We have posted the survey results regarding how companies are preparing now for the SEC’s upcoming pay disparity rulemaking, repeated below:
1. At our company, the board:
– Does not consider internal pay equity when setting the CEO’s compensation – 51.8%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to all employees – 1.8%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to other senior executives – 44.6%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to a formula different than the two noted above – 1.8%
2. Ahead of the SEC’s mandated pay disparity disclosure rulemaking under Dodd-Frank, our company:
– Has not yet considered how we would comply with the rules – 58.9%
– Has begun considering the impact by assessing whether we could comply with the precise prescriptions in Dodd-Frank but we have not yet tested statistical sampling – 35.7%
– Has begun considering the impact by assessing whether we could comply with the precise prescriptions in Dodd-Frank including assessing whether we could use statistical sampling – 5.4%
3. As one of the companies that have assessed the impact of the SEC’s mandated pay disparity disclosure rulemaking, our company:
– Believes we could comply with the precise prescriptions in Dodd-Frank without too great a burden – 13.5%
– Believes we could comply with the precise prescriptions in Dodd-Frank but it would be too burdensome unless statistical sampling is allowed – 13.5%
– Believes we could comply with the precise prescriptions in Dodd-Frank but it would be burdensome even if statistical sampling is allowed – 45.9%
– Believes we wouldn’t be able to ever comply with the precise prescriptions in Dodd-Frank – 27.0%
4. In your own opinion, do you think that statistical sampling would have too high a potential for manipulation or material error:
– Yes – 38.2%
– No – 29.1%
– I don’t have an opinion – 32.7%
Recently, Kyoko Takahashi Lin and Gillian Emmett Moldowan of Davis Polk gave us this blog, repeated below:
Among the new proxy disclosure requirements under the Dodd-Frank Act is the mandate that issuers disclose in their CD&A “[w]hether, and, if so, how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation… in determining compensation policies and, if so, how that consideration has affected the registrant’s executive compensation decisions and policies.” Thus far, the vast majority of the 110 large accelerated filers who filed proxy statements in the 2012 season through February 29, 2012 have addressed this new requirement in their CD&As. Generally, the disclosure has been fairly predictable: those that received lower shareholder approval ratings on say on pay in 2011 have provided lengthier disclosure, often addressing changes made to their compensation programs, while those that received stronger shareholder support have simply stated that they have considered the results and decided to continue their previous compensation practices in light of the support.
However, 14 large accelerated filers have failed to disclose the effect of the 2011 say on pay vote results in their CD&As. Of these, 9 did not mention the say on pay vote in their CD&A at all. Five companies reported last year’s vote results but did not go on to discuss whether or how the company considered the result.
Interestingly, the failure to disclose the effect of last year’s say on pay vote has not negatively affected either ISS recommendations regarding this year’s say on pay proposals or say on pay results in 2012. Of the 14 companies discussed above, the 9 that have received a recommendation on their 2012 say on pay proposal from ISS have all received a “for” recommendation. Of the 14 companies discussed above, the 6 that have reported their 2012 say on pay results as of February 29, 2012 have all received above 90% shareholder support. The lack of focus on the new disclosure by ISS and shareholders may be because all of these companies received at or above 89% shareholder support in 2011. Query whether the SEC will be as forgiving with respect to companies that do not address the new disclosure requirement.
Recently, Mark Poerio of Paul Hastings posted this on ExecutiveLoyalty.org: In litigation against two CFOs re their failure to disclose perquisites provided for the CEO, the SEC has prevailed in a motion to have its expert testify about a “primary purpose” methodology that is applicable under from the Internal Revenue Code for determining whether an item is a business or a personal expense. The federal district court decision in SEC v. Das states:
(1) “Contrary to the Defendants’ assertion, a comparison of the two methodologies reveals that a methodology borrowed from the IRC [Internal Revenue Code] would be less conservative and rigorous, and therefore, should result in fewer items being classified as perquisites, than the SEC methodology”; and
(2) “Although such a methodology might not reveal the exact amount of perquisites received by Info’s CEO, it would not prejudice the Defendants, and it would be helpful to the jury because it is relevant and reliable to show the general scope of the perquisites received by Info’s CEO during the relevant time period.”
With the proxy season in full bloom, the mass media is covering the latest just like us. For example, there was this WSJ article on Thursday about ISS recommendation’s on Disney – and then this follow-up on Friday with Disney’s rebuttal (here’s Steve Quinlivan’s related blog). Not to mention the two WSJ articles noted in this blog by Mike Melbinger. And then there is this WSJ article by Joann Lublin from Thursday:
Shareholder votes on executive pay are starting to change the shape of compensation at some big companies. A group of institutional investors recently joined forces to seek executive-pay and governance changes at 10 companies where nonbinding “say on pay” votes narrowly passed last year. The informal coalition, led by unions and public pension funds, already has persuaded Allstate Corp., Northern Trust Co. and five other companies to ban “gross-up” payments to executives. Those payments cover taxes executives owe on benefits provided by their employer.
