The Advisors' Blog

– Broc Romanek, CompensationStandards.com

With the Inauguration still fresh in our mind, it is interesting to read this article about the costs involved with a Presidency. Wouldn’t you love to see how this would look in a Summary Compensation Table? Hat tip to Chris Edwards of DLA Piper for pointing this out!

– Broc Romanek, CompensationStandards.com

Here is some follow-up on my blog about former Rep. Barney Frank’s fight against clawback insurance policies. In her article, Francine McKenna wades into the recent debate about the claws in clawbacks. And here is something that Bill Tysse of McGuireWoods blogged last year in his “Just Compensation” Blog:

This recent story in Insurance News reports that a major insurance firm, Marsh, is now offering protection to officers against potential clawback liability under Section 210 of the Dodd-Frank Act. Section 210 allows the FDIC to clawback compensation from officers and directors responsible for the failure of covered financial companies. The article mentions that Marsh is also considering extending the clawback protection coverage to Section 954 of Dodd-Frank, which requires all public companies to adopt a clawback policy covering erroneously paid compensation in the event of a financial restatement.

The enforceability of such protections may be in doubt. In a case of first impression last year, the Second Circuit Court of Appeals held that a company was prohibited from indemnifying an officer for clawback liability under Section 304 of the Sarbanes Oxley Act, a precursor to the Dodd Frank clawback provisions which only covers the CEO and CFO. If a company is prohibited from indemnifying an officer or director for such liability directly, then it may be unlikely a company could indemnify the officer or director indirectly through a D&O policy.

One member muses: Doesn’t this miss the points that (1) insurance has been treated differently that indemnification and (2) an approach may be for directors and officers to pay the premium associated with this portion of the insurance coverage as is now the case with D&O insurance?

– Broc Romanek, CompensationStandards.com

We have posted the transcript from our recent webcast: “The Latest Developments: Your Upcoming Proxy Disclosures–What You Need to Do Now!”

– Broc Romanek, CompensationStandards.com

Check out this piece by Steve Seelig of Towers Watson about the utility of changing your disclosures due to litigation worries…

– Broc Romanek, CompensationStandards.com

We have posted the transcript for our recent webcast:”The Litigation Explosion in Executive Compensation.”

– Mark Poerio, Paul Hastings

This posting on Harvard Law’s “Corporate Governance Blog” describes a new “Say Before Pay” law that took effect in Israel about a month ago. The authors advised the Justice Department’s committee that formulated Israel’s executive compensation reform. Although not going so far as to require binding say on pay, Israel has injected a twist in that the shareholder advisory vote on executive compensation – and CEO employment agreements – must occur before they become final. As described in the blog, Israel’s law reflects US and UK rules relating to compensation committee independence, as well as policies favoring clawbacks and long-term performance-based compensation that takes risk into consideration. These practices are consistently being endorsed as executive compensation controls continue to go global . . . with all trending toward more and more shareholder empowerment.

– Broc Romanek, CompensationStandards.com

We are excited to announce that we have just posted the registration information for our popular conferences – “Tackling Your 2014 Compensation Disclosures: The Proxy Disclosure Conference” & “Say-on-Pay Workshop: 10th Annual Executive Compensation Conference” – to be held September 23-24th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas for the Conferences.

Early Bird Rates – Act by March 8th: Huge changes are afoot for executive compensation practices and the related disclosures – that will impact every public company. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by March 8th to take advantage of the 33% discount.

– Brink Dickerson, Troutman Sanders

I recommend that when companies revise their compensation committee charters to reflect the new NYSE and Nasdaq rules that they also consider updating their charters in other regards as well. Troutman recently reviewed the compensation committee charters for the S&P 100 and was surprised at how many of them were out of date. The focus of the review was to assess how deep within an organization compensation committees approve compensation levels.

A large plurality, but not a majority, provide for committee approval of the compensation of “executive officers.” A surprisingly large number tie approval to Section 16 “officers,” which is not a definition generally used in the compensation context, or various ill-defined groups such as “executive management” or “senior executives.” A significant number require full board approval of compensation, which also is surprising given board fatigue at many companies that large.

The important takeaway, however, is that the discussions of the roles of compensation committees in many companies’ CD&As do not reflect the authority that they have and supposedly are to exercise under their charters. Some over-state it; others under-state it; some do so significantly. Also, a solid majority of the charters do not reflect some of the responsibilities that the compensation committees have been charged with post-SOX, including administering stock ownership guidelines, making claw-back decisions, and assessing the risk aspects of compensation programs.

As a litigation risk minimizer, I recommend that compensation committee charters should clearly delineate which officers must have their compensation approved by the compensation committee – and I suggest “executive officers” as defined in Rule 3b-7, other officers that report directly to the CEO, and such other employees as are identified by the compensation committee in a resolution – and otherwise delegate to management the establishment of compensation to the extent delegable under the applicable plans. I also recommend that compensation committee charters be updated to otherwise reflect current practices and responsibilities.

– Subodh Mishra, ISS Governance Exchange

Britain’s High Pay Centre is warning companies against the failure to link “at least half the performance pay of top executives to broad measures of success,” suggesting British businesses risk losing out to foreign rivals using such incentive models. The center, a non-partisan think tank established in the wake of the financial crisis to “monitor pay at the top of the income distribution,” said in a Jan. 14 report that executive pay packages across the largest 100 U.K. companies are “overwhelmingly” linked to short-term financial measures of corporate performance such as earnings and share price movement. As a result, the center argues, executives are “encouraged to focus on short-termism, cost cutting and the need for quick returns.”

The group notes that CEO pay has tripled to 4.8 million pounds in 10 years “without any accompanying long-term increase in share values.” “British business will erode its competitive edge even further if it doesn’t start looking beyond share prices and reward executives for their success in fundamental areas of non-financial performance,” said High Pay Centre Director Deborah Hargreaves in a Jan. 14 statement. “We’ve got to start taking a longer term view and that means persuading business that performance in areas like corporate social responsibility, employee engagement and customer satisfaction rates are the key to lasting business success.”

The report finds that total shareholder return (TSR) is used to calculate at least one element of performance-related pay at 74 of the largest 100 U.K. companies, with 96 companies using either TSR or earnings per-share (EPS), or a combination of both to determine performance for their chief executives’ long-term incentive plan. Most companies, the center argues, pay little or no regard to the long-term benefits of non-financial performance across areas like employee engagement, corporate social responsibility and customer satisfaction.

In addition to calling on businesses to link at least half of chief executives’ performance related pay to non-financial yardsticks, the High Pay Centre said it is seeking the introduction of mandatory reporting on social and environmental performance and a new tax and procurement incentives “to encourage companies to focus on wider measures of performance.”

The group also wants requirements for pension fund trustees, investment managers and commercial pension providers to take into account the social/environmental impact of their investments on beneficiaries and for employee representation on company boards “to challenge decisions based on short-term financial considerations that may jeopardise the company in the long-term.”

The High Pay Centre says longer-term institutional shareholders like the Association of British Insurers “support broader measures” of executive performance and says leading businesses like BP, Barclays and HSBC, who have suffered reputational damage, “have gone further than others to link top pay to non-financial measures of success.”

– Broc Romanek, CompensationStandards.com

Towers Watson has updated its “CD&A Scorecard” for this year…