ISS Corporate Services recently released a white paper, “Bridging the Pay Divide: Trends in C-Suite Pay Disparities.” This white paper examined the total direct compensation for the top five highest-paid executives at Russell 3000 companies in fiscal years 2008, 2009, and 2010. Total direct compensation is defined as the sum of pay received from: base salary, bonus, non-equity incentive plan compensation, stock awards, option awards, change in pension value and nonqualified deferred compensation earnings, and all other compensation, such as perquisites.
Here are some of the paper’s key takeaways:
– The gap between total direct compensation of the CEO and next highest paid named executive officers has closed dramatically since fiscal 2008.
– As of fiscal 2010 and where the CEO is the top paid executive, the pay gap is most pronounced at large-cap companies, where CEOs received, on average, 2.4 times the pay of the next highest paid executive officer. By comparison, the multiple is 2.1 times at Russell 3000 companies below the S&P 1500.
– Across sectors, companies in the materials sector saw the largest pay spread with an average multiple of 2.4 in fiscal 2010, while, conversely, telecommunications firms had an average multiple of just 1.9.
– The prevalence of “excessive” multiples between the CEO and next highest paid executive, defined here as three or more, declined markedly from fiscal 2008 when evidenced at more than half of all Russell 3000 companies.
– Across indices, the CEO’s share of total compensation of the top five earning officers dropped radically from fiscal 2008 to 2009, though has held steady into 2010 with CEOs claiming 42.2 percent of the total pay pie across the full Russell 3000 universe.
This recent CFO.com article notes how going public can be costly for shareholders, particularly the hike in executive pay. Here is an excerpt:
Being public adds about $2.5 million, on average, to a company’s cost structure, with $1.5 million of that devoted to higher compensation for CEOs, CFOs, and others in the finance function, such as investor-relations professionals, according to the survey. That figure also covers increased board costs, as more than 80% of companies had either added new members to their boards of directors or increased director compensation prior to their IPO.
Indeed, Angie’s List, which went public this week, notes in its S-1 filing that it boosted executive cash compensation to hit the 75th percentile, based on a study of other pre-IPO companies, in advance of its offering. “As part of the compensation committee’s comprehensive review of executive compensation levels during July 2010, we found that our base salaries generally fell significantly below the median in both of our pre-IPO and public companies studies,” according to the S-1. As a result, Angie’s List made “significant increases in recognition of both the growth of our company over the last few years and the efforts that would be required of all our executive officers as we began to move toward becoming a public company.”
Twelve Australian ASX 300 companies have received a first “strike” under the new “two strikes” law in Australia that allows shareholders to oust directors if a company’s remuneration report receives 25 percent or more “against” votes for two consecutive years.
The controversial rule, which is part of an amendment to the Australian Corporation Act that went into effect July 1, requires companies to put a “spill” motion on the ballot of the annual general meeting at which a second strike could occur. If the spill motion passes with a simple majority, the company must hold a general meeting within 90 days at which all directors, except managing directors, stand for reelection. The legislation, which applies to any Australian-domiciled company, prohibits key management personnel or their closely related parties from voting on the remuneration report and on the spill resolution.
The 12 companies with first strike votes so far are: Bluescope, Crown, Dexus, Pacific Brands, Watpac, UGL, GUD, Austock, Tassal Group, Sirtex Medical, Perpetual, and Globe.
The two strikes rule has increased the focus on executive pay in the Australian market, but has otherwise received mixed reviews, with some stakeholders concerned that shareholders could use the rule as a way of ousting directors instead of focusing on remuneration. They fear it could dilute the existing feedback mechanism without actually curbing any of the pay excesses. An advisory vote on remuneration packages has been required in Australia since 2005.
Recently, I blogged about the spate of Section 162(m)-based lawsuits that increasingly are in vogue. The latest one of those was filed against Allergan in Delaware last week (here’s the complaint).
Now we have a new breed of lawsuit – or perhaps it’s more accurate to call it a retread of a vein of old-fashioned pay suits – because it’s not a say-on-pay or Section 162(m) lawsuit, but rather a breach of fiduciary duty – with a helping of alleged self-dealing – suit filed against Ralph Lauren last week in the New York Supreme Court. Even though there was a negative ISS recommendation, the company’s say-on-pay received 96% support (84% when backing out management’s ownership) Founder Ralph Lauren has voting control of the company though Class B shares and it’s deemed a “controlled company” under NYSE rules. The complaint is posted in our “Comp Litigation” Portal. Steven Kittrell notes these allegations in his “Just Compensation” Blog:
– Ralph Lauren Company made a large donation to a charity “affiliated” with a member of the compensation committee;
– One compensation committee member is a “Class B” director. Class B directors are elected solely by Class B stock that is owned only by Ralph Lauren and his family;
– The compensation committee did not hire a compensation consultant in the last year, but got recommendations from management’s compensation consultant for review.