Coalition members also withdrew 2012 shareholder resolutions opposing pay policies after a few companies required top managers to hold their company’s stock longer and put limits on accelerated vesting of equity grants after a takeover. “The changes demonstrate that say-on-pay votes are working to make companies more responsive to shareholder concerns about runaway CEO pay levels,” said Brandon Rees, deputy director for the AFL-CIO’s Office of Investment. He helped coordinate the coalition, which includes the International Brotherhood of Electrical Workers union and the pension system for firefighters in Kansas City, Mo.
In legally mandated advisory votes on executive-compensation policies last year, 358 publicly held companies got less than 80% support from their investors, according to proxy adviser Institutional Shareholder Services. Some of those companies have revamped pay practices, rather than face investor criticism during annual meetings this year.
Among them is Allstate. The big insurer got the support of about 58% of the votes cast for its executive-pay practices, and Chief Executive Tom Wilson was re-elected to the board by just 68% of the votes, the lowest margin last year for any CEO of a company in the Standard & Poor’s 500-stock index, according to ISS. After the vote, Mr. Wilson spoke with owners of 30% of Allstate’s shares, because he wanted to know “why people were concerned,” he said in an interview. “My job is to make our shareholders happy.” As a result of those efforts, the company was on its way to changing its practices when coalition members submitted four resolutions for this year’s annual shareholders’ meeting, Mr. Wilson said.
During talks, Allstate accepted a compromise suggested by the firefighters pension plan: require executives to hold on to 75% of their company shares until they meet their stock-ownership requirements. “That was a good idea,” Mr. Wilson recalled. Similarly, Allstate named its first permanent lead independent director last November, just before the electrical workers’ union offered a resolution favoring a split between the chairman and CEO posts. A separate chairman isn’t “the right model right now,” said Mr. Wilson, who holds both titles at the insurer. The union pulled its proposal after Allstate agreed to expand the lead director’s duties. They now include communicating with significant shareholders about broad corporate policies and practices.
Investment manager Northern Trust did away with tax gross-ups for new employment accords with top officers and tightened stock ownership rules, according to Greg Kinczewski, general counsel for Marco Consulting Group, an investment adviser for several coalition members. A Northern Trust spokesman confirmed both changes, and said the company’s proxy statement, scheduled for release next week, will “speak for itself.”
On Tuesday, the PCAOB issued a proposed auditing standard that would change how an auditor evaluated a client’s identification of, accounting for, and disclosure about its relationships and transactions with related parties. As noted in this Towers Watson alert, this proposal could bring added involvement of independent auditors into executive pay decisions. Under this proposal, a company’s auditor would have to review its client’s pay programs and determine if they might encourage excessive risk-taking.
I haven’t read the proposal yet myself, but it seems that going down that slippery slope, might it be possible that an auditor would say to a company, “too risky, we can’t sign off on the financials” – so auditors could possibly play a role of essentially pre-approving pay programs? Comments are due by May 15th.
We are excited to announce that we have just posted the registration information for our popular conferences – “Tackling Your 2013 Compensation Disclosures: 7th Annual Proxy Disclosure Conference” & “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” – to be held October 8-9th in New Orleans and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference (the Executive Compensation Conference’s agenda will be posted soon).
Early Bird Rates – Act by April 13th: 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 April 13th to take advantage of the 25% discount.
In the “Q&A Forum” on TheCorporateCounsel.net, a member recently asked: “Are issuers revising or enhancing CD&A disclosure to address the new ISS P4P evaluation methodologies, and if so, how? I have seen one proxy statement that includes a table comparing CEO pay and average NEO pay to two company performance metrics (not those utilized by ISS) over a 5 year period.
Here are two responses:
1. Mark Borges notes: I expect that we will see some companies take on the ISS pay for performance methodology this year where they fail the analysis and believe that they have a compelling story to share with their investors as to why the ISS conclusion is inappropriate. In other words, I expect to see some feedback, similar to what we saw during the 2011 proxy season with the supplemental filings that were made/ To me, the key difference this year is that more companies are running simulations using the ISS methodology ahead of time (albeit with incomplete and imperfect information) to get a sense of where they may come out under the ISS test. Accordingly, I expect that more companies will address the likely outcome of the ISS analysis in their CD&A, rather than simply rely on supplemental materials.
The other thing that I expect we will see are companies running simulations using the ISS methodology but using “realized” or “realizable” compensation rather than “awarded” compensation as under the ISS test.
2. Broc Romanek notes: I see companies trying to anticipate the ISS peer group selection and if that group results in a potentially bad report, being proactive as to why they use a particular peer group and even going so far as to say why a GICs-based peer group is not appropriate for them. None of the ones I’m aware of have filed their definitive proxy yet.
Even last year, of course, companies were trying to address how their programs did have pay for performance even if it might not show up on the ISS methodology (for example, due to timing of decisions or other factors that make the SCT reporting not reflect an accurate picture).
By the way, here is a blog by Irv Becker and David Wise of Hay Group entitled “If All Comp Committees Followed ISS.”
