As noted in its Form 8-K, Cogent Communications Group is the 7th company holding an annual meeting in 2013 to fail to gain majority support for its say-on-pay (40% support). Cogent also failed in 2011, with 39% support. That makes them the first company to fail, pass (68% in ’12), then fail again. Hat tip to Karla Bos of ING Funds for pointing this out!
In this podcast, Mike Melbinger of Winston & Strawn discusses the risks of not separating your 401(k) summary plan description from the prospectus, including:
– I have seen you blog on this issue of securities law liability and 401(k) Plan summary plan descriptions, but as a compensation and securities lawyer, what exactly is the issue we need to worry about?
– So what should companies do now?
– I have run this poll on the topic – but what are you seeing – are companies moving to separate the SPD from the prospectus?
I’ve been posting memos & articles about proxy season results. Here’s analysis from Davis Polk’s Ning Chiu from this blog:
According to the latest Semler Brossy report, only three Russell 3000 companies (Nuance Communications, Digital Generation and Navistar) have failed their say-on-pay vote, with Navistar receiving only a startling 18% in favor. ISS has been recommending against companies about 9% of the time, and companies facing ISS opposition received 24% less support on average. Interestingly, ISS continues to reverse unfavorable recommendations. It did so for 17% of companies in 2012 and most recently for both Hewlett-Packard and Kaman Corp., after the company removed excise tax gross-ups from an executive’s renewed change-in-control agreement.
In a recent analysis, the consulting firm discussed why a company may encounter a significant reduction in votes from one year to next. While only a small number of companies see a truly meaningful reversal, the firm urges that “the low frequency of this event belies the significant risk companies may face if they become complacent in their approach…Garnering strong support in one year is certainly no guarantee for future Say on Pay success and no company is necessarily immune from such a reversal of fortunes.” It concluded that when a company’s TSR performance declined and pay was not adjusted accordingly, the more thorough qualitative review ISS conducted once companies failed the first quantitative review identified problematic practices that were probably in existence in prior years. Companies may be “caught off-guard,” and therefore unprepared to respond, since those same practices that may never have even been mentioned in prior ISS voting reports were suddenly cited as the reasons that investors should vote against the proposal. Semler Brossy recommends being prepared, including “preemptive conversations” with the proxy advisers rather than making supplemental filings after-the-fact.
In our view, this reflects the need for companies to understand, as outlined in the somewhat dense ISS white paper on their say-on-pay analysis, that an initial quantitative screen by ISS represents exactly what it sounds like: a test of a few numerical-based factors focused on the size of the overall compensation paid and the company’s TSR performance, relative to peers. A more holistic approach, the so-called qualitative review, to the company’s compensation program is not undertaken unless ISS believes that the initial test reflects a “misalignment” between pay and performance. In other words, a favorable recommendation by ISS in any one year is not a wholesale endorsement of the company’s compensation structure, and in fact, ISS may have many issues with those practices if it actually has to get to the next step of examining them.
ISS Governance QuickScore, which is designed to identify governance risk, replaced the GRId database on February 25th. With the first wave of QuickScore results now out, ClearBridge Compensation Group conducted an analysis of these results as well as the prior proxy season’s say-on-pay vote recommendations and vote results. Key findings include:
– Of the four governance pillars, Compensation is the most highly correlated with the Overall QuickScore, by a significant margin
– While QuickScore is not a direct input to ISS’ Say on Pay evaluation process, Compensation QuickScores demonstrate a strong link with ISS’ Say on Pay vote recommendations
– 97% of companies that scored a “6” or better on Compensation QuickScore received a “for” vote recommendation in 2012
– 71% of companies that scored a “10” on Compensation QuickScore received an “against” vote recommendation in 2012
– ISS has significant influence on the vote outcome. When ClearBridge 100 companies received an “against” recommendation from ISS on Say on Pay, median Say on Pay vote results were only 59%, vs. 95% when ISS recommended “for” Say on Pay
Marking a first for the market, roughly 64 percent of shareholders in Zurich-based Julius Baer voted against management’s non-binding say-on pay resolution at an April 10 annual meeting, Reuters reported. The vote follows a March referendum that will usher in sweeping changes in investor oversight of executive remuneration for all Swiss companies, and reflects continued concerns over pay, particularly among financial services firms. (Credit Suisse will hold its meeting April 26, while UBS shareholders are slated to convene on May 2.)
Concerns over pay at Julius Baer, a private bank catering principally to individuals and families, were notable, touching on the lack of a ceiling on variable pay, equity awards vesting in under three years, and a lack of disclosure on remuneration arrangements such as severance pay. Responding to the vote, the group said in a statement it “will take the appropriate measures to work towards a positive vote at the next [annual meeting].”
Meanwhile, shareholders of multinational foods group Nestle meeting in Lausanne April 11 gave majority backing to management’s advisory pay vote, though exact figures were not disclosed. Addressing attendees on the implication of the pay reforms adopted in the March referendum, Nestle Chairman Peter Brabeck-Letmathe warned that “the political and regulatory environment for publicly listed companies is becoming more difficult in this country” though added the company wants to stay in Switzerland.
Separately, the Financial Times reported this week that the head of Austria’s second-largest bank by assets, Raiffeisen Bank International, told employees he would return Euro 2 million of his roughly Euro 5 million 2012 pay package, saying that executive remuneration could sometimes “turn out to be too high.” In an email to staff, Herbert Stepic said he was taking the action because the size of his payout was “neither in accord with my own self-conception nor with the Raiffeisen banking group’s foundation of values,” adding it was his contribution to cost-savings initiatives being undertaken by the bank.
This Skadden alert describes a new proposed IRS regulation providing guidance on the $500,000 deduction limit for compensation paid by certain health insurance companies to their employees – and analyzes its complexity. This will be a difficult provision as it has none of the exceptions of Section 162(m) as we know it – plus, you would be surprised at how many companies get brought into the definition of “health insurance provider” because of some entity in their controlled group.
The WSJ’s Emily Chasan recently wrote this article:
With the Standard & Poor’s 500-stock index striking a fresh record high Thursday, many executives who were issued stock options during the financial-crisis era could stand to take home substantially more money than expected when the options were granted.
In a study on Thursday of realizable pay figures, or the amount of compensation an executive could have taken home in a given year, compensation researcher Equilar found that at 20 companies with the highest realizable pay figures last year, 26.5% of executives’ pay stemmed from 2010 equity awards. By comparison, strong stock market performance in 2012 depressed the value of most recent stock option grants, which only comprised 15.5% of the executives’ realizable pay.
“Because the stock market was so low in 2010, a lot of companies were giving their executives greater numbers of options,” said Aaron Boyd, director of research at Equilar. “For many companies, the current value of the awards is a lot higher than what was originally estimated, since a lot of the estimations were based on slower growth estimates.”
Over the past few years, companies have increasingly looked to emphasize realizable pay, which includes stock option and equity grants that have vested, but may or may not have been cashed in. That differs from the compensation figures required by the U.S. Securities and Exchange Commission, which focus on the potential value of an equity grant on the date it is given. Realizable pay typically trails that figure when stock performance is negative, but can often exceed it when stock performance is positive, according to Equilar.
Of the 20 companies where executives had the highest amount of realizable pay in 2012, 16 reported double-digit total shareholder returns that year.
Here is a blog by the team at Katten Muchin who worked at getting a say-on-pay case that was filed against AAR Corp. in Northern Illinois dismissed last week. In this blog, Jim Barrall parses the decision – and here is Wachtell Lipton’s analysis.