The Advisors' Blog

– Broc Romanek, CompensationStandards.com

We have posted the Summer Issue of our Compensation Standards print newsletter, which provides some examples of CEOs who have taken a stand on executive pay including their guidelines and motivations.

– Francis Byrd, The Altman Group

To date, there have been 637 Say on Pay proposals brought forth by management, which is almost a 20% increase from 2009 when there were 518 as of this time last year. These figures include firms that participated in the TARP program and were required to place SOP management proposals in the proxy and a number of companies who chose, in response to resolutions from activist institutional investors, to adopt SOP for submission to stock owners.

The majority of firms submitting SOP proposals to their shareholders this year have, thus far, experienced high ratification votes with overwhelming support in the high 90 percentiles. A serious caveat that boards and senior managers need to keep in mind is that the SOP proposal is presently a routine item under NYSE rules, allowing brokers to vote uninstructed client’s shares in favor of the SOP resolutions. A provision in the bill approved by the Senate would make SOP proposals a non-routine item and as is now the case with director elections – brokers would not be able to vote clients’ shares for management SOP proposals.

As we see it, under a mandatory SOP regime – without the safety net provided by the broker vote – companies will have a much more difficult time getting a high percentage approval vote from shareholders for executive compensation advisory votes. According to impact analyses we conducted on the effects of NYSE Rule 452 on companies with a significant retail shareholder base (20% to 60%), they could expect a drop off in the range of 10% to 44% in voting for directors.

Putting this into the Say on Pay context, issuers should expect to see a similar and sizable decrease in the percentage of support for these management proposals in 2011. Issuers would be strongly advised to also consider the results of the KeyCorp, Motorola and Occidental SOP votes (which failed to achieve majority support) when thinking about the exclusion of broker votes effect upon SOP proposals going forward.

– Broc Romanek, CompensationStandards.com

As noted in this press release, the International Corporate Governance Network recently issued a set of guidelines for setting non-executive director pay. The guidelines are intended to be of general application around the world, irrespective of legislative background or listing rules.

Key aspects of the guidelines include:

– The policy places an emphasis on non-executive director alignment of interest with long-term owners.
– The policy draws a distinction to differences to executive remuneration, particularly related to performance-based remuneration. The policy opposes the use of performance-based remuneration for non-executive directors.
– The policy examines the tools of remuneration, and favors solely cash retainer and equity, with a preference against the use of options.
– The policy provides flexibility for companies to implement the principles in ways consistent with their unique circumstances.
– The policy calls for clear disclosure including the philosophy of the non-executive director programme.
– The policy calls for equity to be vested immediately but subject to holding periods.
– The policy suggests companies establish ownership guidelines for non-executive directors.
– The policy states non-executive directors should not be eligible for retirement benefits.

– Broc Romanek, CompensationStandards.com

Last Wednesday, the SEC announced it had charged Diebold and three former finance officers for engaging in a fraudulent accounting scheme to inflate the company’s earnings. The SEC separately settled an enforcement action (here’s the litigation release – and here’s the complaint) against Diebold’s former CEO Walden O’Dell, obtaining reimbursement of certain financial benefits that he received while Diebold was committing the accounting fraud. The SEC used the clawback provision under Section 304 of Sarbanes-Oxley to get the former CEO to agree to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock and stock options for 85,000 shares of Diebold stock.

Notably, the SEC didn’t allege that the former CEO engaged in the fraud (or any other violation of the securities laws) – something the SEC did last year in an action against the former CEO of CSK Auto Corp. (ie. Maynard Jenkins), who pushed back in a motion to dismiss last September as I noted in this blog. Jenkins’ motion has not yet been ruled upon (oral arguments were heard on April 30th; here’s the transcript from that hearing posted in the “Clawback Policies” Practice Area) – but a ruling is expected soon…

– Broc Romanek, CompensationStandards.com

We have posted the transcript from the recent webcast: “Smaller Company Proxy Disclosures: The Latest Developments.”

– Broc Romanek, CompensationStandards.com

In this 11-minute podcast, Ning Chiu of Davis Polk does a great job of boiling down the corporate governance and executive compensation provisions that apply to all US public listed companies in the recently passed Senate reform bill, the “Restoring American Financial Stability Act of 2010.”

Not only does Ning compare the differences between the Senate and House bills, but she identifies which provisions aren’t all that clear – and she notes which provisions are more likely to sail through and which may be altered before Congress reconciles the two bills. Finally, Ning notes the practical consequences for companies of these provisions.

