myStockOptions.com just turned 10 years old this month! It started at the what turned out to be the high point of stock options. It survived and evolved to cover all types of stock grants, with engaging content, tools, and courses on restricted stock, stock options, SARs, and ESPPs. To celebrate, we are offering a $50 discount on one and two year memberships (use promotional code of “Tenth”).
While it was created for plan participants with its financial planning and tax focus, it has developed a following with stock plan professionals in administration, finance, and legal. Its editorial content and tools have won many awards and media accolades, plus even a US patent. For an interesting take on how equity compensation has evolved since the site started, read the article on the site: “Five Major Developments In Equity Compensation Of The Past Decade.”
To follow up on my blog posting about my “provoking” presence on a panel at the ICGN conference which has just wound up in Toronto, I thought it might be an idea to summarize what I said.
If you remember, we were tasked with coming up with good examples of compensation.
Now, my problem is that I can come up with good examples, but they always have so little in common that moving from knowing what the problems are elsewhere to knowing “what the answers are” as the panel description said is a bit of a problem.
Never mind.
My first example was UK company WPP, which we had written about for AdWeek’s latest issue on executive compensation. This is a classic example of “skin in the game” CEO comp, where execs must invest their own money – that’s right, folks, their own money – in shares which will then be matched or not to the extent that a relative TSR target is met or not. And the TSR must equal or exceed the median for any match. That’s right folks, they have to be better than their peers. Are you listening Corporate America!?
For contrast I described Morgan Stanley’s “Leveraged Coinvestment Program” in which execs were “allowed” to defer shares they had just “been given for free” as part of the annual bonus plan into some kind of “fund of funds”. The company gives a two for one match (regardless of performance) and the participant receives all the investment returns on the whole amount though, at the end of the day, will only receive their own deferred shares when the plan is cashed out. But note, the fund of funds invests in everyone else’s shares, not the company’s.
See the difference?
Then I contrasted the US banks’ reaction to the worldwide economic crisis with the European banks.
US banks – defer more pay, stringent clawbacks, no fundamental change.
European banks – major pay makeover with introduction of plans that deliver the majority of compensation and are based on long-term performance. That’s right! Long-term performance. What? Long-term? Yes, long-term. Wow!
Then I brought in the shining knight from the US – Nucor, the steel company that has made a profit every year since Rubber Soul came out and is star of no less than three reports about wonderful compensation policies. Check them out.
Conclusions? They have little in common except that they have little in common. That, and simplicity and moderation. Possible real conclusion? Stop copying everyone else and figure out the right compensation policy for YOUR executives, YOUR company, YOUR point in the economic cycle, YOUR industry, YOUR company’s maturity level.
As an update to our initial study released in March that compared ’09 and ’10 data, Exequity has now released an updated study that includes CEO LTI awards from ’08 to identify trends in LTI opportunity over the last three years. Overall, we found that 2010 CEO LTI award levels have essentially returned to 2008 levels.
At the median, total LTI value decreased slightly (-2%) from 2008 to 2010 relative to an equal decrease (-2%) in grant price. This study presents additional key findings, including LTI opportunity percent change by industry from 2008 to 2010, an updated 2009 vs. 2010 CEO LTI analysis by stock price change which includes companies granting LTI awards in March and April, and an updated in-the-money option analysis for 2008 and 2009 stock option awards.
This post is copied from what Lucian Bebchuk recently blogged on the “Harvard Corporate Governance Blog,” and is based on his study with Prof. Jesse Fried:
In our recent study, “Paying for Long-Term Performance,” we provide a detailed blueprint for how equity-based compensation should be designed to tie executive payoffs to long-term results and to avoid excessive risk-taking incentives. Our conclusions can be distilled into the following eight “principles”:
1. Executives should not be free to unload restricted stock and options as soon as they vest except to the extent necessary to cover any taxes arising from vesting.
2. Executives’ ability to unwind their equity incentives should not be tied to retirement.
3. After allowing for any cashing out necessary to pay any taxes arising from vesting, equity-based awards should be subject to grant-based limitations on unwinding that allow them to be unwound only gradually, beginning some time after vesting.
4. All equity-based awards should be subject to aggregate limitations on unwinding so that, in each year (including a specified number of years after retirement), the executive may unwind no more than a specified percentage of the executive’s equity incentives that is not subject to grant-based limitations on unwinding at the beginning of the year.
5. The timing of equity awards to executives should not be discretionary. Rather, such grants should be made only on prespecified dates.
6. To reduce the potential for gaming, the terms and amount of post-hiring equity awards should not be based on the grant-date stock price.
