Yesterday, GMI Ratings releases its 2012 Preliminary Pay Survey providing an early look at pay changes from compensation year 2010 to compensation year 2011. Based on a comparison of 817 Russell 3000 CEOs, with proxies evaluated by our analysts as of the start of April 2012, preliminary pay figures show a total annual compensation climb of more than 3% at the median. Total realized compensation, which includes all elements of annual compensation in addition to equity profits and increases in deferred compensation, is up more than 15% at the median.
The report examines pay changes in the Russell Index as well as the S&P Index. In addition, they provide a look at the ten highest paid CEOs of 2012 thus far and the details of the executive pay packages. Key findings of the preliminary survey include:
– Second consecutive year of double digit total realized compensation increases at the median and average for the Russell 3000
– Total realized compensation in the Russell 3000 saw a median increase of about 15 percent
– Average 2012 total realized compensation for the Russell 3000 is $5.8 million
– Average 2012 total realized compensation in the S&P 500 is $12.1 million
– The ten highest paid CEOs earned about 78 percent of realized compensation through option exercises and vested equity
– The highest paid CEO so far is Michael O. Johnson of Herbalife Ltd. at $89, 419,474
– Three of the ten highest paid CEOs thus far in 2012 are from the software Industry
This recent blog by Doug Friske and Steve Seelig of Towers Watson is interesting:
Our short answer would be yes. U.S. companies should be considering all of the alternatives for explaining how they pay for performance for their 2012 proxies, even in advance of new SEC rules mandating enhanced pay-for-performance disclosures, as required by Dodd-Frank. For this reason, U.S. companies may want to take note of what companies in the U.K. will be seeing in reports from Research, Recommendations and Electronic Voting (RREV), the U.K.-based arm of ISS. RREV’s voting advisory reports will include four summary pay charts that show for the highest paid executive:
1. The “expected value” of their arrangements versus the “realized” value
2. Total bonus earned versus company profit, and as compared to peers
3. Salary and bonus earned versus TSR growth, and as compared to peers
4. Salary level compared to peers.
At a recent meeting our U.K.-based consultants attended with RREV, the U.K. proxy advisor mentioned that the four charts are not used to quantitatively define voting recommendations, but instead will be used to provide extra “color” and potentially highlight any disconnects for further consultation. RREV representatives also noted that they have no intention of importing the U.S. approach to pay-for-performance analysis to the U.K. because they recognize the differences in the markets.
The new RREV charts represent another alternative U.S. companies might want to consider to depict how they pay for performance. In particular, we have not seen many companies use a depiction of the Total Compensation number from the Summary Compensation Table juxtaposed against the actual pay realized or realizable as an absolute measure of how well calibrated their plans may be to performance. Similarly, peer comparisons tend to also focus on pay opportunity granted, rather than on realizable pay earned. Of course, once Dodd-Frank regulations are promulgated, all companies may be required to depict pay earned versus TSR growth, if the SEC adopts that approach.
The “two strikes” amendment to the Australian Corporation Act, which went into effect in July 2011, continues to make waves in the market. Under that rule, a board is subject to a “spill” resolution (which would force all directors to stand for election) should a company receive more than 25 percent opposition to its remuneration report for two consecutive years. However, lawmakers are considering legislation to address a so-called “drafting error” in the rule that currently prevents the chairman of the board from voting undirected proxies on the remuneration report.
Some corporate advocates, such as Chartered Secretaries Australia and the Australian Institute of Company Directors, see this exclusion as disenfranchising shareholders who, by explicitly appointing the chairman as their proxy, have effectively given a vote of confidence to the board and management. Other stakeholders, such as the Australian Shareholders Association, argue that this provision is necessary to exclude biased proxy votes.
In late 2011, the Australian Federal Government introduced an amendment to address this issue as a rider to an unrelated bill making its way through Parliament. Despite bipartisan support to allow the chairman to vote undirected proxies on the remuneration report, delays in the legislative schedule, driven in part by an internal leadership struggle in the governing Labor Party, are closing the window on whether any changes will go into effect for companies with annual general meetings (AGMs) in the second half of the year.
The lack of legislative resolution has left in flux the fate of the 36 companies in the S&P/ASX All Ordinaries index that received a “first strike” vote during the 2011 AGM season. Of those 36 companies, five were in the S&P/ASX 100, nine were constituents of the S&P/ASX 200, and 11 were in the S&P/ASX 300. Common themes among strike recipients included inappropriate bonus outcomes in light of company performance, high overall pay relative to the size of the company, and poor disclosure of remuneration practices. Other issues included excessive termination payments and poorly structured long-term incentive plans.
The two strikes rule has received mixed reviews in Australia, with some stakeholders concerned that investors could use the rule as a way of ousting directors instead of focusing on remuneration. These stakeholders fear that the rule could dilute the existing feedback mechanism without actually curbing any pay excesses. Additionally, critics claim the rule disenfranchises executives and directors, particularly those who maintain large ownership positions, as evidenced by Crown Limited, the casino operator that received a first strike at its AGM, where only 18 percent of Crown shares were eligible to vote on the resolution. While legislation prohibits key management personnel and their affiliates from voting on the remuneration report, executives and directors are allowed to vote on the spill motion. Crown’s chairman James Packer, who owns 44 percent of the company, has vowed to vote down the spill motion should it come to a vote.
Regardless of the concerns with the mechanics of the “two strikes” law, the rule has increased the focus on executive pay in the Australian market, and has led to a substantial uptick in engagement between companies, investors, and other stakeholders. Many board members and senior executives appear to understand the need to control the message at a minimum, but also to listen to shareholders’ questions, concerns, and suggestions on executive remuneration. Importantly, adroit company officials have started this conversation sooner in the year instead of waiting until AGM season, when the ink has already dried on many remuneration reports and shareholders’ time is in more short supply.
