With the proxy season long over, it’s been a long time – 9 weeks – since we’ve seen a company fail to garner majority support for its say-on-pay. But as Mark Borges reported over the weekend in his blog, Exar has become the 41st company to do so this year.
In this Form 8-K, Exar reports that it was a close vote with the company receiving more “for” votes compared to “against” – but as Mark notes, the Delaware company counted its “abstentions” as “against” votes back when the company filed its proxy statement (see pg. 4) – thus resulting in the receipt of 49% in support. A list of the Form 8-Ks of the “failed” companies is in our “Say-on-Pay” Practice Area.
If it survives at all, this case might be worth watching. This Bloomberg article reports on arguments heard in In re the Goldman Sachs Group Inc. Shareholder Litigation in the Delaware Chancery Court. Counsel for plaintiff Southeastern Pennsylvania Transportation Authority argued that Goldman’s compensation plan unfairly rewards the investment bank’s employees at shareholders’ expense, that Goldman “is being run for the benefit of employees rather than shareholders,” and that the firm’s compensation system is wasteful and rewards employees for taking risks that hurt the firm’s stock price, such as the creation and sale of CDOs that resulted in Goldman’s paying a $550M settlement with the SEC.
According to the article, Goldman has lost $50 billion in market value since 1999 while the company has paid out billions in compensation, including $19 million to CEO Lloyd Blankfein for 2010. His compensation was almost double the prior year’s award and included a $5.4 million cash bonus, even though Goldman’s profits fell. The derivative suit against the Goldman directors seeks to hold them “responsible for the firm’s flawed pay plan and for not properly overseeing the company’s employees.”
The author reports that Goldman’s counsel argued in response that it is not the role of the courts to decide how much risk a firm should take or how much compensation its employees should be paid. As I said, if this case survives at all, it should be interesting.
Equilar recently released a report -“TSR Performance and CEO Pay Report” – about the relationship between total shareholder return (TSR) and CEO compensation in the S&P 1500. The report’s findings include:
– 23.9% of firms increased their CEO’s pay, despite below-median TSR, in the past year (2008-2009).
– 30.0% of firms increased their CEO’s pay, despite below-median TSR, in the past three years (2006-2009).
– Almost all companies studied increased their CEO’s base salary from 2006 to 2009, even if the CEO’s total compensation went down.
Normally, you can request a copy of Equilar’s reports – but I don’t see a link for that yet on their site…
Here’s something that I just blogged: Yesterday, the SEC announced a settlement with the former chief financial officer of Beazer Homes USA to recover his bonus compensation and stock sale profits from the period when the Atlanta-based homebuilder was committing accounting fraud.
According to the SEC’s complaint filed in federal court in Atlanta, James O’Leary is not personally charged with misconduct, but is still required under Section 304 of the Sarbanes-Oxley Act to reimburse Beazer more than $1.4 million that he got after Beazer filed fraudulent financial statements during fiscal year 2006. The SEC’s settlement with O’Leary is subject to court approval.
Earlier this year, the SEC reached a settlement with Beazer CEO Ian McCarthy to recover several million dollars in bonus compensation and stock profits that he received.
Section 304 requires reimbursement by some senior corporate executives of certain compensation and stock sale profits received while their companies were in material non-compliance with financial reporting requirements due to misconduct. According to the SEC, this can include an individual who has not been personally charged with the underlying misconduct or alleged to have otherwise violated the federal securities laws.
Without admitting or denying the SEC’s allegations, O’Leary agreed to reimburse Beazer $1,431,022 in cash within 30 days of entry of the court order approving the settlement. This amount includes O’Leary’s entire fiscal year 2006 incentive bonus: $1,024,764 in cash incentive compensation and $131,733 previously received from Beazer in exchange for all restricted stock units he received as additional incentive compensation for fiscal year 2006. The settlement amount also includes $274,525 in stock sale profits.
From an anonymous member: “Recently, I listened to an ISS Corporate Services webcast about their new ExecComp Analytics platform. Based on what I saw during the webcast, it would give subscribers access to the same executive compensation database that ISS uses when doing its proxy voting analysis, including their proprietary way of valuing equity-based instruments. It would also give subscribers some insight into how ISS views certain pay elements for particular companies.