7. To the extent that executives have discretion over the timing of sales of equity incentives not subject to unwinding limitations, executives should announce sales in advance. Alternatively, the unloading of executives’ equity incentives should be effected according to a prespecified schedule put in place when the equity is originally granted.
8. Executives should be prohibited from engaging in any hedging, derivative, or other transaction with an equivalent economic effect that could reduce or limit the extent to which declines in the company’s stock price would lower the executive’s payoffs or otherwise materially dilute the performance incentives created by the company’s equity-based compensation arrangements.
A full explanation of the basis for these principles, and a detailed discussion of how they should be implemented, is provided in our study.
It goes without saying that the media has paid unprecedented attention to executive compensation issues as the general public continues to express anger over excessive pay levels. Some media outlets have even created 24/7 pages online devoted to the topic, such as the NY Times’ “Wall Street Pay” Microblog. A “microblog” is akin to a Twitter feed on a topic, with essentially only headlines and a brief description being provided, with a link to more information.
In April, the New York Times partnered with Equilar for their annual CEO Pay study, based on the 200 largest companies to file proxies by the end of March. Now that most of the 2009 proxies are in, we’ve fleshed out our study to provide the latest data on CEOs broken into Small, Mid, and Large Caps, allowing companies to take a deeper look at pay trends.
Mid-cap CEOs saw both the only pay rise (1.7%) and the largest jump in bonus payouts, with the bonus rise echoed by the large-cap CEOs as well. In each of the three groups, healthcare CEOs netted the highest pay, and there’s evidence that early-2009 stock-option grants are rising in value more quickly than many recipients thought.
As we recently noted in this article, a recent SEC interpretation raises some potential accounting and disclosure implications for stock-settled performance share awards in cases where a company retains the discretion to modify the number of shares otherwise earned under a performance share award formula (i.e., the compensation committee has the ability to exercise “negative” discretion). Companies that award performance shares subject to discretion will want to review the SEC interpretation carefully and may want to modify their performance share plans to avoid adverse accounting consequences.
Example: A company awards stock-settled performance shares in January 2010. The award is subject to a performance period that runs from January 1, 2010 through December 31, 2012. The ultimate number of shares that will be delivered after the end of a three-year performance cycle (i.e., early in 2013) will vary based on an objective formula involving a performance or market condition (as defined in ASC 718). However, the plan allows the compensation committee to reduce the number of shares that would otherwise be delivered based solely on the objective performance formula.
Because of the committee’s ability to exercise negative discretion on the ultimate number of shares delivered, it’s possible that such a performance share award would not have an ASC 718 “grant date” until the award is settled, thus jeopardizing fixed accounting treatment for the award. Further, the proxy disclosure rules control the timing of disclosure by generally requiring equity awards to be disclosed in the compensation tables based on the award’s accounting grant date.
If this standard applied to a performance share award of the type described above, the award would not be reported in the tabular disclosure until the discretion is exercised or lapses, typically years after the awards were initially communicated to executives. However, the recent SEC guidance indicates that even though there might not be a grant date for an award of performance shares for accounting purposes, disclosure of the fair value should not be delayed if the “service inception date” (an accounting concept discussed below) precedes the grant date.
It’s worth noting that the use of negative discretion in determining the payout of performance share awards is not a new concept. This approach has been common at least since Section 162(m) of the tax code came on the scene in the mid-1990s. We can only speculate as to why auditors appear to be increasingly sensitive to the potential accounting implications of such discretion with regard to equity awards. Note also that performance awards denominated and settled in cash do not pose the same accounting issue because they could never qualify for fixed accounting treatment.
Read more about the accounting and disclosure implications of this SEC position in our article.
With the Senate and House expected to vote upon the Dodd-Frank Act – formally known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act” – within the next few days – with President Obama then signing it before the 4th of July – the 2000-pages of the Act have been posted. Note that the passing of Senator Byrd last night might delay adoption of the legislation, according to this WSJ article.
We have also posted an excerpt consisting of just Title IX (the investor protections of the Act), which consists of 362 pages (Subtitle E, which includes the governance and compensation provisions, begins on page 207). Finally, here is a 10-page summary – and the Conference Report. We have posted these, as well as memos and scorecards in our new “Dodd-Frank Act” Practice Area, which I’m sure will grow like wildfire over the next few weeks.
Poll: The Acronym for the Dodd-Frank Act?
