The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s a piece from Pay Governance that discusses how say-on-pay has led many companies to homogenize certain elements of their pay programs.

– Broc Romanek, CompensationStandards.com

There have been several more failures during the past week, including:

– Abercrombie & Fitch – Form 8-K (19% – also failed 2012 with 25%)
– Discovery Laboratories – Form 8-K (42%)
– Morgans Hotel Group – Form 8-K (25%)

It is noteworthy that at this time last year, there were 54 failed say-on-pay votes…

– Broc Romanek, CompensationStandards.com

Tune in tomorrow for the webcast – “Law Firms & Independence: What to Do Now” – as law firms – and their compensation committee clients – are scrambling to comply with the new rules regarding independence for consultants. Hear from Troutman Sanders’ Brink Dickerson; Gibson Dunn’s Ron Mueller; Bryan Cave’s Randy Wang and Skadden’s Joe Yaffe.

– Broc Romanek, CompensationStandards.com

Yesterday, Cooley’s Cydney Posner posted this news brief:

You might remember the as-yet-to be-implemented-by-the-SEC provision of Dodd-Frank (Section 953) that required disclosure regarding internal pay equity? In that provision, Dodd-Frank required the SEC to amend Item 402 of Reg S-K to require each company to disclose, in a wide range of its SEC filings, including registration statements, annual reports and proxy statements:

– the median of the annual total compensation of all employees of the company, except the CEO;
– the annual total compensation of the CEO; and
– the ratio of the two amounts above.

Under Section 953, total compensation must be determined in accordance with Item 402(c)(2)(x) of Reg S-K (that is, the provision governing the disclosure of “total compensation” in the Summary Compensation Table). There are numerous components of compensation in the SCT, including salary, bonus, stock awards, option awards, non-equity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings and all other compensation. Needless to say, the calculation of these components just for the five NEOs currently required to be reported in the SCT can be very complex. As a result, there was substantial concern regarding the burden on companies of collecting and analyzing this data for all employees, especially for those companies with hundreds of thousands of employees located all over the world.

Today, the Wall Street Journal is reporting that the House Committee on Financial Services has advanced a bill, H.R. 1135, that seeks to repeal the pay-ratio disclosure requirement. The vote was 36-21, and the bill will now head toward a floor vote in the House.

According to the WSJ, “Rep. Bill Huizenga (R., Mich.), who sponsored the bill, said the provision would be ‘a logistical nightmare for all public companies,’ because they would have to calculate pay for all employees in the manner they currently do for their top five executives and disclose it in every SEC filing. Companies have complained it would be costly to accurately report the compensation of their median employee, amid concerns about how to calculate part-time employees, overtime, benefits, 401(k) matches and differences in the way employees are compensated overseas.”

The WSJ reports that, because the provision had no specific time limit for implementation, the SEC has delayed rulemaking, in part reflecting concerns on the part of some Commissioners: “SEC Commissioner Troy Paredes, for example, said last year that he was concerned the bill would not be ‘workable in practice’ because employee pay data is not often standardized….Chairman of the House Financial Services Committee Rep. Jeb Hensarling (R., Texas) said he didn’t believe investors needed this type of ratio to be disclosed and that the cost of regularly calculating compensation for every employee outweighs the benefits…. ‘I assume there is an infinite number of ratios some investors would find helpful to their decisions….’ Companies might as well be required to calculate the ratio of workers with or without college degrees, the ratio of old versus young workers, or the ratio of office supplies purchased from big box retailers to local suppliers, he joked.”

House Financial Services Committee Ranking Member Maxine Waters (D., Calif.), is reported to have sought, unsuccessfully, “to amend the proposal to require only annual disclosure, limit it to domestic employees and give the SEC more discretion in how it sets the rule.” According to the WSJ, she was concerned a repeal would simply allow “companies to hide embarrassing information.”

Although the bill seems likely to pass in the House, it could face a much tougher battle in the Senate.

– Broc Romanek, CompensationStandards.com

As noted in this WSJ article, a shareholder lawsuit challenging a $120 million stock award to Simon Property Group’s CEO David Simon was given a green light recently to proceed to trial in the Delaware Chancery Court. Due primarily to the stock grant, the CEO was the 2nd highest paid US executive in 2011. Grant & Eisenhofer filed the suit against Simon and its board on behalf of the Louisiana Municipal Employees’ Retirement System (LAMPERS). The company failed its say-on-pay vote last year, but passed this year.

As reflected in this hearing transcript, Chancellor Leo Strine allowed Simon shareholders to bring evidence that the company’s board rubber-stamped the pay package in 2011 without first putting the matter to a shareholder vote – as allegedly required by NYSE rules when compensation plans undergo a material change. Through this motion to dismiss, Simon sought to have the suit thrown out but Chancellor Strine ruled otherwise, questioning the process that the company undertook. The pleadings for this case – including the complaint – are posted in our “Compensation Litigation Portal.”