One interesting thing I learned during the Q&A is that this platform will not source its exec comp data from Equilar. Instead, going forward ISS will use an in-house team to compile exec comp data. To me, this signals the beginning of ISS and Equilar competing head-to-head for subscribers to their respective exec comp databases. While some companies will be able to afford to subscribe to both, I think many may not.”
On the heels of receiving this note, Equilar announced that it was terminating its agreement with ISS…
Check out this recent article from Frank Glassner of Veritas about the future of stock options. I would repeat it in this blog but the blogging software won’t let me paste charts…
Thanks to Mike Melbinger of Winston & Strawn for contributing this nifty chart that lists issues to consider when drafting clawback policies. We have posted it in our “Clawback Policies” Practice Area.
I’m back running my own firm and I have resumed posting thoughts in my “Pay & Performance Blog,” with the latest being this: In the 1990’s and into the 2000’s, employee stock options glittered. When the glitter faded due to market downturns and increasing volatility, new forms of equity compensation emerged to restore the sheen – option exchanges and repricing and restricted stock units. This past week’s market volatility, economic uncertainty, and the contributing factors took away a bit of the remaining glitter.
With widespread concern about equity investments, what has been the newest shining light? Gold. But we can, and in many cases must, compensate employees with equity and we can’t do that with gold…can we?
Beyond the surging price of gold in response to global economic, financial, debt, and currency issues, there are some trends underway not gaining the attention of mainstream media that point to a growing influence of gold as a currency. Does this open an opportunity for considering gold as a form of employee compensation?
While this may appear to be a “fringe” idea, such a view would place the world’s most prominent countries, most sophisticated investors, and a dozen US states on this fringe.
This, of course, is all intended to stimulate discussion.
– My accounting and valuation colleagues will point out the technical issues (with pay linked to a commodity)
– My tax colleagues will poke holes in the court cases and cite the Code
– My legal colleagues will undoubtedly identify all of the reasons that this is a poor idea and the possible liabilities resulting
– My equity plan administration colleagues will curse me for recommending a non-equity form of compensation (can the software platform handle a “restricted gold” award?)
– My survey and proxy data colleagues will wonder where gold would be categorized on a data input questionnaire and in the database. A full value award? Bonus? Other LTI?
– And of course, my corporate governance colleagues will cite the horrendous outcome of decoupling compensation from shareholder value.
Not unlike issues we’ve faced with other “new” pay vehicles, like cash long-term incentive awards.
I’ve provided a few links in this blog that set the stage for what I believe will be a discussion over the next year that will move from what may appear to be a humorous alternative, perhaps even satirical, view to a central discussion point in employee compensation planning – designing, delivering, and measuring pay value if and when the bottom falls out of both the global economy and the US currency.
Some of these links are on sites that are clearly pro-gold, anti-US currency, and even a bit anti-government, but some are a bit more credible. All are factually true. Sources of these excerpts are available at the links.
The Dodd-Frank Act also requires companies to hold separate shareholder votes on “golden parachute” arrangements when they seek approval for mergers, sales, and other transactions. However, the SEC rules on this mandate did not take effect until April 25, so less than a dozen companies have held parachute votes this year.
As of Aug. 7, seven Russell 3000 companies had reported the results of golden parachute votes, and five earned more than 89 percent support. These results suggest that investors will tend to support a company’s golden parachute payments if they believe that the overall transaction has merit.
There have been two exceptions so far. On July 26, MedCath Corp. received almost unanimous support for two asset sales, but just 82.6 percent support on its severance arrangements. At SAVVIS, the sale of the company to CenturyLink earned nearly unanimous investor approval on July 13, but the severance arrangements received just 70 percent support. It appears that SAVVIS investors had concerns over $3.9 million in potential tax gross-up payments for CEO James Ousley.
Two companies have yet to report vote results, and six more severance votes are scheduled for the next two months.
The following are excerpts from a recent Governance Exchange interview with Jella Benner-Heinacher, managing director and counsel for Deutsche Schutzvereinigung fur Wertpapierbesitz (DSW), which is Germany’s largest association of retail investors. The German government has commissioned DSW to study the impact of 2009 legislation requiring an advisory vote on executive compensation. Stephan Costa of the ISS London office conducted this interview.