Back when the Sarbanes-Oxley Act was passed in ’02, it took a while for “SOX” and “Sarbanes-Oxley” to become the common way that folks referred to the historic legislation. An early movement towards “SarBox” never took off – thankfully – although a few still use that term for some reason. So now we have a new piece of legislation to “name.” I personally like the “DFA” – but doubt that will catch on. Please participate in this anonymous poll about how we should refer to the Dodd-Frank Act on a shorthand basis:
Racing to an artificial deadline, the House-Senate conferees worked into the wee hours this morning (5:39 am!) to finalize numerous open provisions in the RAFSA (renamed “The Dodd/Frank Act“?), much of it behind closed doors despite the decision to televise the negotiations on C-SPAN. Once again, thanks to Ted Allen of ISS who blogged along the way yesterday to give us the lowdown on the finalized corporate governance items that were still outstanding (we’ll have to wait to see the final bill to fully realize what transpired, that likely will take a few days):
On other open items, some answers are provided in this Washington Post article – and this Morrison & Foerster scorecard.
I got this from a member yesterday: In this late 2007 letter, a group of Senators lobbied then-SEC Chair Cox to head off the SEC from considering the use of a 5% shareholder ownership requirement because it would “…effectively bar most shareholders from ever filing such proposals…This threshold should be eliminated.” Yet that exact same threshold is what some – but not all – of these same senators argued for this week over the objection of House conferees. Just another day in Washington.
More on “My Ten Cents: Say-on-Pay”
On “The Corporate Library Blog,” Paul Hodgson blows off some steam about the decision to allow flexibility beyond one year for SOP. Although not having an annual SOP certainly means less work for our community of board advisors, is it really a good thing for Corporate America? During an “off-year” when SOP is not on the ballot, shareholders may well choose to vent frustration over a company’s pay package by voting against re-election of the compensation committee (or the full board). Not a good result for them.
Plus my reaction is a bit different than Paul’s because I still believe that say-on-pay has the potential to derail the progress towards responsible pay as boards at the numerous companies who inevitably will receive support from 90-plus percent of their shareholders will think that they are doing a great job in setting pay, even though some of their processes are still broken (eg. the heavy reliance on peer group benchmarking). I don’t like SOP much at all.
In other words, most boards should be thanking their “lucky stars” for say-on-pay because it gives them cover, both reputationally and probably also from liability. Given that, I’ll never understand the knee-jerk reaction from the corporate community to oppose SOP so vehemently as I’ve blogged before. On the other hand, maybe companies do have a reason to be scared of SOP since three companies failed to obtain majority support for their MSOPs over the past month…
I was being interviewed by a business writer for his publication’s annual executive pay story and he asked about an interesting footnote in a proxy statement. A CEO had received performance share grants in 2007 and 2008, which of course appear in the Summary Compensation Table at their grant date fair value. The performance thresholds were not achieved so he had received zero compensation from the grants that had been reported as $1.75 million and $1.15 million for those two years.
I happen to be familiar with that company’s executive compensation practices because it is a member of the peer group of a client of mine. I had noticed the interesting disclosure when reading their recent proxy:
The stock awards granted to Mr. X in 2008 and 2007 were performance restricted stock grants with multi-year performance goals. The goals were not achieved and none of the stock awards vested. Accordingly, Mr. X received no common shares or other value from these awards. These performance restricted stock grants are, however, under SEC rules required to be reported as compensation even though the performance restricted stock never vested and no value was delivered to the recipient.
The company was sure to mention three times in three sentences that no pay resulted from this pay disclosure. It is clear that he did not get paid that $2.9 million.
The writer wondered whether this is a new problem that stems from the change in SEC disclosure rules and I told him it is far from a new problem and one with roots going back to the 25+ year debate about accounting for equity-based compensation awards – remember the anti-FAS123 argument (pre-1995) that expensing stock options could result in a company recognizing an expense when no pay was ever delivered to the employee. Mr. X’s employer has revived that opposition by highlighting to investors that the pay numbers may not be pay numbers at all but are just hijacked accounting expense figures masquerading as pay.
Performance equity awards may require only a year or two or three to confirm that the reported numbers will yield or did yield zero pay, however, unlike stock options which could take up to ten years for the same realization.
In a proxy season that produced a $22.5 million dollar variation in one CEO’s reported pay among various business publications, the “vaporware” aspects of some performance-based equity plans – combined with similar plans in some companies paying at the maximum with investors accusing companies of sandbagging goals – will raise more questions about performance equity plans as a solution to the CEO pay-for-performance issue.
Join Elizabeth Dodge of Stock & Option Solutions and me for the NASPP’s “Practical Guide to Performance-Based Awards” pre-conference program on Monday, September 20th (immediately preceding the NASPP’s National Conference) in Chicago.