Despite a decline in economic activity, golden parachute payments for CEOs increased by 32% over the past two years, according to a study by Alvarez & Marsal Taxand. The study, which analyzed current change in control arrangements among the top 200 publicly traded U.S. companies, revealed the increase was driven primarily by equity-based payouts and tied to a company’s performance.
Of note, double trigger vesting has increased, as shareholders are more reluctant to pay out CEOs upon a change in control without termination of employment. 53% of companies in 2011 offered at least one plan that provided double trigger vesting, up from only 28% in 2009. Additionally, companies are reducing gross-up payments, which cover the full amount of any excise tax imposed upon the executive in a change in control situation.
Key findings include:
– 78% of CEOs and 80 percent of other named executive officers (NEOs) are entitled to receive a cash severance payment upon termination in connection with a change in control
– The majority (59.4%) of benefits are long-term incentive benefits, such as restricted stock/options, that are tied to performance
– Only 49% of CEOs have excise tax gross-up or modified gross-up protection, compared with 61% in 2009 and 66% in 2007.
Here’s something that ISS’s Ted Allen blogged last week:
The California State Teachers’ Retirement System (CalSTRS), the second-largest U.S. public pension fund, has released a report, “Lessons Learned: the Inaugural Year of Say-on-Pay,” that details its experience during the first year of marketwide U.S. advisory votes in 2011.
CalSTRS reported that it voted against 23 percent of the 2,166 management say-on-pay proposals that it considered between Jan. 3 and June 30, 2011. The predominant reason for the pension fund’s opposition was a pay-for-performance disconnect. Other reasons included: a pay disparity between CEO compensation and that of other named executives (43 percent of CalSTRS’ negative votes); CEO base pay above a $1 million (38 percent); and auto-renewing executive employment contracts (12 percent), according to a CalSTRS analysis of a sample set of 120 companies.
“We believe that poorly structured pay packages harm shareholder value by unfairly enriching executives at the expense of owners–the shareholders. On the other hand, a well-aligned compensation package motivates executives to perform at their best. This benefits all shareholders,” according to CalSTRS, which had a portfolio valued at $144.8 billion as of Dec. 31, 2011.
While noting that the compensation discussions in proxy statements are “largely too complex and lengthy for the average investor,” the pension giant praised the many companies in 2011 that provided “short and simple executive summaries which described in ‘plain English’ the companies’ approach to compensation.”
At the same time, CalSTRS expressed concern about companies that have used peer benchmarking to rachet up pay, and said this issue would be a “renewed focus” in the future. “Although peer groups can be a helpful check to determine if the internal structure and policy setting of pay is reasonable and competitive, peers should not be the starting point when structuring pay. CalSTRS found it especially troubling when companies targeted pay above the median, particularly when companies targeted the 75th or 90th percentile. When pay is initially targeted at these above-average levels, it sets the base pay at above-average levels. As a consequence we saw companies over paying for on-par or below-average performance,” the report said.
To pile onto Sunday’s TV commercial extravaganza known as the Super Bowl, here is a FedEx TV commercial from last year that is a riot. It’s about two-sided paper and when a woman notices at the end of the skit that one side says “Executive Compensation,” the officer leaps over the conference room table and swallows her sheet of paper so that no one else can read how the compensation figures were arrived at…
Yesterday, as noted in this Bloomberg article, the Senate voted 96-3 to approve a bill prohibiting executive bonuses at Fannie Mae and Freddie Mac (the House is expected to pass a similar bill next week). The measure was introduced after the companies’ regulator, the Federal Housing Finance Agency, approved nearly $13 million in bonuses to 10 executives. Geesh. For doing what is essentially a government job? Ludicrous. The CEOs of both companies recently left their jobs (see this WSJ article), after earning several million dollars per year for overseeing entities that were mere shells of their former selves. Great work if you can get it…
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.
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.
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.
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).
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…
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.