Executive compensation is again the top area of focus for governance stakeholders globally, according to results from ISS’ recently concluded voting policy survey for 2013. Investor respondents collectively cite the issue of executive compensation as the top governance topic for the coming year, while issuer respondents also cited executive compensation as their top concern in North America and Europe, and as the second most important topic in both the Asia-Pacific region and in developing markets.
More than 370 total responses were received for this year’s survey of global governance practices. A total of 97 institutional investors responded. Approximately 71 percent of investor respondents were located in the United States, with the remainder divided between U.K., Europe, Canada, and Asia-Pacific. In addition, 273 corporate issuers responded, with 79 percent of them located in the United States and the remainder divided between U.K., Europe, and Canada.
Peer Groups
While ISS’ selection of peer groups for analysis of executive compensation invoked divergent views from investors and issuers, both agree that size matters when selecting peers. Eighty-four percent of investors and 74 percent of issuers indicated that an ISS-selected peer being within a specified size range of the target company (e.g., between 0.5 and 2 times the company’s revenue) is a “very” or “somewhat” relevant factor in selecting peers for a pay-for-performance comparison group.
Both the majority of investors and issuers also agreed that the target company’s size should be near the median of the selected peers (75 percent and 64 percent, respectively); the ISS-selected peer within the same GICS group as one or more of the target company’s published peers (79 percent and 51 percent, respectively); and the ISS-selected peer has chosen the target company as a peer (67 percent and 56 percent, respectively) as “somewhat” relevant or neutral factors.
It appears, however, that the ISS-selected peer being included in the target company’s published peer group(s) is only “somewhat” relevant or neutral in selecting peers for a pay-for-performance comparison group for 64 percent of investors while it is the “most” relevant factor for the majority of issuers (65 percent). Moreover, 74 percent of investors indicated the ISS-selected peer being in the same GICS group as the target company as a “very” or “somewhat” relevant factor, while 55 percent of issuers indicated that factor to be “somewhat” relevant or neutral.
A two-thirds majority of investor respondents said that ISS should continue to create its own peer group and provide the company’s peer group as an alternative view. For issuers, the responses varied with the most common response suggesting ISS use the company’s peer group without exception.
Measuring Pay
Investors are very likely to consider performance metrics other than total shareholder return when evaluating say-on-pay proposals. With respect to ISS’ pay-for-performance methodology, a slight majority (52 percent) of investor respondents indicated that they would be “very likely” to consider metrics other than total shareholder return as a factor when evaluating say-on-pay proposals. Common suggestions for such metrics included EPS and revenues as the alternative metrics.
Standardized calculations of realized/realizable pay or measures of such pay provided by the company are favored by both issuers and investors. One-half of investor respondents indicated that they would consider both granted and realized/realizable pay as an appropriate way to measure and analyze executive pay.
The other half of investor responses varied among other perspectives with 25 percent indicating that ISS should use granted pay in a quantitative evaluation but consider realized/realizable pay in a qualitative evaluation to determine overall pay-for-performance. For issuers, responses varied, with the least popular perspective to focus on “granted pay” (primarily cash and the grant-date value of equity awards).
A majority of investors indicated that both a standardized calculation of realized/realizable pay and measures of realized or realizable pay as provided by the company are appropriate ways to consider such pay in a pay-for-performance evaluation. Issuer responses varied, with 36 percent citing a standardized calculation of realized/realizable pay and 29 percent citing measures of realized or realizable pay as provided by the company as the appropriate way to consider such pay.
Pay for Failure
Regarding pay-for-failure scenarios, cash severance exceeding three times base salary and target bonus and new severance agreements entered immediately prior to a CEO’s departure are considered problematic: both issuers and investors agree. Over 80 percent of investor respondents consider all of the following actions as problematic in a scenario where a CEO receives a sizable termination package concurrent to significantly lagging shareholder returns: a severance settlement when the executive is slated to be retiring or resigning, immediate acceleration of all unvested equity upon termination without cause, cash severance exceeding three times base salary and target bonus, a new severance agreement entered into immediately prior to departure, and large pension/SERP payouts.