– Steve Seelig, Towers Watson

For those who thought they’d need only consider how pending Financial Services Reform legislation would influence executive compensation, here’s something else you may need to worry about. Part of the House version of H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, includes provisions that would provide funding relief for certain companies with pension shortfalls, but would offset that relief to the extent the company paid “excess employee compensation” or made certain dividend payments in stock redemptions. While the universe of companies needing to worry about this legislation may be somewhat limited, this provision may signal that Congress is not yet done seeking to have companies recraft executive compensation designs.

For a company electing funding relief, the legislation would increase the required pension funding contribution by the amount of any excess employee compensation paid by the plan sponsor. “Excess employee compensation” is essentially any W-2 compensation for the year that exceeds $1 million (indexed after 2010 for inflation). It also includes any amounts set aside or reserved (directly or indirectly) for employees in a trust or similar arrangement under a nonqualified deferred compensation plan.

The latter definition appears to apply without regard to whether the employee’s compensation exceeds $1 million. A grandfather rule would exclude any nonqualified deferred compensation, restricted stock, stock options or stock appreciation rights payable or granted under a written binding contract that was in effect on March 1, 2010 and was not modified in any material way before the remuneration was paid. Commissions paid to those who would not be considered specified employees under 409A are also excluded as is compensation attributable to services rendered prior to 2010 (other than the funding of deferred compensation).

On its face, the legislation seeks to have companies craft pay programs to avoid the funding of nonqualified deferred compensation for higher paid employees during the years for which they are taking advantage of relief by funding less of their pension shortfall. Further, by defining “excess employee compensation” based on W-2 income, the rule will also tend to punish companies that grant equity compensation (after March 1, 2010) whose value is realized in a later year where stock values have increased. Given the choice of dealing with the vagaries of stock price volatility, companies that elect funding relief may be more inclined to craft cash-based programs where they can at least cap the amount of funding relief they would lose.

Of course, regardless of the form of the pay program, companies considering whether to elect funding relief will need to weigh the relative cost of the executive pay program in its current state versus the additional cash cost of having to contribute more to their pension plan.

Policy-wise, it seems Congress may also believe this structure also will help to drive down executive compensation levels for these companies. An interesting dynamic, thus, is created where the very executives in charge of choosing whether to elect funding relief may be doing so at the peril of their compensation committee granting them a scaled-down or non-equity based compensation program. And once the decision to use funding relief is made, the compensation committee will need to include the potential cash cost to the company of losing out on some funding relief, as it considers the other tax, accounting and cost implications of the pay program it approves.

– Broc Romanek, CompensationStandards.com

Although we likely will not know the entire composition of the House-Senate Conference Committee that will reconcile the Senate and House versions of a financial reform bill for another week, we do know that Rep. Barney Frank will head the Committee (as noted in the NY Times’ DealBook) and we do know the twelve Senators that will be included in that Committee (as noted in this Reuters article; this Reuters article identifies likely House members of the Committee even though they won’t be officially named til week of June 7th). Congress – and President Obama – have a goal to wrap up a final bill by the 4th of July recess.

Even though the House’s bill was weaker in the governance area, it is likely that Rep. Frank will push to keep the stronger Senate provisions in the final bill – with some tweaks as noted below – given that very few of the 400-plus proposed amendments to the Dodd bill dealt with governance issues. The real reconciliation debate will center on how financial institutions are regulated (ie. derivatives, “too big to fail”, etc. – see Frank’s comments in these areas yesterday).

Note that Barney Frank wants the Conference Committee negotiations televised.

Barney Frank Speaks: His View of Which Governance Provisions Will Survive Reconciliation

According to this article, Rep. Frank said last week that the specific language regarding the proxy access provision was up in the air. He also said that the Senate provision for a self-funded SEC may be tweaked to keep Congress involved somewhat – and he indicated that the House provision to exempt smaller companies from SOX’s internal controls requirement may survive. According to the ISS Blog, Frank said that the Senate’s majority vote requirement could well be stripped out in the final bill.

Below is a piece written by CongressDaily’s Bill Swindell entitled “Frank Sees SEC Self-Funding Language As Ripe for Revision” that covers a number of topics:

A drive to allow the SEC to self-fund its budget by retaining fees it collects will likely have to be modified to allow for greater oversight by appropriators, House Financial Services Chairman Barney Frank said Tuesday. Frank said conference negotiators on legislation to revamp the nation’s financial regulatory system will have to take into account the resistance of appropriators to SEC self-funding because they would lose their power to dictate its budget.