On a topic that will be covered more fully in the January-February issue of The Corporate Counsel that will be out within a few days, the Corp Fin Staff recently addressed the fact that hundreds of companies forgot to amend their Form 8-Ks last year to disclose their say-on-pay frequency decision – and how that impacts their Form S-3 eligibility. Here is a WSJ article from yesterday on this topic:
Hundreds of companies “forgot” to comply with an aspect of the say-on-pay advisory vote law that went into effect last year, according to the U.S. Securities and Exchange Commission. As part of the Dodd-Frank law that requires companies to give shareholders an advisory vote on compensation, companies had to let shareholders decide whether say-on-pay votes should occur every one, two or three years and file an amended 8-K within 150 days of the vote explaining their decision on the vote’s frequency. While most companies filed an 8-K with the preliminary results a few business days after the vote, hundreds didn’t follow-up with the other filing, according to the SEC.
Companies that failed to file the reports are technically not in compliance with timely-filing requirements and could be impinging on their shareholders’ rights. However, the SEC said it would likely grant waivers to many companies that missed the filing. “We haven’t seen too many of those amendments, and that’s a problem for companies because the failure to file the amended 8-K means they are not timely for S-3 purposes,” Jonathan Ingram, deputy chief counsel in the SEC’s Division of Corporation Finance, said at the Practising Law Institute’s “SEC Speaks” conference in Washington D.C. last week, referring to the timely filing requirements in S-3 rules companies comply with to register securities.
“We said in the release [companies] need to do this, but we think they just forgot,” Meredith Cross, Director of the SEC’s Division of Corporation Finance, said at the conference. She said the SEC wants companies to file the amended 8-Ks so there would be a record of what shareholders decided for the subsequent proxy season. If the company didn’t implement what the shareholders wanted, then a shareholder proposal would be allowed, which requires the amended 8-K, Cross said.
However, if the company’s board followed the shareholder recommendation and forgot to file the 8-K, the agency will likely grant a waiver, so the company can maintain its S-3 eligibility status, Cross and Ingram said. “If the company did what the shareholders asked for, then it’s not likely the shareholders would have wanted to put in a proposal, so the access to the 8-K wouldn’t have made a difference to them,” Cross said. “But, anyway, please file your 8-Ks.” The frequency vote is only required every six years, so Cross said it “shouldn’t be a recurring problem.”
I’ve been remiss in not blogging about this paper by Michael Jensen and Kevin Murphy sooner – here is the executive summary:
Discussions about incentives for CEOs in the United States begin, and often end, with equity-based compensation. After all, stock options and (more recently) grants of restricted stock have comprised the bulk of CEO pay since the mid-1990s, and the changes in CEO wealth due to changes in company stock prices dwarf wealth changes from any other source. Too often overlooked in the discussion, however, is the role of annual and multiyear bonus plans–based on accounting or other non-equity-based performance measures–in rewarding and directing the activities of CEOs and other executives.
In this paper, Kevin J. Murphy and Michael C. Jensen describe many of the problems associated with traditional executive bonus plans, and offer suggestions for how these plans can be vastly improved. The paper includes recommendations and guidelines for improving both the governance and design of executive bonus plans and, more broadly, executive compensation policies, processes, and practices. The paper is a draft of a chapter in Jensen, Murphy, and Wruck (2012), CEO Pay and What to Do About it: Restoring Integrity to both Executive Compensation and Capital-Market Relations, forthcoming from Harvard Business School Press. Key concepts include:
– While compensation committees know how much they pay in bonuses and are generally aware of performance measures used in CEO bonus plans, relatively little attention is paid to the design of the bonus plan or the unintended consequences associated with common design flaws.
– These recommendations for improving executive bonus plans focus on choosing the right performance measure; determining how performance thresholds, targets, or benchmarks are set; and defining the pay-performance relation and how the relation changes over time.
– In the absence of “clawback” provisions, boards are rewarding and therefore providing incentives for CEOs and other executives to lie and game the system. Any compensation committee and board that fails to provide for the recovery of ill-gained rewards to its CEO and executives is breaching another of its important fiduciary duties to the firm.
Earlier this week, I blogged about a quartet of bills that the House Financial Services Committee approved. Ted Allen of ISS blogged yesterday that one of the bills would exempt newly public companies from holding say-on-pay votes for five years. A similar bill has been introduced in the Senate and has attracted bipartisan support.
The House bill, the “Reopening American Capital Markets to Emerging Growth Companies Act,” H.R. 3606, would create a new class of issuers, “emerging growth companies,” that would be exempt from the Dodd-Frank Act-mandated advisory votes for five years, or until they reach $1 billion in annual revenue or $700 million in public float. These companies also would be exempt from holding separate shareholder votes on “golden parachute” severance arrangements.
The bill would also excuse these emerging companies from Section 953(b) of Dodd-Frank, which would require disclosure of the ratio between a CEO’s total compensation and that of the firm’s median employee. These companies also would be spared from Sarbanes-Oxley’s requirement to hire an outside auditor to attest to the sufficiency of their internal financial controls.