A majority of issuer respondents, on the other hand, do not consider any of these actions to be problematic with the exception of cash severance exceeding three times base salary and target bonus and a new severance agreement entered immediately prior to departure.
Canada
Guaranteed pay elicits mixed views among investors with respect to voting against the management say-on-pay proposal. Investor respondent views were split with 51 percent indicating that any form of guaranteed pay set out in employment agreements should not trigger a vote against a voluntarily adopted advisory vote on executive compensation, while 49 percent indicated that it should trigger a vote against the proposal.
Factors that received a majority response as warranting a vote against the proposal include an unreasonable payout range for incentive compensation (i.e., where the range does not start at zero for no achievement to an upper payout potential of 400-500 percent generally of base salary), lack of any performance based long-term incentive compensation, interest-free or forgivable loans to executives to exercise options or purchase shares, and a single trigger change in control provision in an employment agreement.
Europe
Investors and issuers generally support deferred bonus shares. Many European banks have been required to adjust their compensation practices in light of a new EU-level directive on remuneration at financial institutions. The most significant resulting trend has been a movement away from the traditional short-term/long-term variable pay mix and toward a deferred bonus model, in which all variable pay is measured based on performance in a single year and then deferred for a multi-year period. Oftentimes, the deferred pay is converted into share units and settled in shares.
A significant majority of both investor and issuer respondents, 69 percent and 78 percent, respectively, indicated that they would either generally support time-vesting deferred bonus shares or support them as long as clawback features are present. Most investors (49 percent) indicated that they would generally support these types of bonus shares as long as clawback features are present. By comparison, most issuers (50 percent) would generally support them outright.
Much discussion here at our Conferences about the role of proxy solicitors during the say-on-pay process. Here are the survey results on the use of proxy solicitors that I recently blogged on TheCorporateCounsel.net. Some interesting stats related to say-on-pay…
Last week, ISS posted the results from its policy survey – 370 responses were received. Not surprising, executive compensation is the top area of focus across the globe. A summary of ISS’s summary is in this Davis Polk blog. As noted during our Conferences, we should expect draft policies on Monday from ISS, available for comment…
Here is the video archive from yesterday’s “The Say-on-Pay Workshop: 9th Annual Executive Compensation Conference.”
Today is the “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference”; yesterday was the “7th Annual Proxy Disclosure Conference” – and the video archive of that Conference is already posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s Conference Agenda; times are Central.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list for each Conference in the FAQs.
Today is the “Tackling Your 2013 Compensation Disclosures: 7th Annual Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s Conference Agenda; times are Central.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list for each Conference in the FAQs.
Mark Poerio of Paul Hastings reports: Last week, the application of Delaware law principles has led courts in Colorado (Janus Capital), North Carolina (Dex One), and California (Hewlett-Packard) to dismiss shareholder challenges based on alleged disconnects between pay and performance, failed say-on-pay votes, and alleged waste through payment of $53 million of severance. In each case, the underlying complaints failed to excuse a pre-suit demand because none of the allegations created a reasonable doubt that the questioned transaction was entitled to protection under the business judgment rule.
Here’s news from Kyoko Takahashi Lin and Ning Chiu in this Davis Polk blog:
The NYSE has published an updated rule filing submitted to the SEC on the recent proposed listing standards related to compensation committees. The rule filing notes that “Amendment No. 1 corrects a single error in the rule text in Exhibit 5 as originally filed. The error was in Section 303A.00 under the heading ‘Transition Periods for Compensation Committee Requirements.'”
To be clear, listed companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new director independence standards with respect to compensation committees. Other proposed changes, including those related to compensation committee advisers, will become operative on July 1, 2013.
For the many of you that have registered for our Conferences coming up in less than one week, we have posted the Course Materials (attendees received a special ID/PW yesterday via email that will enable you to access them; but copies will be available in New Orleans). The Course Materials are better than ever before – with over 40 sets of talking points comprising 160 pages of practical guidance. We don’t serve typical conference fare (ie. voluminous memos and rule releases); our conference materials consist of practical bullets and examples. Our expert speakers certainly have gone the extra mile this year!
