February 2, 2012
– Broc Romanek, CompensationStandards.com
Tune in today for the webcast – “Ethics, Conflicts and Privilege Issues in Executive Compensation” – to hear Christie Daly of Bryan Cave HRO, Mike Melbinger of Winston & Strawn and Mark Poerio of Paul Hastings analyze the tricky ethical, conflicts and privilege issues involved in setting executive pay. Please print out their presentation in advance.
February 1, 2012
– Broc Romanek, CompensationStandards.com
Recently, James F. Reda & Associates issued this study on “2010 Short- and Long-Term Incentive Design Criterion Among Top 200 S&P 500 Companies.” This study provides a behind-the-scenes look at how incentives are being structured to connect pay and performance.
January 31, 2012
– Broc Romanek, CompensationStandards.com
Last week, ISS issued this set of FAQs about its newly-minted compensation policies; 15 about pay-for-performance, 3 about management say-on-pay responsiveness and 2 about equity plans.
January 30, 2012
– Broc Romanek, CompensationStandards.com
Recently, ISS posted this commentary on ISS’ new pay-for-performance methodology by Carol Bowie, ISS’s Head of Executive Compensation Research (here’s ISS’s white paper discussing the new methodology).
We have posted memos analyzing ISS’s new methodology in our “ISS Policies & Ratings” Practice Area.
ISS recently issued this new paper entitled “Post-Crisis Trends in CEO Pay.”
January 27, 2012
– Broc Romanek, CompensationStandards.com
In the wake of President Obama’s State of the Union address, the front-page headline in the Washington Post screamed “Obama: Nation Must Address Inequality.” Some claim that the President is playing a class warfare card ahead of the November elections and maybe he is. But that is because he can. Not only is it abundantly clear that the vast majority of those in this country – and around the world for that matter, remember Britain’s actions just this week – are angry about increasing pay disparity, but quite a few experts believe our country’s ability to continue to be a high achiever is at risk because the rich are getting richer at the expense of the middle class. So even more than it was for the last Presidential election, excessive CEO pay will be a lightning rod once a GOP nominee is found and we head into the general election.
So what does this mean for advisors that help set CEO pay? It means a lot because the governance reforms of the past few years have changed only a few practices at the margins – but the bulk of the procedural deficiencies that led to an unsightly climb in pay over the past two decades remain. As I’ve said many times, boards need to get over their heavy reliance on peer group surveys since they are well known to be unreliable given that most boards sought to pay their CEOs in the top quartile for many years – thus tainting the database with a slippery slope upwards. How can boards continue to use these as a crutch when the plaintiff’s bar can so easily prove that the data is unreliable – and thus directors arguably didn’t fulfill a fiduciary duty because they knew they weren’t fully informed by not considering alternatives?
There are still too many cases of underachieving CEOs earning a lifetime’s worth of money in a single year. Sometimes they are fired before a year of service is even over – yet they walk off with a more than generous severance package. And this is not just a handful of outliers – this is the norm. It is far past time to do something about it.
An Alternative to Peer Group Benchmarking? Internal Pay Equity
Recently, a group of trade associations jointly sent this letter to the SEC regarding the need for further research before implementing Section 953(b) of Dodd-Frank, the pay ratio provision. The SEC Staff repeatedly has noted that Dodd-Frank grants the SEC fairly narrow latitude to veer from what Section 952(b) dictates, so I’m not sure how successful this letter will be. And I am well aware of the technical issues – and potential burdensome costs – of how the provision was written by Congress.
But how are boards (and their advisors and trade associations) embracing the spirit of this law? We’ve been touting internal pay equity as an untainted alternative to peer group benchmarking for the better part of a decade. We’ve told the story about how American capitalist J.P. Morgan is reputed to have had a rule that he would not invest in a company whose CEO was paid more than 50% above the executives at the next level. He reasoned that, if the CEO was paid more, he wouldn’t have a team but only courtiers. Internal pay is a primary factor when a company determines how to pay its workforce – why shouldn’t that principle apply to how CEOs get paid?
It’s shocking to me how few companies employ internal pay equity today. It’s use by DuPont, Whole Foods and a handful of others is no secret. And Dodd-Frank’s mandate for disclosure is well known. Shouldn’t boards demand to see what those ratios look like ahead of the mandated disclosure? And even more important, as noted above, shouldn’t boards demand to see those ratios to protect themselves from liability given the known bad data in the peer group surveys they get year after year? Of course, advisors should be willingly recommending the use of this alternative since it’s their job to protect the board. Sadly, most advisors blindly adhere to the status quo as too often happens.
