The Advisors' Blog

– Broc Romanek, CompensationStandards.com

As I head out on vacation, I thought I would leave you with this interesting two-part series of memos from the proxy solicitor, Alliance Advisors, regarding how say-on-pay played out this past proxy season:

– Part 1
– Part 2

– Broc Romanek, CompensationStandards.com

With the odds of Congress taking action to alter Section 953(b) of Dodd-Frank – the section eliciting pay disparity disclosures – looking pretty slim, the battle to influence the SEC ahead of a proposal coming out is heating up. Last week, I blogged about the AFL-CIO’s new white paper on the topic.

Now we have this comment letter from 22 corporate lawyers (which is not yet posted with the other comment letters sent to the SEC). Here’s a description of the comment letter from Cleary Gottlieb:

Although final rulemaking on the Dodd-Frank (Section 953) CEO pay ratio disclosure requirement has now been delayed until the first half of 2012, we thought you would be interested in this SEC comment letter that addresses many of the conceptual deficiencies of the requirement. The comment letter was a collaborative effort by many leading executive compensation lawyers and supports wholesale repeal of the requirement or, failing that, advocates several modifications to ease the burden of the requirement. Those modifications include:

– At least two years of implementation time following adoption of the rule;
– Exclusion of non-US employees from the calculation;
– A safe harbor for using W-2 compensation (or comparable measurement for non-US employees, if they are included in the calculation) in lieu of “total compensation” as defined by the proxy rules for non-NEO employees;
– A “good faith efforts” standard for determining the median amount of pay;
– Flexibility in selecting the date as of which median pay is determined; and
– Authorization to provide an alternative voluntary measure of relative CEO pay, such as for example the ratio of CEO pay to average pay of private non-farm workers as compiled by the Bureau of Labor Statistics, which would promote comparability of disclosure across companies.

– Broc Romanek, CompensationStandards.com

Recently, ISS released its “Preliminary 2011 U.S. Postseason Report,” whose key findings include:

– During the first year of advisory votes on executive compensation under Dodd-Frank, investors overwhelmingly endorsed companies’ pay programs, providing 91.2% support on average.

– Shareholders voted down management “say on pay” proposals at 37 Russell 3000 companies, or just 1.6% of the total that reported vote results. Most of the failed votes apparently were driven by pay-for-performance concerns.

– “Say on pay” votes spurred greater engagement by companies and prompted some firms to make late changes to their pay practices to win support.

– Investors overwhelmingly supported an annual frequency for future pay votes, even though many companies recommended a triennial frequency.

– Among governance proposals, the biggest story this year was the greater support for board declassification. Shareholder resolutions on this topic averaged 73.5% support, up more than 12% from 2010, and won majority support at 22 large-cap firms.

– Shareholder resolutions on environmental and social issues reached a new high of 20.6% average support. Five proposals received a majority of votes cast, a new record.

– The arrival of “say on pay” contributed to a significant decline in opposition to directors. As of June 30, just 43 directors at Russell 3000 firms had failed to win majority support, down from 87 during the same period in 2010. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported investor proposals were among the reasons that contributed to investor dissent.

– Broc Romanek, CompensationStandards.com

As it has done before, the SEC has adjusted its tentative rulemaking calendar to push back some of the expected proposal and adoption dates for the remaining executive compensation and corporate governance items on its agenda. Thanks to Mike Melbinger, who blogged this information yesterday on CompensationStandards.com (see Davis Polk’s blog for more analysis):

On Friday, the SEC modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation, as follows:

August – December 2011 (planned)

– §951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
– §952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts

January – June 2012 (planned)

– §953 and 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
– §954: Adopt rules regarding recovery of executive compensation
– §956: Adopt rules (jointly with others) regarding disclosure of, and prohibitions of certain executive compensation structures and arrangements

July – December 2012 (planned)

– §952: Report to Congress on study and review of the use of compensation consultants and the effects of such use

Dates still to be determined

– §957: Issue rules defining “other significant matters” for purposes of exchange standards regarding broker voting of uninstructed shares

Thus, it seems unlikely that all five of the clawback, pay-for-performance, CEO pay ratio, incentive compensation rules for large financial institutions, and hedging by employees and directors provisions will be effective for next year’s proxy season. However, if they meet this schedule, one or two of the provisions will be effective for proxies filed after January (as with the say on pay rules, published in January 2011). Fortunately, the SEC will propose rules first (and already has for a couple of the provisions), so we should know well in advance which provisions will be final for the 2012 proxy season.

– Broc Romanek, CompensationStandards.com

We continue to post numerous reports about the results of say-on-pay from this past proxy season in our “Say-on-Pay” Practice Area – including this one from Bentham Stradley and Ira Kay of Pay Governance. Also check out this blog from Matt Orsagh of the CFA Institute which describes say-on-pay developments in various countries.