For those seeking CLE credit, here’s a list of states in which credit is available for watching the Conferences live in New Orleans and by video webcast. And for those attending by watching video online, you can test your access now.
Act Now: As happens so often, there is now a mad rush for folks to register for these Conferences that begin next Monday, October 8th. With an aggregate of over 50 panels (including the “20th Annual NASPP Conference”), if these Conferences don’t help get you prepared for the upcoming proxy season, nothing will. You can either register for the three days of the “20th Annual NASPP Conference” (in New Orleans) – or the two days of the “7th Annual Proxy Disclosure Conference” & “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” (in New Orleans or by video webcast, or a combination of both). Register Now.
– Daniel Smith and Michael Chandler, ISS’ Australia & New Zealand Research
The 2012 proxy season marks the second year under Australia’s controversial “two strikes” law. As investors, boards, executives, and the broader public gear up for an intense debate over the appropriateness of executive pay practices in the market, now is a good time to review the legislation and implications of a second strike. The two strikes regime, introduced through the Corporations Amendment (Improving Accountability and Executive Remuneration) Act 2011, went into effect on July 1, 2011. Shareholders should note the following mechanics of the law:
– A company will incur a first “strike” if it records at least 25 percent “against” votes on the resolution to approve the remuneration report at the annual general meeting (AGM).
– If the company receives at least 25 percent “against” votes on the remuneration report at the subsequent AGM, the company will incur a second “strike.”
– If the company records a second “strike,” shareholders must also vote on a “spill resolution” to determine whether a general meeting should be called to consider the election of certain directors on the board (“spill meeting”).
– If 50 percent of votes cast on the “spill resolution” are in favor, then the company must call a spill meeting to be held within 90 days of the second AGM.
– In this case, all directors, aside from the managing director, who were directors at the time “when the resolution to make the directors’ report [which contains the remuneration report] considered at the second AGM was passed” will cease to hold office before the end of the spill meeting, unless the director is reelected at the spill meeting.
– In order to prevent a complete board spill in the event no directors are reelected at the spill meeting, at least three directors will remain on the board after the spill meeting: the managing director, and the two directors who received the highest percentage of “for” votes on their reelection.
Companies that have already recorded a first strike in 2011 are required to detail in the notice of meeting for their 2012 AGM the implications that will arise from losing most board directors. These companies are also required to highlight the degree of uncertainty that results from a spill meeting, irrespective of whether those directors are to be replaced. There are currently 23 companies within the S&P/ASX 300 index that are facing a potential second strike and subsequent board spill meeting in 2012.
With the two strikes law raising the stakes, many shareholders are prepared to put more pressure on boards. According to an August 2012 study jointly conducted by the Melbourne Institute and Global Proxy Solicitation, just over half of respondents indicated that they would be more likely to vote against remuneration proposals if their company had already received a first strike at the 2011 AGM.
Earlier this year, as heat of summer gave way to the cooler air of autumn, a flurry of equity raisings at blue chip companies left a number of Australian investors feeling like they were left blowing in the wind. The tone was set with QBE Insurance’s (QBE) A$450 million placement, completed in February 2012, and reinforced with Bank of Queensland’s (BOQ) A$150 million placement, announced in March 2012. In neither placement were existing shareholders able to participate to avoid dilution to their equity position, and both placements raised shares at a discount to the then-current market price: QBE’s was at 4.9 percent, and BOQ’s was at 17.1 percent.
At the same time, both institutions combined these placements with raisings in which existing shareholders could participate. QBE raised an additional A$150 million through a share purchase plan; BOQ also brought in A$150 million, through a pro-rata entitlement offer. This apparently was not enough to assuage some investors, who believed there was plenty of demand by shareholders already on the company register to meet these institutions’ capital needs.
What You Need to Do Now: These soon-to-be-adopted new rules will be a hot topic during our “7th Annual Proxy Disclosure Conference”” (and the combined “Say-on-Pay Workshop”) coming up in just over a week – October 8-9th in New Orleans and via Live Nationwide Video Webcast. If you haven’t been to our Conferences before, give it a try – particularly this year when New Orleans needs the tourism dollars. Here are the agendas for the combined conferences. Register Now.