The Advisors' Blog

– Broc Romanek, CompensationStandards.com

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…

– Broc Romanek, CompensationStandards.com

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).

– Broc Romanek, CompensationStandards.com

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:

– Bloomberg’s “Bonus Disclosures Risk Backfiring by Boosting Pay Demands”

– New York Magazine’s ” Europe’s Bizarre Bonus-Capping Plan”

– Reuter’s “The lavish and leveraged life of Aubrey McClendon”

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.

– Broc Romanek, CompensationStandards.com

Last Thursday, ISS updated its Compensation FAQs and Non-Compensation FAQs relating to its proxy voting policies issued last month. ISS separately had issued Peer Group FAQs a few weeks ago. We are posting memos regarding these FAQs in our “ISS Policies & Ratings” Practice Area.

– Broc Romanek, CompensationStandards.com

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.

– Broc Romanek, CompensationStandards.com

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!

– Broc Romanek, CompensationStandards.com

Cooley’s Cydney Posner gives us this news brief (and here’s a Davis Polk blog on this):

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…

– Subodh Mishra, ISS’ Governance Exchange

Shareholder proposal filings related to compensation in 2013 will be a mix of old and new, covering issues ranging from stock retention for executives to peer group selection determining CEO pay. Pay-related resolutions will be filed principally by labor and retail investors, as has been the case in the recent years, and the volume of such filings is expected to easily eclipse that seen in 2011 and 2012, while approaching that for 2010, the last year in which investors filed proposals calling for say-on-pay.

Stock Retention
Proposals calling on executives to retain a significant portion of their equity awards until reaching retirement age will likely be more prevalent in 2013 than in 2012, when roughly two dozen came to a vote. Retail shareholder activists tell us they will file more such proposals next year, while labor funds, such as the AFL-CIO, confirm they have already submitted the proposals for 2013 with potentially more to come.

Stock retention proposal proponents typically call on the compensation committee to adopt a policy requiring that senior executives retain a “significant” percentage of equity awards until reaching normal retirement age, with a recommendation that the committee adopt a share retention percentage requirement of at least 75 percent of net after-tax shares. Advocates suggest such policies will better align the interests of executives with those of shareholders and typically target companies with weak executive stock ownership guidelines.

Companies typically counter that their stock ownership guidelines are sufficient to align executives’ interest with those of shareholders and caution against adopting such prescriptive policies that would hinder a company’s ability to attract and retain high caliber executives.

Pro-rata Vesting
While expected to be fewer in number than proposals calling for stock retention, resolutions seeking to bar the accelerated vesting of equity awards upon a change-in-control will be back next year. Roughly a dozen of these proposals came to a vote in 2012 with average support touching nearly 40 percent of votes cast “for” and “against.”

Beyond barring accelerated voting, resolutions typically provide that any unvested award may vest on a “pro rata basis” up to the time of a change-in-control. Proponents also seek to ensure performance goals are met to the extent any such unvested awards are based on performance, and specify the requested policy be prospective without “affecting any contractual obligations that may exist at the time.”

Companies receiving these resolutions often argue against the request by noting it is the prevailing practice among larger companies that typically see the proposal, and that accelerated vesting benefits shareholders by sharpening management’s focus on value creation, given they are apt to realize awards concurrent to shareholders doing so through the change-in-control transaction.

While labor funds have led the campaign on this issue, the relatively high level of support has made the resolution attractive to retail shareholders who have thus far filed at least 10 proposals for 2013. Moreover, we have learned that at least one proponent has said it will continue to push the resolution despite the presence of double-trigger severance agreements, focusing on whether performance-based goals are met.

Triennial Say-on-Pay
A new proposal for 2013 will be to request that companies alter the frequency of their say-on-pay from an annual to triennial cycle. These proposals, filed by the United Brotherhood of Carpenters and Joiners of America, or “UBCJA,” calls for a “for” or “against” vote on a company’s overall compensation plan at every third annual meeting, while also providing the opportunity to “register approval or disapproval” on annual incentives, long-term incentives, and exit packages for named executive officers.

UBCJA, which called for triennial votes prior to last year’s market-wide adoption of say-on-pay, says it has filed 14 proposals already and expects to “between 45 and 50” in sum for 2013, the Council of Institutional Investors reported last month. Targeted companies will be those with high levels of support in past votes with proponents contending annual votes are not needed at such firms and that a triennial cycle will allow more time for in-depth analyses of pay policies and practices. In addition, the UBCJA argues that a switch to triennial voting at firms where pay concerns are not evidenced or limited would be timely and ideal for investors with deep portfolios, given smaller issuers will begin holding say-on-pay in 2013, under SEC rules.

162(m) Performance Definition
These proposals, filed by the AFL-CIO, target companies with low say-on-pay support levels or failed votes in 2012 and are expected at roughly a half dozen firms next year. Specifically, the proponent calls on compensation committees to adopt a policy that future compensation plans, which are submitted to shareholders for awards intended to qualify as performance-based under Section 162 (m) of the Internal Revenue Code, “specify performance standards that will enable shareholders to determine what amount of awards will be generated by what level of performance.”

We’re looking for companies to “specify performance standards in such a manner that shareholders will be able to determine the level of awards,” Vineeta Anand, chief research analyst at the AFL-CIO’s Office of Investment, said on a recent Governance Exchange webcast. “We’re seeking a level of specificity that’s lacking right.”

Peer Group Selection
The AFL-CIO also will file novel resolutions to address concerns over the use of flawed peer groups in setting CEO pay. Pointing to a recent University of Delaware study that finds peer groups are central to the problem of “mega-pay,” proponents call on compensation committees to adopt a policy that its choice of benchmark should not exceed the 50th percentile of the company’s peers. Anand indicated “several” such resolutions had been or would be filed, adding the labor fund was “hopeful” that companies would be responsive on this issue.

– Broc Romanek, CompensationStandards.com

Towers Watson recently posted this interesting article summarizes the views of a number of directors sitting on compensation committees of the boards of some large Canadian companies (originally published in the November 2012 issue of the Canadian Institute of Corporate Directors’ “Director Journal”). I found some of the remarks quite refreshing as they addressed some of the issues on the top of the general public’s minds directly…

– Broc Romanek, CompensationStandards.com

In this podcast, Gregg Passin of Mercer explains the findings from a recent Mercer survey on retention and success bonuses in M&A transactions, including:

– What were your survey’s main findings?
– Any surprises?
– What should companies do in the wake of the survey