Last week, the Canadian Coalition for Good Governance (CCGG) updated its Executive Compensation Principles, whose 46 members manage nearly $2 trillion in assets on behalf of Canadian investors, to focus on approaches to aligning pay with performance as well as integrating “risk management functions into the executive compensation philosophy and structure.” The principles were last updated in ’09. Broadly, the document comprises six principles covering the following:
– A significant component of executive compensation should be “at risk” and based on performance;
– “Performance” should be based on key business metrics that are aligned with corporate strategy and the period during which risks are being assumed;
– Executives should build equity in the company to align their interests with those of shareholders;
– A company may choose to offer pensions, benefits and severance and change-of-control entitlements. When such perquisites are offered, the company should ensure that the benefit entitlements are not excessive;
– Compensation structure should be simple and easily understood by management, the board and shareholders; and
– Boards and shareholders should actively engage with each other and consider each other’s perspective on executive compensation matters.
There has been so much going on with the wave of “Say-on-Pay Litigation 2.0” (although the lawsuits are more than just say-on-pay related) that I have been tempted to blog about it daily (see this Mark Borges’ blog and this D&O Diary Blog – as well as this list of cases posted by Faruqi & Faruqi and our own list & memos in the “Executive Compensation Litigation Portal“).
But I have held off blogging because I knew you could tune in tomorrow for the comprehensive webcast – “The Litigation Explosion in Executive Compensation” – to hear Orrick Herrington’s Rick Gallagher, Simpson Thacher’s Joe McLaughlin and Paul Hastings’ Mark Poerio discuss what is involved in the rash of new executive compensation-related lawsuits, as well as how to handle them. Please print off these “Course Materials” in advance.
Just like ISS did during the end of December, Glass Lewis – via Equilar – seeks input from companies on the peer groups they should use by January 18th. Under new methodology used by Glass Lewis, peer groups are constructed using a “market-based” approach developed by Equilar that uses a company’s self-disclosed peers and the peers of those peers. Input should be provided using this online form…
The WSJ has been conducting this spot survey asking if the US should have binding shareholder votes on pay here in the US. So far the voting has been strongly in favor – over 80% with over 11,000 votes being cast…
In his blog, Ed Hauder of Exequity describes the new burn rate caps – and he includes this PowerPoint comparing the rates over the past five years. Here is an excerpt from the blog:
Interestingly, there are no instances for Russell 3000 GICS groups where the ISS 2 percentage point governor limited an increase/decrease from last year’s ISS burn rate caps. This is the first time since the governor was introduced that this happened. Note though that the governor did apply to a few Non-Russell 3000 company GICS groups.
Also, on an aggregate basis, the burn rate caps didn’t change all that much and remained flat (aggregate total -0.76% decline in burn rate caps for 2013 versus a 6.21% aggregate increase in 2012, a 29.74% aggregate increase in 2011, and a -15.53% aggregate decline in 2010).
If you were out during the last week or so, perhaps you missed my blog about ISS’ new sets of FAQs. In addition, here are some random articles about pay practices that came out:
And mark your calendar for next Wednesday’s webcast: “The Litigation Explosion in Executive Compensation.” As all memberships expired on December 31st, please renew now if you haven’t yet renewed your membership for CompensationStandards.com for ’13. The grace period for this site will end this Friday night- and you will need to renew to access this upcoming program.
Here is a note from Tamsin Sridhara of Towers Watson:
In recent years, the primary focus of European Union (EU) policy makers in terms of regulatory interventions on remuneration has been within the financial services sector. Currently, the European Parliament and European Council are negotiating the nature and scope of any maximum ratios relating to variable/fixed pay in financial services.
However, last week the focus shifted (temporarily) back to listed companies in general with the European Commission’s publication of its action plan for various corporate law and governance initiatives for EU member states. These initiatives are focused on enhanced transparency for shareholders (and other stakeholders), engaging shareholders and supporting business growth.
In line with these themes, the Commission’s proposals with respect to director remuneration are focused on:
– Ensuring consistent levels of disclosure across all member states on director remuneration policy and individual executives’ remuneration levels
– Giving shareholders in all member states a vote on director remuneration policy and/or the report (it is unclear whether this would be binding or not).
The Commission is due to publish detailed draft proposals in 2013. A current suggestion is that the vehicle for any new disclosure and shareholder voting requirements would be an updated version of the Shareholder Rights Directive. Any changes would need to go through the standard EU process — negotiated by the European Parliament and the European Council. This is when the diverse political agendas across Europe come into play and alternative proposals can be introduced. This process means that proposals are unlikely to be finalized until 2014.
Implications
For companies in European countries that already require detailed disclosure and shareholder votes on pay, there may be little impact. For companies in other EU countries, there will likely be ample time to prepare for the changes. Towers Watson will keep you informed of significant developments.
With Friday’s deadline looming for companies that want to provide input into the peer groups that ISS will consider when making its recommendations, Exequity’s Ed Hauder shares the email that ISS recently sent to companies explaining how they can provide this input. Remember the deadline for input is this Friday, the 21st!
Nasdaq has just filed an amendment to its proposed rules relating to compensation committee independence and consultants. The change addresses a troublesome timing problem with the original proposal.
Proposed Rule 5605(d)(3) states that a compensation committee must have the specific responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act relating to the retention, compensation, oversight and funding of compensation consultants, legal counsel and other compensation advisers, and is required to consider the six independence factors enumerated in Rule 10C-1(b)(4) before selecting, or receiving advice from, these advisers. Originally, these provisions – that is, requiring that the committee be granted the specific authority and responsibility referenced in Rule 5605(d)(3) — were to have become immediately effective upon approval of the Nasdaq proposal by the SEC, creating some implementation and coordination problems. Under the amended proposal, Rule 5605(d)(3) will become effective on July 1, 2013; by that date, the committee’s authority and responsibility under Rule 5605(d)(3) must be reflected in the committee charter, resolutions or other board action, as permitted by state law. (Ultimately, the authority and responsibility under Rule 5605(d)(3) must be included in the charter in accordance with the regular transition schedule for these rules.) In addition, under the amendment, Nasdaq proposes that companies comply with the remaining provisions of the amended listing rules by the earlier of (1) their first annual meeting after January 15, 2014 or (2) October 31, 2014. This revision is consistent with the NYSE proposal.
Also notable in the amendment is the express deletion of the word “independent” prior to “legal counsel” to make clear that only in-house counsel are excluded from the requirement to consider independence. In addition, the original proposal discussed the committee’s need to consider the six independence factors in “making an independence determination” regarding compensation consultants, legal counsel and other advisers. In the amendment, the concept of an “independence determination” has been deleted, with the reference now only to the need to consider the six factors before selecting, or receiving advice from, these advisers. The deletion may have been intended to emphasize that the committee “is not required to retain an independent compensation adviser.” The addition of the phrase “receiving advice from” makes clear that the analysis cannot be avoided simply by not “selecting” an advisor.
The amendment also proposes changes to the phase-in schedule for companies ceasing to be Smaller Reporting Companies, allowing these companies six months, in lieu of the originally proposed 30 days, to certify that they have adopted a formal compensation committee charter. These companies will also be permitted, under the amendment, to phase in fully compliant compensation committees.
The proposed form of compensation committee certification is now attached to the amendment to the proposal. The certification will be due 30 days after the final implementation deadline applicable to the company.
Meanwhile, Ning Chiu of Davis Polk analyzes the 15 comment letters submitted on the Nasdaq’s and NYSE’s proposals in this blog…