Steven concludes that this case is unlikely to go to trial – and while that is always the best assumption because these cases rarely do, the complaint has a load of allegations that don’t pass the “stink” test giving this case somewhat of a “Disney-esque” quality to it…
It’s worth repeating this blog from Mark Borges from Saturday:
This past week, the United Kingdom High Pay Commission (an independent inquiry into executive compensation) released the results of its year-long study of executive pay. Entitled “Cheques With Balances: why tackling high pay is in the national interest,” the report includes 12 recommendations on ways to combat spiraling executive compensation.
The one that I found most interesting is the recommendation that the current shareholder advisory vote on executive compensation be made “forward-looking.” By this, the Commission means that shareholders would be given the opportunity to vote on a company’s proposed remuneration arrangements for the next three years (following the date of the vote). This would include future salary increases, bonus awards, and all ancillary benefits (such as pension arrangements).
As the Commission notes, this approach would give shareholders a genuine say in the remuneration to be paid to executives, not just the ability to “approve” or “ratify” the pay packages that have already been implemented. It almost goes without saying that this would be a radical departure from the current structure of shareholder advisory votes on executive pay (both in the UK and the US). Given that the concept of shareholder advisory votes originated in UK a mere decade ago, the proposal bears watching – if only to see how it is received in the UK corporate and investor communities.
Intriguingly, a recent study found that bosses who don’t play golf are paid 17% less on average than those who do. Could this be because the qualities that make a good golfer–a mixture of hyper-competitiveness with strategic thinking and coolness under fire–also make for a good chief executive?
Probably not. The same study found that although golfing bosses are paid more, they do not produce better results for shareholders. One explanation would be that they are buttering up members of the compensation committee by inviting them to play wonderful courses like Wentworth. More likely, the correlation is pure chance.
Illustrating how no company is immune from shareholders voting down a say-on-pay (regardless of its size), Tuesday Morning Corporation – as Mark Borges blogged yesterday – became the latest to fail when its SOP received only 36.4% support for its say-on-pay at its annual meeting. I will be adding Tuesday Morning’s Form 8-K to our list of failed say-on-pays in our “Say-on-Pay” Practice Area.
The new phone book is here! The new phone book is here! Yesterday, ISS released its 2012 updates for its US, Canadian, European and international proxy voting guidelines. Here is a description of some of the updates from ISS:
One of the most significant updates is ISS’ revised U.S. pay-for-performance policy. During the policy process, both clients and issuers indicated that pay-for-performance alignment should be viewed in a long-term context rather than the most recent year. In light of this guidance, ISS’ new approach will provide clients with a more robust view of the relationship between executive pay and company performance over a sustained time horizon. Specifically, ISS will consider: the relative alignment between the company’s total shareholder return and the CEO’s total pay rank within a peer group, as measured over one and three years; and absolute alignment (the alignment between CEO pay and a company’s share return over the prior five years). If alignment appears weak, further in-depth analysis will determine if there are mitigating factors.
ISS strives to make its policies as transparent as possible. ISS will provide additional guidance on its pay-for-performance methodology in December 2011. ISS also intends to disclose its peer group methodology and rationale, allowing investors and issuers to understand how peer groups are constructed by ISS.
In line with investor feedback, ISS will make recommendations on a case-by-case basis on compensation committee members and the management say-on-pay proposal if the company’s previous say-on-pay resolution received less than 70 percent support from all votes cast, taking into account the company’s response; disclosure of engagement with major investors; specific actions taken to address the compensation issue(s) that caused the significant dissent; whether the issue(s) raised is recurring or one-time; and the company’s ownership structure. Cases where support was less than 50 percent will warrant the highest degree of responsiveness.
We have posted the Fall 2011 Issue of our Compensation Standards newsletter that contains practical guidance pulled from our successful pair of executive pay conferences. With Dave Lynn and Mark Borges wrapping up the 2012 Edition of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise & Reporting Guide”- about half of the updated Chapters of the Treatise are already posted on CompensationStandards.com – we thought it was best to compile a select group of the Talking Points as our Fall issue (attendees of the Conferences received the entire 200-page set; you can still register to watch the archived video of the Conferences) since it’s too late to insert them in the upcoming edition of the Treatise.
In last year’s report on director pay trends, we asked if compensation for corporate directors had found its floor following two consecutive years in which the economic environment prompted many companies to hold director pay levels in check. Pay for directors rose 3% in 2008 and just 1% in 2009. However, our latest annual review of director pay programs shows that, as with executive pay, director compensation rose in 2010 as the market and economy regained momentum.
Although last year’s growth in director pay levels was below the nearly 10% level of several years ago, the trend is once again upward. Our latest analysis of director compensation at Fortune 500 companies shows a moderate increase in year-over-year pay for directors in the largest U.S. companies, increasing 6% at the median during the past year. While most large companies continue to provide a roughly equal mix of cash and equity for directors, recent increases in pay components have been primarily concentrated on the stock side of the program, further strengthening the link between the interests of shareholders and directors.