Costa: The Act of Appropriateness of Management for Compensation came into existence a little over a year ago, in August 2009. This initiative changes the practice of management compensation and its determination by the supervisory board. DSW was tasked by the German government to study the effectiveness of this law. Can you provide us with some background and key findings of the study?
Benner-Heinacher: Sure. First of all, I would like to underline that this new law has had a large impact on our daily work and on the corporate governance practices in Germany. DSW was asked by the German government to prepare a study on our experiences with this new “say on pay” system for the 2010 proxy season. Although the study is not yet published, let me tell you about some of the key findings.
Let’s start with some statistics. Twenty-eight out of the 30 DAX companies–the leading and the largest companies in Germany–introduced a new pay system for directors. I find this to be quite revolutionary by German standards. Twenty-one out of 30 DAX companies consulted an external expert on remuneration for advice when they prepared their new pay systems. This indicates that, before now, this was not the case. In my opinion, this is quite revealing. And obviously, there was need for external advice.
Twenty-six of the 30 DAX companies actually put this new “say on pay” possibility on their agenda this season. One company didn’t put it up as a resolution, but [presented it instead] for informational purposes only. So, I would say the majority of the DAX 30 companies really used this new law, and tried to ask their shareholders to support the new pay system. This represents quite a big step for Germany.
Costa: What did the German government seek to achieve by introducing “say on pay”?
Benner-Heinacher: Its intention was very clear. It wanted to introduce a higher degree of responsibility for the members of the supervisory board. The supervisory board is responsible in Germany for fixing the remuneration of directors [on the management board]. This requires them to look at the long-term variable part of pay and sustainability regarding the incentives of pay. This can also be partially attributed to the lingering effects of the financial crisis.
Costa: Do you see a movement toward this aim being achieved?
Benner-Heinacher: Yes. But, we have to be careful, because we had a look at the DAX 30 companies, which are the leading and the largest companies in Germany. But we should not generalize. We also had a look at the midsize and the smaller companies in the MDAX, SDAX, and TecDAX. And to tell you the truth, there is still a long way to go. Only a few of the mid- and smaller cap companies really paid close attention to the new rules. The clear majority of the MDAX companies did not.
Costa: Do you think that there was a cost consideration of implementation?
Benner-Heinacher: No. I think it’s always the DAX 30 companies that lead the way in Germany. They’re still the model companies for corporate governance change. Everyone is looking at them to see what they are doing. For the first proxy season, these changes were accepted by the DAX 30 companies. Hopefully, the medium and smaller-cap companies will follow suit in 2011 and 2012.
Costa: Were there any examples of significant shareholder votes against remuneration this past proxy season? And if so, what were the shareholders’ reasons for opposing?
Benner-Heinacher: Yes. There’s actually one very good example, and that was the general meeting of Heidelberger Cement. The majority of shareholders–54 percent–voted against [management’s “say on pay” proposal.] Now you would say it’s not binding, and it’s only an advisory vote; but nevertheless, the public criticism was very loud. And the supervisory board promised that they will reexamine the pay system going forward.
The reason why the majority of the shareholders opposed the “say on pay” [proposal] was in their view the inappropriateness of the pay. And there was also an issue of a EUR 5 million extra bonus for the directors. This did not please the shareholders. Second, besides the inappropriateness, there was also a lack of transparency of the directors’ pay. So, if shareholders do not really understand the “say on pay” system and are not convinced that this is the right one, then they will vote no.
Costa: This legislation has aligned Germany with the U.K. and Holland, where it’s common practice for the shareholders to vote on executive remuneration and where companies consult investors on a regular basis about such issues. Have you seen a noticeable increase in dialogue between investors and the board, as we have seen in the U.K. and in Holland?
Benner-Heinacher: Yes. We are seeing a real strengthening of the dialogue between the institutional investors, investor representatives such as DSW, and the issuers. Not as much at the board level, because in the German system, it’s the investor relations manager who is tasked with meeting with shareholders. But it is fair to say that there is an ongoing dialogue, especially before the general meeting season even gets started.