A new study by BDO USA surveyed directors on a variety of topics, including these related to pay practices:
– Say-on-Pay Not Helpful to Managing Pay – More than three-quarters (78%) of board members do not believe Dodd-Frank’s “Say-on-Pay” disclosure rules will help them better manage the compensation of their key executives. In fact, just one-fifth (22%) describe the rules as helpful. Directors who serve as members of their board’s compensation committee were even more likely (91%) to say the new rules will not help manage executive pay. Moreover, an overwhelming majority (81%) of board members believe shareholder criticism of executive compensation frequently suffers from 20/20 hindsight.
– Compensation Weary – Dodd-Frank’s executive compensation mandates seem to have taken a toll on corporate directors. When asked a variety of topics they would like their board to spend more or less time on, 71 percent say they do not want to spend more time on executive compensation – no other topic elicited such a negative response.
– Non-Binding Votes are Non-Issue – Although most board members do not find Dodd-Frank helpful, they do not see the non-binding nature of the Say-on-Pay votes as a problem. When asked if the non-binding nature of the Dodd-Frank Say-on-Pay votes diminished their effectiveness, only a quarter (24%) of the directors agreed. Three-quarters (76%) feel the non-binding nature of the votes do not limit their effectiveness, and directors serving on their board’s audit (85%) and compensation (79%) committees were even more likely to feel this way.
– Change of Control Provisions – Less than a fifth (19%) of directors perceive the disclosure of change-of-control provisions in executive compensation packages, mandated by Dodd-Frank, as having a negative impact on M&A activity. In fact, three-quarters (81%) indicate this provision will have no impact on merger activity. Members of compensation (91%) committees are even more confident that these disclosures will not adversely affect M&A activity.
– Board Compensation – When asked about their own compensation as board members, more than two-thirds (69%) believe their compensation is commensurate with their responsibilities. Yet, almost one-third (31%) feel their compensation is lacking, given the increased responsibilities and workload brought about by recent regulatory changes. Board members serving on the compensation committee (39%) were more likely to feel their compensation needs to be enhanced.
Yesterday, the Washington Post ran this lengthy article criticizing peer group benchmarking on the front page, in the upper left corner. The piece is way too long to repeat here – but it’s well worth a read.
With an election year upon us and the unemployed becoming more willing to be vocal about perceived inequalities, I imagine we are going to see much more media attention to the processes by which CEO pay is set. Although much progress have been made over the past decade in corporate governance generally – and CEO pay specifically – I believe we are still in the infancy of the governance reforms that ultimately need to be made. There still are way too many stories of excesses – and not just by “outliers.” And as we’ve been saying all along, the overreliance on peer group surveys is one of the biggest adjustments that boards need to make…
A handful of companies have received SEC comments on their say-on-pay proposals in their proxy statements. The comments we found are outlined below. In general, they can be summarized as follows:
– Issuers can be sloppy by not following the technical wording of the rule (or worse yet, in ignoring it altogether), and the SEC is capable of making silly comments.
– Issuers depart from having the advisory vote cover anything other than “compensation of its named executive officers, as disclosed pursuant to Item 402 of Regulation S-K” at their own risk.
– Most of the comments were on preliminary proxy statements so the SEC policy on correcting in future proxies is unclear.
– The SEC will look closely at the language in the proxy card as well.
Issuer A
Comment:
Please include separate resolutions providing shareholders with an advisory vote to approve the compensation of your named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, and whether the shareholder vote should be held every 1, 2, or 3 years. Alternatively, tell us why you are not required to comply with Exchange Act Rule 14a-21 at this time. Refer to Item 24 of Schedule 14A, Exchange Act Rule 14a-21(a)-(b). For additional guidance, see Securities Act Release 33-9178.
Response:
The Company inadvertently omitted the proposals from its preliminary proxy statement and the proposals are now included as Proposal Number Five and Proposal Number Six.
