Assuming the SEC posts the adopting release later today for its new say-on-pay rules, tune in tomorrow for the CompensationStandards.com webcast – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to say-on-pay including analysis of what the adopting release says.
If the adopting release is not posted today, we will push back this program to Tuesday, February 1st so that these experts can provide you their guidance on this important rulemaking. Stay tuned!
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 153 companies filing their proxies, 54% triennial; 8% biennial; 31% annual; and 7% no recommendation. These are fairly close to the percentages seen earlier – so the relative ratios remain pretty steady so far. But many more companies will be filing over the next month or so and could disrupt current trends…
Many institutional investors will have their first chance to express their views on the frequency of advisory votes on compensation when Monsanto, an S&P 500 company, holds its annual meeting on Jan. 25. Under the Dodd-Frank Act, companies are required to hold “say on pay” votes at their first annual meeting after Jan. 21 and to ask investors to vote on whether to hold future votes on an annual, biennial, or triennial basis. Both the pay vote and the “say when” frequency vote will be non-binding. Frequency votes also will be the ballot next week at the annual meetings of Johnson Controls (Jan. 26), Costco Wholesale (Jan. 26), and Visa (Jan. 27).
These early votes may have a significant influence on companies with later meeting dates that still are deciding which frequency to recommend. Most companies with early meeting dates have recommended triennial votes, but two recent surveys suggest that more large issuers will endorse annual votes as the traditional U.S. spring proxy season gets under way.
Pay vote advocates and corporate lawyers will be watching closely to see whether investors follow the triennial vote recommendations of management at Monsanto, Johnson Controls, Costco, and other firms. Monsanto, which doesn’t have a significant insider share block, should be a good test of institutional views on frequency. The agricultural products company’s five largest institutional holders (which all have less than a 5 percent stake) include: PRIMECAP Management, Marisco Capital Management, Vanguard Group, BlackRock Fund Advisors, and State Street Global Advisors, according to FactSet data. Johnson Controls and Costco also don’t have large insider share blocks. If a plurality of investors defy management and vote for an annual frequency at these companies, it’s likely that other large issuers will take notice. Visa is recommending an annual vote, so presumably most of that company’s investors will support that recommendation.
So far, it appears that many institutions plan to back annual votes. In a Jan. 20 webcast hosted by ISS’ Governance Exchange, representatives from State Street, Vanguard, and the California State Teachers’ Retirement System all said they would support annual votes. (Editor’s Note: ISS has advised its benchmark policy clients to vote for an annual frequency.)
Walden Asset Management, Connecticut’s state pension system, and the American Federation of State, County, and Municipal Employees (AFSCME) are among the activists that are urging investors to support annual votes. These activists argue that compensation is too important of an issue for only biennial or triennial consideration. Given that compensation committees typically make annual decisions on executive salaries, bonuses, and severance, the investors contend that an annual vote is central to proper shareholder oversight. They also assert that annual votes would not be overly burdensome for investors, pointing out that shareholders already vote annually on the election of directors and the ratification of auditors. The activists further point out that annual votes are standard practice in other markets with shareholder votes on pay, including Australia, the United Kingdom, France, the Netherlands, Norway, Spain, and Sweden. However, some investors may be swayed by the arguments of the United Brotherhood of Carpenters and Joiners, which has argued that triennial votes would be more meaningful and less burdensome.
So far, a majority of issuers that have filed early proxy statements are advising their investors to support a triennial advisory vote. As of Jan. 20, 125 companies had filed proxy materials that include a “say when” ballot item. Among those companies, 66 (52.8 percent) had a triennial recommendation, while 40 companies (32 percent) endorsed an annual vote, according to ISS data. Eleven issuers supported a biennial vote, while eight companies gave no recommendation. Apple, TD Ameritrade, Oshkosh, and Beazer Homes USA are among the well-known companies that have endorsed annual votes.
While many companies have focused on pay vote frequency during their engagement efforts before the 2011 proxy season, some institutional investors have expressed frustration that corporate officials are not doing enough to address concerns about their underlying pay practices. These investors see the debate over frequency as distraction away from the more important question of whether a particular company’s pay practices merit investor support.
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.