and the binding vote on remuneration policy which take effect this month. “We hope that highlighting the few companies where shareholders have felt compelled to give the company another reprimand will cause them to reflect, listen to shareholder concerns and introduce changes next year,” said NAPF head Joanne Segars in a statement. “We will continue to keep an eye on them and encourage all companies to assess whether their current remuneration practices align rewards to long-term success and returns to shareholders.”

This year’s inaugural report also explores shareholder voting on auditors, which has been in focus following corporate governance code changes last year recommending regular tendering and rotation of auditors, and sweeping reforms to the U.K.’s statutory auditor market expected soon from the Competition Commission.

The NAPF lists four “significant rebellions” against audit-related resolutions this year where shareholders signaled their dissatisfaction over high levels of non-audit fees, including at Pennon Group, Inmarsat, Unite Group, and Laird. Meanwhile, other companies headed off audit-related disputes by either tendering their longstanding auditor contracts or “indicating an intention to do so in the near future,” the report states. These included: HSBC, which moved the U.K.’s largest audit contract after a more than 20 year relationship with KPMG, according to the NAPF; Unilever, which ended a 26 year relationship with PwC; Land Securities, where PwC was replaced by Ernst & Young after 69 year tenure; and BG Group, where PwC replaced Ernst & Young, which had been in place since the company’s incorporation in 2000.

– Subodh Mishra, ISS Governance Exchange

Given the “sensational” performance of the stock market in 2013, one-third of public company board members are concerned that a focus on equity pay is leading to a growing gap in compensation between the CEO and other members of the management team, according to findings from a BDO USA survey.

Of those expressing concern, the survey–conducted in September with 74 corporate directors of public company boards with revenues ranging from $250 million to $750 million–finds a majority (56 percent) believe the best approach to address the gap is to expand equity-based compensation to more members of the management team, while one-third (33 percent) suggest moving a larger portion of CEO compensation back to traditional, long-term cash or annual cash incentive programs, according to a statement. Just 11 percent suggest re-introducing executive perquisites back into the compensation mix for key employees.

“The concern with the gap in compensation between the CEO and other members of management is a subject we are increasingly being asked to address by clients,” said Randy Ramirez, senior director on compensation in the groups’ corporate governance practice. “Given the ongoing increase in equity markets and the SEC’s current proposal to require companies to disclose the ratio of CEO pay to median employee pay, this issue is only going to get bigger. Boards must decide whether they want to close the gap by expanding equity pay to other members of management, moving more CEO compensation back to traditional compensation or a combination of both of these strategies.”

When asked what performance measurement they consider the best substitute for at least a portion of equity-linked pay, board members cite profit growth (39 percent) and free cash flow (24 percent) as the most likely substitutes. Operational efficiency (18 percent), revenue growth (14 percent), and market share (6 percent) are the other alternative measurements cited by the directors.

Meanwhile, the survey finds 84 percent of directors expect to the spend the same amount of time on executive pay-related issues as last year, with just 8 percent saying the time allocation would be less, and another 8 percent saying more. By comparison, close to half of the board members cite succession planning (47 percent) and studying industry competitors (45 percent) as areas they would like to spend more time on, underscoring the dominance of pay in board discussions.

– Broc Romanek, CompensationStandards.com

One of my in-house friends recently noted that a “sleeper” in the SEC’s recently-proposed rules on pay ratios involves the compliance date. Under the proposal, companies that don’t have December 31st fiscal year-ends might not have the luxury of an extra year before complying as December 31 year-end companies would.

As proposed, companies would have to begin complying for their first fiscal year commencing on – or after- the effective date of the rule. The proposing release explains that if the final requirements were to become effective sometime in calendar year 2014 – which is likely to be the case – a company with a fiscal year ending on December 31 would be first required to include pay ratio information relating to compensation for fiscal year 2015 in its proxy statement filed in 2016. This gives those companies a long transition period.

However, if the requirements were to become effective prior to July 1, 2014 – then companies with fiscal years beginning on – or after – July 1, 2014 would be required to include pay ratio disclosures for fiscal year 2014 in their proxy statements filed in 2015 for their 2015 annual meetings. They would not have the extra year’s worth of lag time.

The SEC can easily fix this problem by including a reference in the compliance provision to January 1st when it adopts final rules – which would in effect make the final rule effective for all companies for their 2016 annual meetings regardless of their fiscal year end…

– 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.