Issuer B
Comment:
Rule 14a-21(a) of the Exchange Act of 1934 requires that you provide shareholders with an advisory vote to approve the compensation of your named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including related narrative disclosure. It does not appear that the resolution on page 48 meets the requirements of Rule 14a-21(a), given that it seeks approval only for your “overall executive compensation policies and procedures” (emphasis added). Please tell us how you intend to address this apparent noncompliance or tell us why you believe that your present disclosure is in compliance with Rule 14a-21(a).
Response:
The Company recognizes that the wording of the Resolution which is presented to the stockholders in the Proxy Statement filed April 21, 2011 did not satisfy the requirements in Rule 14a-21(a) of the Exchange Act of 1934. In light of this, the Company has filed and mailed to its stockholders an Amendment to its Proxy Statement amending Proposal 3 to specifically ask the stockholders to vote, on an advisory basis, on the Company’s executive compensation, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission.
Issuer C
Comment:
Please revise your proxy statement to include the proposals required by Item 24 of Schedule 14A or provide us with an analysis as to why you are not required to include these proposals.
Response:
The Company advises the Staff that it is a “smaller reporting company” as such term is defined in Rule 12b-2 (“Rule 12b-2”) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), because the Company had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter (i.e., June 30, 2010). On such date, the Company’s public float, computed in accordance with the definition of “smaller reporting company” set forth in Rule 12b-2, was $28,046,748. Pursuant to Securities Act Release No. 9178/Exchange Act Release No. 63768 (Jan. 25, 2011), companies that qualify as “smaller reporting companies” as of January 21, 2011, are not subject to Exchange Act Section 14A(a) and Rule 14a-21(a) and (b) until the first annual or other meeting of shareholders at which directors will be elected and for which the rules of the Commission require executive compensation disclosure pursuant to Item 402 of Regulation S-K occurring on or after January 21, 2013. Accordingly, the Company is not required to include such proposals in its proxy statement for its 2011 annual meeting.
Issuer D
Comment:
Please include a separate resolution subject to shareholder advisory vote to approve the compensation of your named executive officers, as disclosed pursuant to Item 402 of Regulation S-K. See Rule 14a-21(a) of the Exchange Act and Instruction to Rule 14a-21(a) of the Exchange Act.
Response:
During our telephonic conversation on April 25, 2011, we indicated that we will file an amended preliminary proxy statement to include a separate resolution to approve the compensation of our named executive officers. The resolution we will include is as follows:
RESOLVED, that the shareholders of this corporation approve, on an advisory basis, the compensation of the named executive officers for the fiscal year ended February 26, 2011, as described in the “Compensation Discussion and Analysis” section of and the compensation tables and related material disclosed in the corporation’s proxy statement for its 2011 Regular Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission.
Issuer E
[T]his letter is in response to your telephone call on Friday, April 22, 2011 relating to our proxy statement for the 2011 Annual Meeting of Stockholders. In such call you stated that the resolution of the stockholders contained in the Advisory Vote on Executive Compensation (Proposal 10) on page 54 of the proxy statement did not adequately comply with the requirements of Rule 14a-21(a) adopted last February by Securities and Exchange Commission Release No. 33-9178 (the “Release”), Shareholder Approval of Executive Compensation and Golden Parachute Compensation, because it did not directly approve the actual compensation of our named executive officers as disclosed in the proxy statement.
In drafting the resolution, the Company intended to clearly and broadly seek stockholder approval, on an advisory basis, of the actual compensation of our named executive officers as disclosed in the proxy statement. The first sentence of the third paragraph of the proposal makes the scope of the vote explicit:
We are asking for stockholder approval of the compensation of our named executive officers as disclosed in this proxy statement in accordance with SEC rules, which disclosures include the disclosures under “Executive Compensation–Compensation Discussion and Analysis,” the compensation tables and the narrative discussion following the compensation tables.
The fifth paragraph of the proposal similarly refers to the vote as addressing “named executive officer compensation as disclosed in this proxy.”
The language of the formal resolution included in the proposal is not limited to an approval of executive officer compensation policies and procedures as prohibited by the Release. By including the language “practices of the Company as disclosed in this proxy statement” in the resolution we intended to cover the actual compensation of our named executive officers, rather than the Company’s general approach to compensation.