– Broc Romanek, CompensationStandards.com

Regardless of your political bent, you will enjoy’s last night’s 5-minute skit from “The Daily Show with Jon Stewart” that tackles the 1-year anniversary of Dodd-Frank. Jon Oliver is dressed up in a beaten-up costume representing the legislation and sings his answers to Jon’s questions about where the rulemakings stand now, etc. Pure comical genius:

– Anne Cotter, Leonard Street & Deinard

Here is something I recently blogged on our Dodd-Frank.com Blog: Section 954 of the Dodd-Frank Act requires national securities exchanges (meaning, for instance, the NYSE, Amex and Nasdaq) to adopt rules as directed by the SEC, which rules will require issuers to develop and implement a policy providing:

– for disclosure of an issuer’s policy on incentive compensation that is based on financial information required to be reported under securities laws; and
– that, if an accounting restatement is prepared, the issuer will recover any excess incentive-based compensation from any current or former executive officer who received such incentive-based compensation in the three preceding years.

Rules regarding Section 954 of the Dodd-Frank Act have not yet been proposed or finalized. However, we reviewed recent SEC filings to see what public companies are doing to prepare for the eventual adoption of the rules related to clawback policies:

Robbins & Myers. The board of directors of Robbins & Myers, Inc. adopted a compensation clawback policy and approved a compensation clawback acknowledgement and agreement. The form of acknowledgement and agreement provides that all annual incentives and other performance-based compensation granted on or after October 1, 2010 are subject to the clawback policy. The policy provides that the employee must repay or forfeit any annual incentive or other performance-based compensation as directed by the board of directors of the company if:

– the vesting of such compensation was based on the achievement of financial results that were subsequently the subject of a restatement of the company’s financial statements,
– the employee engaged in fraud or misconduct that caused or contributed to the need for the restatement,
– the amount of such compensation that would have been received by the employee would have been lower than the amount actually received, and
– it is in the best interests of the company and its shareholders for the employee to repay or forfeit the compensation.

Caplease. Under Caplease, Inc.’s recently adopted clawback policy, the board of directors may recover incentive compensation paid to any current or former executive officer of the company if all of the following conditions apply:

– the company’s financial statements are required to be restated due to material non-compliance with any financial reporting requirements under the federal securities laws (other than a restatement due to a change in accounting rules),
– as a result of such restatement, a performance measure which was a material factor in determining the award is restated, and
– in the discretion of the compensation committee, a lower payment would have been made to the executive officer based upon the restated financial results.

The clawback policy applies to any incentive compensation paid on or after December 7, 2010 and the recovery period is the three year period preceding the date on which the company is required to prepare the accounting restatement.

Employment Agreements

Signet. An employment agreement for a new CEO of Signet Jewelers Limited provides “[t]he Executive shall be subject to the written policies of the Board applicable to executives, including without limitation any Board policy relating to claw back of compensation, as they exist from time to time during the Executive’s employment by the Company.”

SuperMedia. An employment agreement for a new CEO of SuperMedia Inc. provides “[n]otwithstanding any other provision in this Agreement to the contrary, any “incentive-based compensation” within the meaning of Section 10D of the Exchange Act will be subject to claw-back by the Company in the manner required by Section 10D(b)(2) of the Exchange Act, as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission.”

Benefit Plans

Dover. Dover Corporation recently adopted a severance plan and a change-in-control severance plan. Each plan gives the corporation the right to recover amounts paid to an executive under the respective plan “if required under any claw-back policy of the Corporation as in effect from time to time or under applicable law.”

NACCO. Nacco Industries, Inc. recently amended its Value Appreciation Plan to provide “[t]he Employers may recover all or a specified portion of any Award paid after the Effective Date under the Plan . . . in the event the Participant, either during employment with the Employers or within two years after termination of such employment, commits an act materially adverse to the interests of the Employers or that materially disrupts, damages, impairs or interferes with the business of the Company and its affiliates.

Dominion Resources. The grant agreement for a recent award of restricted stock to the CEO of Dominion Resources, Inc. includes provisions regarding:

– recovery of shares in the event of restated financial statements as a result of fraud or intentional misconduct;
– recovery of shares in the event of fraudulent or intentional misconduct materially affecting the company’s business operations; and
– the award is subject to any clawback policies the company may adopt to conform to the Dodd-Frank Act.

– Broc Romanek, CompensationStandards.com

Recently, the AFL-CIO released this white paper supporting Section 953(b) of Dodd-Frank regarding disclosure of pay disparity ratios.

– Broc Romanek, CompensationStandards.com

From this Cooley news brief: Equilar has issued a report on trends among the S&P 1500 in selecting peer groups in 2010. Apparently, companies change their peer groups quite a bit. According to Equilar, 55.8% modified their peer groups from 2009 to 2010. The most interesting finding was this: “companies benchmark to higher-revenue peers: 78.6% of companies had revenues equal to or below the 60th percentile of their peer group. The average revenue rank was around the 45th percentile.” This finding is consistent with those of earlier academic studies and just might account for the constant ratcheting up of executive pay.

– Broc Romanek, CompensationStandards.com

As I blogged a few weeks back on TheCorporateCounsel.net Blog, ISS recently released its 2011-2012 Policy Survey – comments are due by August 3rd. Although it’s only a survey, the questions, responses and comments serve as the basis for ISS’s policy formulation process. Here’s some thoughts on the survey from Amy Wood of Cooley – and here are thoughts from ExeQuity.