Over the past week, there have been a flurry of failed say-on-pays (as Mark Borges has beaten me to the punch reporting) and the total for 2012 is now 7. As noted in our list, the latest ones are: NRG Energy (45%); Ryland Group (40%); Cooper Industries (30%); and FirstMerit Bank (47%).
The astounding news – according to the list on page 14 of Semler Brossy’s latest recap of say-on-pay results – is that 35 companies so far have filed additional soliciting material to voice displeasure with a recommendation from either ISS or Glass Lewis!
That’s an overwhelming number considering that ISS has recommended “against” only 43 companies so far (as noted on page 2)! Although the number of failed SOPs is roughly in line with last year’s results, the percentage of companies filing supplemental materials compared to negative recommendations from the proxy advisors is off-the charts…
Are we seeing the start of a wave of executive compensation clawback lawsuits by the Securities and Exchange Commission? As Kevin LaCroix pointed out in his D&O Diary blog, last week the SEC filed two lawsuits to recoup compensation from former top executives of two companies. These actions are the latest examples of the SEC’s increased use of Section 304 of Sarbanes-Oxley, which has been interpreted to allow the SEC to recover incentive compensation paid to top executives at companies that restate their earnings as a result of wrongdoing, even if the executives aren’t the ones accused of the misdeeds.
The first case was filed April 2 against the former CEO and CFO of ArthroCare, an Austin, Tex.-based company that makes medical devices. In this case, the SEC wants to claw back an unspecified amount of compensation from former CEO Michael Baker and former CFO Michael Gluk, even though the two aren’t accused of wrongdoing. Instead, two former Arthro sales executives have been charged by the SEC with inflating revenue by channel stuffing.
The second case, filed on Friday, targets former leaders of the failed Franklin Bank of Houston: former CEO Anthony Nocella and former CFO Russell McCann. In contrast to the ArthroCare case, these two men are accused of wrongdoing in that they allegedly misrepresented the bank’s underperforming loans. Both cases were filed by the SEC’s Forth Worth office.
Section 304 of the Sarbanes-Oxley Act states that if a company has restated its financials because of misconduct, then the CEO or CFO must reimburse incentive compensation to the company. In 2009 a federal court ruled for the first time that this provision can be used against executives who aren’t charged with misconduct. That case was brought against Maynard Jenkins, the former CEO of CSK Auto Corporation. Last January the SEC used Section 304’s strict liability provisions to claw back $450,000 in compensation from the former CEO of Symmetry Medical Inc., and $185,000 from its chief financial officer, who were not themselves charged with wrongdoing. (You can read our article about that case here.)
The lawyers for the former ArthroCare executives blasted the SEC’s action as unconstitutional. Jay Pomerantz of Fenwick & West, who represents former CEO Baker, asserted that the SEC is relying on “a flawed interpretation of the Sarbanes-Oxley Act.” He added: “Such overreaching against an admittedly innocent person violates constitutional principles of fairness and due process.” Jason Lewis of Locke Lord, who represents former CFO Gluck also maintained that the SEC’s action “raises numerous constitutional and equitable concerns.” He stated: ” With its overreaching and broad interpretation of the Sarbanes-Oxley Act, the SEC is telling public companies and their officers that even being diligent and innocent of wrongdoing does not protect you from the SEC’s grasp. This certainly could not have been the intent behind the law and Mr. Gluk intends to vigorously defend himself against this unjust action.”
In the Franklin Bank case, Nocella is represented by James Munisteri of Gardere Wynne Sewell. Munisteri told the Wall Street Journal that the SEC’s complaint doesn’t tell the whole story. “Conspicuously absent from the SEC’s mischaracterization of events are many important facts that the SEC will not be able to ignore during a court proceeding,” he said. Barrett Reasoner of Gibbs & Bruns, who represents McCann, pointed out that a class action against Nocella and and McCann stemming from the bank’s failure was dismissed, and that ruling was upheld by the U.S. Court of Appeals for the Fifth Circuit. “Just as the class action claims were dimsissed, the SEC’s claims similarly will not pass muster,” Reasoner told the Litigation Daily.
A spokesperson for the SEC told us: “The SEC has staked out its legal position in cases like Jenkins. Our position is very clear.”
3. Florida State Board of Administration proxy voting guidelines [Among other changes, the guidelines advocate separation of CEO and chair roles “as part of any success planning event,” and indicates general support for proxy access proposals if they set a minimum equity ownership threshold of 1 percent and require at least a 1-year holding period]
As the other bloggers on this site were quick to point out, Citigroup was hit with a say-on-pay lawsuit within two days of the revelation that it had failed to garner majority support for say-on-pay at its annual shareholders meeting last week. In fact, Citi’s Form 8-K reporting the vote results was filed on Friday – and the complaint was filed in the US District Ct.- SDNY on Thursday. The lawsuit was filed before the 8-K!
With bank M&A heating up, the complaint against Encore Bancshares could be symptomatic of what to expect from the new “say-on-parachute” disclosure requirement. Encore filed its special meeting proxy statement on April 12th, and the complaint soon followed with allegations drawn directly from the say-on-parachute disclosure on page 55.
The complaint basically alleges breaches of fiduciary duties by officers and directors due to the compensation they receive from Encore’s sale. This litigation is a healthy reminder that, although the Dodd-Frank Act’s Say on Parachute disclosure and vote are not expected to derail transactions, they involve sensitive disclosures that warrant up-front diligence and thoughtful presentations to shareholders.