Finally, our proxy card say-on-pay item seeks approval for the “Advisory Vote on Executive Compensation.” The resolution language is not repeated on the proxy card. This further illustrates our intent to obtain stockholder approval of the compensation of our named executive officers and not solely to approve our policies and philosophy.
Notwithstanding the above, we acknowledge your comment. We note that Rule 14a-21(a) does not require any specific form of resolution, and indeed, per Compliance & Disclosure Interpretation Q&A 169.04, a formal resolution is not even required under Rule 14a-21(a). We believe the current disclosure in the proxy statement is not materially inconsistent with the intention of the Release and Rule 14a-21(a), that shareholders are likely to understand the scope of the proposed vote to include a vote on the compensation of the named executive officers as disclosed in the proxy statement, and therefore, we cordially request that no changes be required for this year’s proxy statement. We do, however, undertake that any formal resolution included as part of our Rule 14a-21(a) advisory vote in our future proxy statements shall clearly state that the Company is seeking approval of our stockholders, on an advisory basis of “compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion” when obtaining future advisory votes as required by the Release.
Issuer F
Comment
We note that Proposal 3 on the proxy card is described as a vote to “[p]rovide an advisory vote on executive compensation.” Using the word “provide” to describe the proposal implies that shareholders are voting on whether they should be provided an advisory vote on executive compensation in the future. But the discussion of the proposal starting on page 5 indicates that you are providing a shareholder advisory vote on the compensation of your named executive officers. Revise your proxy card to more clearly describe the effect of Proposal 3 as required by Rule 14a-4(a)(3). Refer to the example in the instruction to Rule 14a-21(a).
Response
The Company has revised the preliminary proxy card to delete the reference to “provide”.
In our “2011 Consultant League Report,” we took a look at annual reports and proxy filings of public companies to determine which consulting firms had the largest, most profitable clients, and which had the best market share in various indices, sectors, and geographic locations. Although many of the large consulting firms consistently stand atop the rankings, categorical breakdowns reveal some of the smaller shops’ unique market niches. Some of our findings:
– Frederic W. Cook and Co. led the rankings for engagement in the Russell 3000 (14.2% market share), the Fortune 1000 (20.9% market share), and the S&P 1500 (16.2% market share).
– Pearl Meyer & Partners had the highest percentage of new engagements, with 15.3% market share. Towers Watson was second, with 12.7%.
– Total Rewards Strategies had the highest average percentage of votes in favor of clients’ pay packages, with 95.7%, while Radford has the highest median percentage of those votes, with 97.2%.
Below is a sample table from the report, detailing the market share of firms engaged by the Russell 3000 (in comparison, here are last year’s numbers):
Other charts in the 2011 Consultant League Report include:
– Financial Data: Firms’ client base ranked by revenue, net income, year-end market capitalization, total assets, and one- and three-year total shareholder return
– Indices: The firms with the most market share in the Fortune 1000, S&P 1500, and more
– Sectors: Eight different industry categories, from Healthcare to Financial Services
– Geography: The firms with the most market share in each of four U.S. regions
– Engagement: The market share of firms engaged by management
The complete report is provided to all Equilar Knowledge Center subscribers. Non-subscribers can request a copy of the report.
Earlier this week, I blogged about the dismissal of Beazer Home’s say-on-pay lawsuit being dismissed and I noted that the judge rule from the bench. The judge has now issued a 24-page court order explaining the dismissal, which we have posted in the “Say-on-Pay” Practice Area.
Here’s news from ISS’s Ted Allen in his blog: The Council of Institutional Investors (CII) released a report that addresses how institutional investors approached “say on pay” votes during the spring 2011 U.S. proxy season. As expected, most investors said “pay-for-performance” disconnects were a major reason for voting against corporate compensation practices.
The investor group hired Farient Advisors, which interviewed 19 CII members about how they cast their “say on pay” votes. These investor participants consisted mostly of public pension systems (58 percent), mutual fund firms (32 percent), and union pension funds (11 percent).
