Last week, the SEC brought a rare enforcement action involving perks when it charged NIC Inc. and four current or former officers with failing to disclose more than $1.18 million in perks paid to the former CEO over a six-year period. Correct me if I’m wrong, but this is the first perks case that the SEC has brought since this Tyson Foods settlement in 2005 (and this General Electric order from the year before that). The company and three of the officers agreed to pay a combined $2.8 million to settle the charges.
The SEC alleges that NIC Inc.’s SEC filings failed to disclose that the company footed the bill for wide-ranging perks enjoyed by the former CEO, his girlfriend, and his family – including vacations, computers, and day-to-day personal living expenses and that NIC’s related party disclosures for 2002 through 2005 also were misleading. Among the alleged undisclosed perks for Fraser outlined in the SEC’s complaints filed in federal court in the District of Kansas:
– More than $4,000 per month to live in a ski lodge in Wyoming.
– Costs for Fraser to commute by private aircraft from his home in Wyoming to his office at NIC’s Kansas headquarters.
– Monthly cash payments for purported rent for a Kansas house owned by an entity Fraser set up and controlled.
– Vacations for Fraser, his girlfriend and his family.
– Fraser’s flight training, hunting, skiing, spa and health club expenses.
– Computers and electronics for Fraser and his family.
– A leased Lexus SUV.
– Other day-to-day living expenses for Fraser such as groceries, liquor, tobacco, nutritional supplements, and clothing.
In his blog about this action, Mike Melbinger notes: “The SEC’s allegations make this seem like an egregious situation. However, this action is still a bit frightening to those of us who are making a variety of tough calls each proxy season on whether to report certain items as perquisites.”
We have winners! The 39% that guessed that the SEC would adopt final say-on-pay rules shortly after January 21st are right! The SEC has calendared an open Commission meeting next Tuesday, January 25th to adopt these rules, as well as propose a new definition of “accredited investor” and propose reporting obligation for investment advisors to private funds.
Assuming the SEC posts its adopting release on the same day as the open Commission meeting, we will cover the new rules during our January 26th webcast: “The Latest Developments: Your Upcoming Proxy Disclosures–What You Need to Do Now!” If not, we will push back this webcast to cover the new rules as soon as the adopting release is out.
Tune in today for the webcast – “The Proxy Solicitors Speak on Say-on-Pay” – to hear Art Crozier of Innisfree M&A, David Drake of Georgeson, Ed Hauder of ExeQuity and Reid Pearson of Alliance Advisors discuss solicitation and engagement strategies to help educate shareholders about a company’s compensation program in light of mandatory say-on-pay.
In Friday’s blog, I conducted a poll regarding your guess as to when the SEC would adopt final say-on-pay rules. The 30% who believed that the SEC would adopt them before or on January 21st (which is the date of annual meetings that Dodd-Frank begins to apply mandatory say-on-pay) are proven wrong because the SEC has now calendared an open Commission meeting for this Thursday – but the two agenda items apply to asset-backed securities and not SOP.
So we shall now see if the 38% who believed the SEC would act before the end of this proxy season are right – or the 28% who believed it would be after the proxy season. Or the 10% who believed they would never be adopted. PS – The math doesn’t add up to 100% because folks were allowed to make more than one selection.
During yesterday’s webcast on TheCorporateCounsel.net that dealt with the non-exec comp aspects of Dodd-Frank for this proxy season (audio archive available), the panel had a spirited debate – pure conjecture, mind you – about when the SEC will adopt final say-on-pay rules. You may recall that Section 951 of Dodd-Frank applies mandatory say-on-pay to all shareholder meetings held on or after January 21st – regardless if the SEC adopts final rules.
Please participate in this anonymous poll regarding your guess as to when the SEC will act on final rules:
Recently, a member asked “Have you had any experience or seen anything about Glass Lewis’s new pay for performance proprietary model? There doesn’t seem to be much in the way of transparency as to how it works so far?” I didn’t know the answer so I asked some of our Task Force members and this is essentially what I learned:
Glass-Lewis’s pay-for-performance model is their grading system (each company is assigned an A – F). It’s not new. They have been doing for this a while. As noted, there is little transparency on how the model works and Glass Lewis does that on purpose. We have to cross our fingers and hope for the best once the report is released. Typically, an expert (eg. proxy solicitor or compensation consultant versed in this area) can often sort of tell if a company might be in trouble, but it’s impossible to know the exact grade.
