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
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
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!
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…
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.
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!
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).
Here’s news from Davis Polk’s Ning Chiu from this blog:
ISS received more than 500 responses on emerging issues that could make up its policy update for the 2014 season, with a total of 128 institutional investors and 350 corporate issuers. Over 90% of the issuers were based in the United States, compared to 66% of the investors.
Last year, ISS implemented a controversial policy that they will recommend against any board that fails to respond to a shareholder proposal that receives a majority of votes cast. Recognizing the flak that resulted, ISS included a question about the policy in this year’s survey. Only 36% of investors indicated that the board should implement specific actions, while 40% wanted the board to exercise its discretion freely. Another 24% of investors suggested it depended on the circumstances, including the level of shareholder support on the proposal. It is unclear whether these survey answers will change the policy.
Investors were more inclined to rally around concerns of director tenure, as more than 10 years would be deemed problematic by 74%, with concerns related to independence and limitations on the board’s ability to change its membership. Over half of investors encouraged rotation of key positions such as board chair, lead director and committee chairs.
Service on other public company boards is one way investors assess director performance, including positive factors such as a director’s breadth of experience and expertise, or negative aspects such as governance concerns at those other companies. Fifty-four percent of investors believe ISS should consider company performance, primarily TSR, when evaluating directors.
More than half of the investors indicated it would be appropriate for ISS to distinguish policies based on company size when it comes to equity compensation plans, but not as many investors supported differentiation for issues such as chair and CEO separation.
Performance conditions on equity awards in equity-based compensation plans seeking shareholder approval were considered very significant by 75% of investors if ISS moves to a holistic approach to equity plan evaluation, while the cost of the plan and other features such as vesting requirements were similarly viewed by a majority of investors.
For share authorizations, a large number of investors found the size of the requested increase, the ratio of outstanding compared to new potential shares and the use of the shares to be important. More than half indicated that a company’s governance structure was very important in these voting decisions.
The next step is for ISS to release draft policies for open comment, before issuing new policy updates in November.
Ahead of today’s webcast that will help you figure out how to do the math behind the SEC’s pay ratio proposals, take time to digest the numerous memos that I have posted – as well as this set of FAQs from this Davis Polk blog:
As companies begin digesting the SEC’s proposed pay ratio rule (which we discuss here) and analyzing its impact, here are answers to some frequently asked questions. Final rules may affect the responses.
Is there a safe harbor for the use of any particular method to identify the median employee?
No, the SEC specifically declined to establish any “safe harbor methodologies” or a “menu of alternatives” for determining the median employee.
Do the compensation measures used to identify the median employee need to meet any requirements?
The proposal requires the use of “any consistently applied compensation measure” and mentions several possibilities, such as total direct compensation (salary or wages and performance-based pay); annual cash compensation; or amounts reported in payroll or tax records such as W-2s. The compensation measure can be for a different time period than the company’s fiscal year.
How should different elements of compensation be calculated to arrive at the median employee’s total compensation?
The rule permits the use of “reasonable estimates” that are disclosed, and companies must have a “reasonable” basis to conclude that the estimate for any compensation component, or total compensation, approximates the actual amount of compensation. This includes benefits provided to non-U.S. employees that are not provided to U.S. employees. Personal benefits that are less than $10,000 in the aggregate may be excluded.
When can a full-time employee’s pay be annualized?
A full-time employee’s pay may, at the company’s option, be annualized if that employee did not work the entire fiscal year. This might apply to an employee who was hired during the course of the year, or who was on unpaid leave during part of the year.
When can a part-time employee’s pay be annualized?
A permanent part-time employee’s pay, may at the company’s option, be annualized if that employee only worked part of the fiscal year. However, companies cannot adjust the part-time schedule to a full-time equivalent schedule.
What other adjustments are not permitted?
Companies cannot annualize pay for temporary or seasonal employees or make cost-of-living adjustments for non-U.S. workers.
What if more than one CEO is reported in the summary compensation table?
As a technical matter, the proposed rule requires a ratio using “principal executive officer” as defined in Item 402(a)(3) of Regulation S-K, which could be more than one individual.
Are directors included as employees for purposes of calculating the ratio?
No, directors are not included. Neither are independent contractors or leased employees.
Can we disclose more than one pay ratio?
Yes. As with the non-GAAP disclosure rules, the required ratio must be the most prominent. Companies can disclose one or more other ratios as supplemental information if they are clearly identified and not misleading. For example, if the supplemental ratio excludes the effect of non-U.S. employees, it should be explained as such.