Investors gave various reasons for opposing corporate pay practices, but the factors most frequently cited were:
– A disconnect between pay and performance (92 percent)
– Poor pay practices (57 percent).
– Poor disclosure (35 percent).
– Inappropriately high level of compensation for the company’s size, industry, and performance (16 percent).
The report’s other findings include:
– Investors were extremely thoughtful about evaluating executive compensation for “say on pay” votes
– Due to resource constraints, investors used proxy advisory firms’ analyses to varying degrees.
– Investors considered multiple factors as well as inputs from various sources in determining their say-on-pay votes.
– Investors evaluated performance and pay over multiple years, and focused primarily on total absolute shareholder return (TSR) over one-, three- and five-year periods.
– Investors spent the most time and resources analyzing pay at “outlier” companies: those with large disconnects between pay and performance, high overall pay and/or low TSR in comparison to their industry or peers.
– Investors focused on CEO pay, rather than the pay of other NEOs, and on the overall “reasonableness” of the level of compensation in view of the company’s size, industry, and performance.
– Investors mostly regarded the “say on pay” vote as an opportunity to voice their concerns about a particular pay program, not a referendum on directors’ oversight of compensation.
The report also had this observation: “This first year of mandatory say on pay has been a learning experience for all participants. Farient encourages investors to conduct a ‘post-mortem’ of their voting processes, including an assessment of any additional resources needed to evaluate ‘say on pay’ proposals fairly and efficiently. Concerned investors should follow up to see what steps, if any, companies take in response to failed ‘say on pay’ proposals, and consider appropriate action.”
On Monday, ISS released the results of its latest policy survey, which both companies and investors are invited to fill out. Although investors and companies appear to be on the same page regarding some pay practices, there are many where they may not be. Among the findings per Mike Melbinger in his blog:
– A majority of both investor (60%) and companies (61%) cited executive compensation as one of the top 3 governance topics for the coming year, similar to last year.
– Investors and companies had different views on when companies should address shareholder opposition during “say on pay votes.” On a cumulative basis, 72% of investors said there should be an explicit response from the board regarding pay practice improvements if opposition exceeds 30%. Among companies, 48% said an explicit response wasn’t necessary unless there was more than 50% dissent. (The most commonly cited level of opposition on a say-on-pay proposal that should trigger an explicit response from the board regarding improvements to pay practices was “more than 20%” for investor respondents.)
– A majority of investors (57%) indicated more engagement activity with companies in 2011. When asked about engagement activity with institutional shareholders, companies almost equally cited “about the same as in 2010” and “more engagement in 2011.”
– Pay levels relative to peers and a company performance’s trend are relevant for both investors and companies when determining pay for performance alignment. When determining whether executive pay is aligned with company performance, an overwhelming majority of investors considered both pay that is significantly higher than peer pay levels and pay levels that have increased disproportionately to the company’s performance trend to be very relevant. On the other hand, most companies indicated that both of these factors to be “somewhat relevant.”
– A majority of investors (57%) and 46% of companies agreed that discretionary annual bonus awards (i.e., those not based on attainment of pre-set goals) to be sometimes problematic if the awards are not aligned with company performance.
– Regarding new equity plans, responses from investor and companies varied as to whether positive factors, such as above median long-term shareholder return; low average burn rate relative to peers; double-trigger CIC equity vesting; reasonable plan duration; robust vesting requirements, should be taken into account to mitigate an equity plan where shareholder value transfer (SVT) cost is excessive relative to peers. Most investors were reluctant to indicate that any of those factors would “very much” mitigate the cost.
– Where SVT cost is not excessive and whether negative factors, such as liberal CIC definition with automatic award vesting; excessive potential share dilution relative to peers; high CEO or NEO “concentration ratio”; automatic replenishment; prolonged poor financial performance; prolonged poor shareholder returns, weigh against the plan, a majority of investors indicated all of the factors, with the exception of high CEO/NEO “concentration ratio,” should “very much” weigh against the plan.