The way it works is if a company gets an “F,” the compensation committee will get a withhold/against recommendation. If a company gets a “D” for two years in a row, the compensation committee chair will get a withhold/against recommendation. However, with say-on-pay on ballot, they will take it out on SOP first and I have seen that in practice with a few late January 2011 meetings already.
The little we know about their model is that they break the grades down by %s. So over the course of the year, they will assign 10% As, 20% Bs, 40% Cs, 20% Ds, and 10% Fs. The peer companies are determined using some weighted formula:
1. Sector -based on 2 digit GICS
2. Sub-Industry -based on 8 digit GICS
3. Geographic location – based on zip code
4. Size of company – based on enterprise value
Total Compensation for them is:
1. Cash portion (salary, bonus, non-equity comp, other comp)
2. Equity portion of grants made during FY. Value options using a Black-Scholes with their own assumptions, value stock awards on face value on date of grant.
Another issue that is frustrating with the Glass Lewis model is how they calculate performance-based awards. So if you make a performance-based grant for a three year cycle and in year one you have to include the full amount in the Comp Table – that is what they will take despite the fact that those awards may not be earned out. So it’s completely distorted.
Tune in on Tuesday for the webcast – “The Proxy Solicitors Speak on Say-on-Pay” – to hear Art Crozier of Innisfree M&A, David Drake of Georgeson, Ed Hauder of ExeQuity and Reid Pearson of Alliance Advisors discuss solicitation and engagement strategies to help educate shareholders about a company’s compensation programs in light of mandatory say-on-pay.
As more fully explained in this Cleary Gottlieb alert, the UK Financial Services Authority has published an amended Remuneration Code, which implements the revised Capital Requirements Directive rules on financial institutions’ remuneration structures, performance measurement and governance. It has also published new Disclosure Rules which implement certain requirements on disclosure of remuneration policies and practices. Both measures apply to a broad range of UK financial institutions.
The Revised Code came into force on January 1, 2011. Firms that are not subject to the existing Code may justify not complying with certain of the Revised Code requirements relating to remuneration structures until July 1, 2011. For firms already subject to the existing Code, it may be possible to justify non-compliance with the requirement to pay 50% of variable remuneration in shares or other non-cash instruments until July 1, 2011
Hat tip to Prof. Barbara Black for noting that: Wall St. Journal reports that Wilmington Trust Corp., which received more than $330 million in TARP funds, recently rescinded more than $1.8 million in compensation from CEO Donald Foley. This may be the first time an executive had to give back compensation under the TARP rules.
Our “8th Annual Survey of Selected Corporate Governance Practices of the Largest US Public Companies” reflects a year of consolidation, rather than innovation, in compensation disclosure by the largest US public companies. The proxy statements of the Top 100 Companies continue many of the trends noted in prior years: enhanced attention to the risk profile of compensation strategies; more companies adopting clawback policies; increased acceptance of shareholder say-on-pay votes; and increased use of independent compensation consultants.
Few proxy statements report new compensation strategies or novel approaches to compensation disclosure. One possible reason for the relative stability in compensation practice and disclosure was the absence of significant new legislation during the period covered by this Survey. Companies were not required to assimilate and react to anything nearly as dramatic as the legislation implementing the TARP of the prior year.
Here is something that I recently blogged on my firm’s Dodd-Frank.com Blog. Several key themes can be distilled from filed say-on-pay and frequency proposals required by the Dodd-Frank Act. Key differences also exist in issuer treatment of inclusion of a resolution on the frequency vote and how issuers explain how they will determine if a frequency vote passes.
Say-on-Pay
Many proposals address:
– What the board will consider based on the outcome of the vote
– Emphasis on the advisory nature of the vote: it will not be binding on the board, overrule any decision made by the board or create or imply any additional fiduciary duty by the board
– Compensations programs are designed to tie to performance that creates long term value
– Compensation in relation to median or peer groups
– Link to long term stock performance
– Alignment to shareholder expectations both short and long-term
– Emphasis on recent positive operating results
– Reduced pay when operating results decrease
– Alignment of executive compensation with key business objectives
– Corporate governance controls over executive compensation
– Absence of tax gross-ups
– Limited compensation that is not tied to performance – absence of multi-year employment agreements, guaranteed incentive awards, “golden parachutes” or significant lump-sum compensation payments upon termination of employment
– What the advisory vote is not a vote on: not a vote on the company’s general compensation policies, compensation of the company’s board, or the company’s compensation policies as they relate to risk management
Frequency Vote
Many proposals address:
– What the board will consider based on the outcome of the vote
– That shareholders are free to express their concerns on executive pay to the board in years where a say-on-pay vote is not held
– Annual votes might hinder long-term focus of compensation plans
– Annual votes may overburden investors
– Triennial votes afford the board the time to understand the results of the vote, discuss with shareholders and implement changes
– Noting option plans and the like have been regularly submitted for shareholder approval
– Triennial votes tie to multi-year performance cycles
Resolutions on Frequency Vote
Companies continue to vary on whether they include a formal resolution on the frequency vote, or just recommend a vote for one of the three alternatives.
