As noted in this K&L Gates memo, the FSA in the United Kingdom has released a set of Remuneration Policy Statement Templates and other guidance. And here’s updated information from Barbara Nims and Gillian Emmett Moldowan repeated from Davis Polk’s blog:
On August 5, 2011, the UK Financial Services Authority (FSA) proposed two draft “Dear CEO” letters providing guidance on issues relating to the revised Remuneration Code, which came into force on January 1, 2011. The Remuneration Code covers a relatively wide-range of financial institutions in the UK (both UK firms and non-UK firms with branches in the UK) including banks, building societies and broker-dealers (over 2,500 institutions in all). The letters, one of which is for firms in proportionality tier 1 and the other for firms in proportionality tiers 2, 3 and 4, detail how the FSA plans to monitor implementation of the Remuneration Code and provide guidance on FSA policy with regard to the Code. Each letter contains annexes that provide specific guidance on the following topics: the definition of “Code staff”, expectations regarding qualifying long-term incentive plans and how firms may interpret the share-equivalent payment instrument alternatives.
The tier 1 letter and the letter for tiers 2, 3 and 4 differ with respect to how the FSA will assess a firm’s compliance with the Remuneration Code. Each tier 1 firm will be subject to an annual compliance review, which will include, among other elements, meetings between the FSA and the firm. Further, while all firms are required to prepare a Remuneration Policy Statement (RPS) within a given timeframe, only tier 1 firms must automatically submit their policies to the FSA (non-tier 1 firms need only submit an RPS if specifically requested by the FSA). A RPS template for tier 1 firms was published by the FSA along with the “Dear CEO” letters. The RPS templates for tier 2, 3 and 4 firms were published on April 19, 2011.
Here is the FSA notice announcing the proposed guidance, including links to the draft “Dear CEO” letters and annexes. The FSA is inviting comments to the proposed letters until September 2, 2011.
As expected, the Canadian Securities Administrators (CSA) have released a final version of the proposed disclosure amendments to Form 51-102F6 Statement of Executive Compensation. Issuers with fiscal years ending on or after Oct. 31, 2011, will be subject to the amended disclosure rules.
Pursuant to these updated rules, issuers will be required to disclose the following significant provisions:
– A detailed explanation in the Compensation Discussion & Analysis (CD&A) section as to whether and why a company is relying on the competitive harm exemption to not disclose performance goals;
– Information pertaining to peer compensation benchmarking groups, including a description of why the benchmarking group and selection criteria are relevant to the company;
– Also in the CD&A, a new requirement that companies disclose whether the board of directors considered the implications of the risk associated with the company’s compensation policies and practices;
– A new provision in the CD&A requiring a company to disclose whether any director or named executive officer (NEO) is permitted to purchase hedging instruments to offset a decrease in the market value of equity securities granted as compensation or otherwise held by the director or NEO;
– Greater compensation committee disclosure including members’ independence and relevant experience as well as an overview of how the committee functions;
– Expanded disclosure with regard to the work performed by compensation advisers and a breakdown of the fees paid to each consultant for services related to executive compensation and all other services, if any;
– Clarification that disclosure regarding the methodology used to calculate the grant date fair value of all equity-based awards must accompany the Summary Compensation Table (SCT) in which the grant date fair value amounts appear;
– A new column in the incentive plan awards table which discloses the value of vested share-based awards that have not been paid out or distributed;
– To calculate the annual lifetime pension benefit payable for those NEOs who are not yet eligible for benefits, the company must assume that the NEOs are eligible to receive payments or benefits at year-end. Also, any company contributions made on behalf of any NEO under a personal retirement plan must be disclosed in the “Other Compensation” section of the SCT. The non-compensatory amounts for defined contribution plans will no longer be required disclosure.
The above updates have not been significantly altered from when they were initially proposed in November 2010. As Canada’s executive compensation disclosure rules evolve to align closer to the U.S. model, these amendments should allow shareholders a better understanding of how and why executive compensation decisions are made as well as the overall outcomes of those decisions.
– Jeannemarie O’Brien and Jeremy Goldstein, Wachtell Lipton
As noted in this memo, a number of derivative suits have been filed in recent months alleging that the senior executive compensation plans at public companies do not comply with Section 162(m) of the Internal Revenue Code. Section 162(m) provides that any compensation paid to the CEO and next three highest compensated proxy officers (other than the CFO) in excess of $1 million per year is not tax deductible unless, among other things, the compensation is subject to objective performance metrics that have been disclosed to and approved by shareholders.
The complaints generally allege that the performance goals established by the plans are not sufficiently objective to comply with Section 162(m) and that the purported failure of the plans to comply with Section 162(m) renders the required proxy disclosure false and misleading in violation of Section 14(a) of the Securities Exchange Act. In addition, the complaints allege that the provision of non-deductible compensation to senior executives constitutes waste, unjust enrichment of the executives and a breach of the directors’ duty of loyalty.
We view these suits as meritless and symptomatic of the excesses that led to reform in other areas of shareholder litigation. In each of the challenged plans that we have reviewed, the terms of the plans do in fact comply with Section 162(m) and the disclosure relating to the plans expressly states that non-deductible compensation may be granted if the compensation committee determines that doing so is in the best interest of the company.
Moreover, the complaints that we have reviewed, alleging that the performance goals are not sufficiently objective to comply with Section 162(m), reflect a basic lack of understanding of the operation of typical Section 162(m) plans in which the compensation committee establishes an objective Section 162(m) goal, which, if met, would then provide the committee with the discretion to make an award below the amount authorized by the plan. This “plan within a plan” structure is expressly permitted by the Code. In addition, there is no legal obligation for compensation committees to grant only compensation that is deductible under Section 162(m). The courts have largely gotten this right by ruling against the plaintiffs on motions to dismiss (see, for example, Justice Stark’s well reasoned opinion in Seinfeld v. O’Connor).
These suits nonetheless serve as a reminder that careful attention must be paid to the design and administration of plans intended to comply with Section 162(m) and that disclosure relating to tax deductibility must be carefully drafted. Companies should design plans to make compliance with Section 162(m) as easy and straightforward as possible. The “plan within a plan” design is the most efficient means of achieving this goal. Equally important, proxy disclosure should not guarantee that all compensation awarded will comply with Section 162(m). Instead, proxy disclosure should say that plans are “intended to” comply with Section 162(m) and that the company may elect to provide non-deductible compensation.
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:
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.
– 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.
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.
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.
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:
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.