I just can’t see what is wrong with putting together internal pay numbers for a board to consider. Where is the evil here? I suppose the downside is it likely will reveal how badly the board has been doing its job setting CEO pay levels over the past 20 years when historical numbers are crunched. But it’s better to make a fix now than perpetuate the problem. Note that I am not saying boards need to demand the ratios as called for by Section 952(b) as simpler ratios are easy to generate. We have sample spreadsheets posted in the “Internal Pay Equity” Practice Area on CompensationStandards.com.
By the way, I also don’t see any problem with using peer group benchmarks either. It’s just that the data in those surveys now are useless due to “pay in the top quartile” craze. There needs to be a reset before that type of data can be relied upon again. This reset will be hard to do, but it’s necessary and certainly doable, particularly if CEO pay levels are brought down to Earth on a widespread basis. The longer boards wait, the harder the medicine will be to take. See Exhibit A: Congress trying to force it upon boards through a misguided formulation of Section 953(b) of Dodd-Frank. If boards hadn’t waited so long to consider internal pay equity, Congress probably wouldn’t have felt compelled to act…
January 26, 2012
– Broc Romanek, CompensationStandards.com
As noted in its Form 8-K, Actuant is the first company holding its annual meeting in 2012 to fail to gain majority support for its say-on-pay with only 46% voting in favor. A list of the Form 8-Ks filed by the “failed” companies is posted in the “Say-on-Pay” Practice Area.
January 25, 2012
– Broc Romanek, CompensationStandards.com
As I’ve blogged before, the United Kingdom has been on a path to revise its executive compensation laws to rein in excessive pay. Yesterday, the UK announced a slew of proposals that would push the envelope in the executive pay area – here are the proposals (or the closest thing I could find to them), as well as British Business Secretary Vince Cable’s oral statement, a summary of responses to the related discussion paper and a comparison with the High Pay Commission’s report that came out a few months ago (note that the HPC is not an independent commission; it’s a left wing charity). And here is a Towers Watson memo, ISS blog and NY Times article discussing these proposals.
The proposed major changes include:
– Say-on-pay votes would be binding
– Approval threshold increased to 75% from 50%
– At least two compensation committee members would have no prior board experience
– Clawbacks of bonuses if executives failed
– Enhanced disclosures
It’s notable that Britain’s opposition party is quoted in media reports as criticizing these proposals as not going far enough! Is this looking at tea leaves for the US? Remember Australia’s new “two strikes” law…
January 24, 2012
– Broc Romanek, CompensationStandards.com
We have posted the transcript for our recent webcast: “The Latest Developments: Your Upcoming Proxy Disclosures-What You Need to Do Now!”
January 23, 2012
– Broc Romanek, CompensationStandards.com
Last week, Mark Borges gave us the disturbing news on his blog that: “Since the middle of December, I’ve been monitoring what companies have been disclosing in their Compensation Discussion and Analyses about the impact of last year’s “say-on-pay” vote. Probably the most startling thing I’ve discovered is the number of companies that have failed to provide the disclosure entirely (even though it’s required by Item 402(b)(1)(vii)). I’d say that almost 15% of the CD&A’s I’ve read don’t address the subject at all.” He then went on to pan the uneven quality of the disclosure and gave examples. Not good – although I guess the tea leaves were being read when I blogged back in September that companies seemed to be slow to engage in the wake of their votes last season.
Last month, Barbara Nims and Gillian Emmett Moldowan of Davis Polk blogged that – as of December 16th – 14 large accelerated filer companies have filed proxy statements for the 2012 season and noted that the ten companies with high shareholder approval ratings (83% and higher) have provided simple and unremarkable disclosure about what happened last season.
January 20, 2012
– Broc Romanek, CompensationStandards.com
In this memo, Eric Larre of Towers Watson notes that the results of his firm’s recent survey of 265 companies reveal the potential for some unpleasant surprises at the close of the current executive pay cycle. Based on their operating performance through the end of October in what’s been a relatively good year for many companies, a majority of the responding companies anticipate that annual bonus pools will be funded at or above target levels, and almost half also project above-target funding for long-term incentive cycles ending in 2011. What’s more, very few of the respondents anticipate that their compensation committees will apply discretion to make adjustments to formulaic incentive payouts.
In short, many companies appear to be viewing the current incentive cycle as a time for “business as usual,” with executive incentive plans paying out in accordance with the plan formula and specific performance goals for the period. However, for the 42% of the responding companies that expect their companies’ shareholders to see negative total shareholder return (TSR) in 2011, it’s likely that some companies could experience a chilly response to the news of their incentive payouts for 2011 operating results from investors who view performance from the perspective of portfolio returns. It’s a very different landscape for investors today versus a year ago, and compensation committees and management should already be considering how different perspectives on pay for performance can best be addressed in their 2012 proxies.