Determining Which Frequency Votes Passes
Generally, most state corporation laws provide that proposals, other than the election of directors, need to receive a majority of the votes cast to pass. Many issuers seem to be departing from this legal standard, and state something to the effect that the frequency that receives the greatest number of votes cast will be the frequency selected by the shareholders. Some recent disclosures in this regard are as follows:
– The choice among the four choices included in the resolution which receives the highest number of votes will be deemed the choice of the stockholders (Hormel).
– The option of one year, two years or three years that receives the highest number of votes cast by stockholders will be the frequency for the advisory vote on executive compensation that has been selected by stockholders (Wegner).
– With respect to the frequency of advisory votes on executive compensation proposed in item (3), we have determined to view the frequency vote that receives the greatest number of votes cast by the holders of our Common Stock entitled to vote at the meeting as the advisory vote of shareowners on this item (Rockwell Collins).
– All other matters require for approval the affirmative vote of a majority of those shares present in person, or represented by proxy, and entitled to vote at the Annual Meeting (Telular).
– The option of one year, two years or three years that receives the highest number of votes cast by shareholders will be the frequency for the advisory vote on executive compensation that has been selected by shareholders (Rock-Tenn).
Earlier this week, I conducted my own informal poll on TheCorporateCounsel.net Blog regarding what say-when-on-pay recommendations companies will choose for this proxy season. The results fell in line with what I predicted – “annual” was the most popular despite the limited experience of companies filing proxies so far mostly going with triennial. My poll results came in at: 50% annual; 4% biennial; 33% triennial; 4% no recommendation. Compare that with the 71 companies who had filed proxies by the end of the year: 11% annual; 24% biennial; 55% triennial and 10% no recommendation.
Yesterday, Towers Watson released its own poll results on this topic – and I’m happy to say that the results are quite similar to my own poll results. Here is an excerpt from their press release:
Conducted in mid-December, the Towers Watson poll of 135 U.S. publicly traded companies found that 51% of respondents expect to hold annual say-on-pay votes, while 39% prefer the vote be held every three years, and 10% anticipate holding biennial votes. The poll, however, found companies have a range of reasons for favoring a particular voting frequency. Four in 10 respondents cited accountability to shareholders and a desire to minimize administrative burdens as factors having the greatest influence on their vote-frequency recommendation, while slightly fewer cited shareholder preferences, proxy advisor policies and providing shareholders with an avenue to express concern about executive pay without casting negative votes on other matters as key factors.
“Clearly, there’s no single right answer to the question of how frequently these votes should be conducted that will work for every company,” said Towers Watson senior consultant James Kroll. “Each company seems to be assessing its own circumstances and needs, taking into account its specific shareholder composition and the degree of potential shareholder concern about the company’s executive pay programs.”
The survey also found that nearly half (48%) of surveyed companies are making some adjustments to their executive pay-setting process in preparing for the upcoming proxy season, although many companies have already strengthened their processes in recent years in light of growing shareholder activism and intensifying scrutiny of pay issues. Among those making further changes in preparation for the 2011 proxy season, 65% are devoting more attention to explaining their programs in the Compensation Discussion & Analysis (CD&A), 41% are performing additional analyses on the link between their executives’ pay and company performance, and 30% have made or are considering changes to programs such as severance, change-in-control benefits and perquisites that have high visibility.
Somewhat surprisingly, almost half (49%) of the respondents don’t know what level of favorable shareholder say-on-pay votes will be considered a successful outcome by their boards, and only 8% of the respondents have a process in place for analyzing the results of the vote and developing appropriate action plans in response to potential shareholder concerns. Of those companies that have defined how they will evaluate success, most believe that a favorable shareholder vote of at least 80% would be considered successful.