– Broc Romanek, CompensationStandards.com

In this letter, the National Association of Pension Funds – the UK equivalent of CII – called for executive pay salary increases “to be capped at inflation and in line with the rest of the work force.” Variable pay performance conditions “should be genuinely stretching and support the long-term growth of the business,” said NAPF, which also noted concern that some “stretch” goals lead to overly-short-term behavior. NAPF criticized over-emphasis on peer benchmarking: “We are often told that each company is unique; as such we would like to see boards reflect more upon the drivers needed to enact their own individual strategies and less comparing themselves against their ‘peers’.”

In February, NAPF and Hermes Equity Ownership Services published a paper that included principles for alignment of executive pay with long-term performance.

– Broc Romanek, CompensationStandards.com

In this blog, Kevin LaCroix gives a nice recap of the status of say-on-pay litigation, as covered by this Haynes and Boone memo…

Note that the NASPP Conference will include a panel – “Stock Plan Proposal & Say-on-Pay Litigation 2.0: How to Avoid the Sharks” – that features both the plaintiff’s lawyer who has brought the most lawsuits over proxy disclosures and stock plan proposals (Juan Monteverde of Faruqi & Faruqi) and the leading experts involved in defending these suits.

– Broc Romanek, CompensationStandards.com

Georgeson recently emailed out this information:

Glass Lewis
Glass Lewis partners with compensation data provider, Equilar, which generates Equilar Market Peers that are subsequently used to prepare Glass Lewis’ pay-for-performance quantitative analysis. Starting May 27, 2013, companies in the Russell 3000 Index can submit their peer groups on Equilar’s website. The deadline for updating your peer group for meetings scheduled for July through December 2013 is June 28.

Going forward, Equilar expects to update the peer groups it prepares for Glass Lewis, with company input, semi-annually in July and January.

Institutional Shareholder Services (ISS)
We understand that ISS will reach out in July to companies in the Russell 3000 (as of June 30) with meetings in the fall of 2013 or the early winter of 2014 and ask if they have changed their peer group since their last proxy disclosure. ISS will update those companies’ peer groups in the July-August timeframe. The timing of any future ISS peer group updates has not yet been determined, but will be considered as part of ISS’s annual policy update process. Companies should remain alert to communications from ISS regarding any peer group update opportunities.

– Broc Romanek, CompensationStandards.com

There have been many more failures during the past few days, including one more that failed three years in a row! At three-peater Nabor Industries, two comp committee members failed to receive majority support and tendered their resignations, which were not accepted by the board – and as noted in this WSJ article, the company engaged in some shady vote counting on its proxy access proposal. Wow…:

– Sonus Networks – Form 8-K (49%)
– Consolidated Water – Form 8-K (49%)
– Vocus Form 8-K (45%)
– Lifepoint Hospitals – Form 8-K (43%)
– Spansion – Form 8-K (49%)
– Nabors Industries – Form 8-K (33%; also failed in 2012 with 25% and in 2011 with 42%)
– OpenTable – Form 8-K (47%)
– FTI Consulting – Form 8-K (41%)

Thanks to Karla Bos of ING for the heads up on these!

– Subodh Mishra, ISS Governance Exchange

Britain’s 2012 annual meeting season, when a wave of investor protest votes on directors’ remuneration swept through U.K. boardrooms, was in the estimation of some a non-event, with dissent levels largely reflecting that evidenced in past years and just four large capital companies seeing majority opposition. For example, an ISS analysis of U.K. remuneration report voting in 2009 found the same number of failed votes–four–and average dissent levels just 0.5 percentage points less than the 10.9 percent evidenced at 216 FTSE 250 companies in 2012.

Still, the impact of what the media dubbed Britain’s “shareholder spring” has been far more profound, lending cover to the government of Prime Minister David Cameron’s plan to introduce binding pay votes for U.K. companies and, arguably, paving the way for tougher pay curbs in continental Europe in the succeeding months. In light of direct and tangential consequences of last year’s voting, a recent paper explores the state of voting on U.K. director pay vis-a-vis that of 2012 to identify trends in support and dissent by company size and business. Key findings include:

– The 2013 U.K. annual meeting season has been far quieter than last year, with most companies seeing gains in shareholder support levels for their remuneration reports over 2012, the year of the so-called “shareholder spring.”
– Fifty-six percent of companies studied this year saw remuneration report support levels rise from 2012.
– While support levels rose for FTSE 100 companies by 2.4 percentage points, they nudged up by a more modest 0.4 points for FTSE 250 firms.
– By sector, Energy companies, including Cairn Energy, Tullow Oil, and BP, saw the greatest gains in overall support levels compared with 2012 at seven percentage points.
– Meanwhile, Materials firms, such as Lonmin, Anglo American, and Glencore International, saw the largest overall decline in average support tallying 1.7 points.
– The U.K.’s Information Technology sector has seen the highest level of support from shareholders on pay practices thus far in 2013 at 93.6 percent on average.
– At the other end, Materials companies netted just 90.3 percent average support.
– Companies seeking to boost support from 2012 have taken to reforming service contract agreements, improving disclosures, addressing concerns over pension benefits, and other steps to successfully mitigate concerns evidenced last year.

The paper also provides a high-level look at how and why some companies fared better this year compared with 2012.