– An overwhelming majority of investor respondents do not consider automatic accelerated vesting of outstanding grants upon a change in control or accelerated vesting at the board’s discretion after a change in control to be appropriate. The vast majority of companies disagree, and consider both scenarios appropriate.
During our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price), come hear investor views from the investors themselves during the panel – “Say-on-Pay Shareholder Engagement: The Investors Speak” – featuring T. Rowe Price’s Donna Anderson; Cap Re’s Anne Chapman; Blackrock’s Michelle Edkins; CalSTRS’ Anne Sheehan and AFL-CIO’s Vineeta Anand. In addition, investors are sprinkled throughout the panels over the two days to help you learn their latest thinking.
Act Now: Come join 2000 of your colleagues in San Francisco – or thousands more watching live (or by archive) online – to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.
Last week, I blogged how the Cincinnati Bell say-on-pay lawsuit survived a motion to dismiss. Now the count is 1-1 since – as noted at the end of this Thomson Reuters article – a state court judge in Georgia dismissed the shareholder derivative say-on-pay lawsuit against Beazer Home with a ruling from the bench.
Meanwhile, Steve Quinlivan has analyzed the Cincinnati Bell decision and has identified errors in his “Dodd-Frank Blog” – and Marty Rosenbaum characterizes the decision as a “game-changer” in his “OnSecurities Blog.”
In this podcast, Euan Fergusson of White & Case and Tony Gilbert of the Hay Group discuss how say-on-pay has fared in the United Kingdom, including:
– How did say-on-pay start in the UK?
– How does the UK say-on-pay regime differ in the UK compared to the US?
– What have been the most recent say-on-pay developments in the UK?
Early yesterday, I tweeted that the first say-on-pay lawsuit has survived a motion to dismiss and boy, did a get a reaction as nearly everyone had predicted that these lawsuits would be seen as frivolous. As noted in this order, the US District Court for the Southern District of Ohio refused to grant Cincinnati Bell’s motion because the company had not proven that it had met its fiduciary duties. The fiduciary duty standard in Ohio is a “deliberate attempt to cause injury to the corporation” or “reckless disregard for the best interest of the corporation.” Pretty breathtaking that the court thought the complaint supported “deliberate intent to injure” or “reckless disregard.” Thanks to Paul Hastings’ Mark Poerio for pointing this lawsuit out.
What does this all mean? A few things to consider:
1. More Lawsuits Coming – There have been 9 say-on-pay lawsuits filed so far. But I hear there are more in the pipeline because these 9 didn’t include demands on the board first. There are a slew of others that have first made demands – and if an agreement is not reached, lawsuits will be filed. And this development will likely encourage more suits to be filed as well.
2. More Failed Say-on-Pays in ’12 – I’ve been saying that this year was a test year for say-on-pay and that companies who just had their say-on-pay pass should not rest easy for next year. Here are just some of the factors that have led me to this belief:
– Conversations with institutions who appear willing to fail more companies next year now that they have had real experience with voting on large numbers of SOPs and realize that more engagement is possible if necessary
– Increasing anger about income inequality generally, including ramped-up rhetoric in an election year
– A rapidly declining economy and stock market – compared with all boats rising earlier this year
– Throw into the mix that we don’t know what positions ISS and Glass Lewis might change for the coming year. As well as investors and their policies.
– Directors were spared “against/withhold” vote campaigns this year in deference to say-on-pay. I wouldn’t necessarily bank on that happening again. And directors are likely to take a large number of “no” votes personally compared to SOP votes.
As I have learned from the prep calls for our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price), I can tell you that we are still in the infancy of how say-on-pay will ultimately play out. And you will hear for yourself the horror stories when a company does fail its say-on-pay – and how the say-on-pay lawsuit really shakes up a boardroom – during the “Failed Say-on-Pay? Lessons Learned from the Front” panel during the conference.
Act Now: Come join 2000 of your colleagues in San Francisco – or thousands more watching live (or by archive) online – to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.