“The Appropriations Committee gets very upset about this. What I am hoping that gets worked out, and it will be with their participation, is a way to do some self-funding, which leaves the Appropriations Committee with a role,” Frank said during a talk at the Compliance Week annual conference. The Senate bill contains the provision, allowing the agency’s chairman to submit a budget to the SEC, but it would automatically get the amount requested. The language was sponsored by Sen. Charles Schumer, D-N.Y., who has argued the agency needs more resources to monitor wrongdoing in the aftermath of the Bernard Madoff and Allen Stanford fraud cases. The House bill set an increase in authorization levels.

The FY10 funding for the SEC was $1.1 billion, a $151 million increase over FY09. It has requested $1.26 billion for FY11. The agency collected $1.5 billion in fees in 2008. “The appropriators are going to push hard to maintain some role, and I think they will be successful,” Frank said. Both bills give the SEC authority to issue rules that would allow shareholders to nominate board of director candidates through increased proxy access. “I think we are at least going to empower the SEC to do it. Beyond that, I’m not sure,” Frank said.

The SEC last year proposed a rule to require companies in some cases to include in their proxy materials the nominations for directors by shareholders, but held off on finalizing the proposal. The U.S. Chamber of Commerce and other business groups question whether the agency has the right to issue rules over corporate governance standards that are enacted at the state level.

The Senate bill, however, includes additional Schumer provisions, such as requiring that directors in uncontested elections receive a majority of the votes cast, or they must tender their resignation. It also would require the SEC to issue rules to require public companies in their proxy statements to disclose why the same or different people serve as chairman and CEO. Frank said he did not know if the additional Schumer provisions could withstand negotiations, though they are a priority for the New Yorker.

Frank expressed some skepticism for a drive to separate the CEO and chairman duties. “In my experience, it hasn’t made a lot of difference if you have looked at the performance, of separating the CEO from the chairman of the board. People say it’s very important. But my guess is that if you threw up the list of major companies, and didn’t tell people which was which, there wouldn’t be [a] way to differentiate by any kind of results and analysis,” he said.

The Senate appointed its conferees Tuesday, with a 7-5 ratio of Democrats to Republicans. Frank said the House will appoint its conferees the week of June 7, and he recommended a party-line ratio of eight to five. “We have an administration that feels strongly about this, and I expect House leadership will be engaged more than they were last year when health care took up much of their time and when they paid us the compliment of trusting us,” Frank wrote to Democratic members of his panel.

“Their greater involvement will not imply a lack of trust, but simply the fact we are down to a very few important issues where the administration will be strongly expressing its view,” he continued. “There is also the fact that the need to keep 60 votes in the Senate will be something of a constraint.”

– Broc Romanek, CompensationStandards.com

Yesterday, the final version of the Senate’s Dodd bill – the “Restoring American Financial Stability Act of 2010” – was made publicly available. At 1,615 pages, it will take quite some time to print (and read!).

If you’re interested in just the corporate governance and executive compensation portions of the RAFSA, check out this 23-page excerpt courtesy of Davis Polk. Of course, we continue to post memos analyzing the bill in our “Regulatory Reform” Practice Area (here is a 8-pager with a nice side-by-side comparison of the House and Senate bills).

– Broc Romanek, CompensationStandards.com

As noted in the ISS Blog, KeyCorp became the third company to fail to obtain majority support for its executive pay package at its annual meeting last Friday. The pay package received only 45% support – it received 87% support last year. Here’s the company’s Form 8-K with the voting results.

So KeyCorp joins Motorola and Occidental Petroleum as the first three US companies whose management say-on-pay ballot items didn’t pass. Wow.

Consider the magnitude of this development:

– These three companies are not Wall Street banks where the general public is angry over banker bonuses.

– There were no organized campaigns against the pay packages at these three companies. This was a pure grass roots movement. With organized campaigns, imagine the level of votes.

– Only a few hundred companies have say-on-pay on their ballot this year; a small fraction of the 10,000 that will have it on their ballot next year when Congress makes it mandatory.

– If the Senate provision remains in the final bill changing NYSE Rule 452, say-on-pay will become a “nonroutine” agenda item – and broker nonvotes won’t be available to be cast in favor of pay packages. This means it will become harder to obtain majority support for executive pay packages.

How to Prepare for Mandatory Say-on-Pay

We have just posted the agendas for the “7th Annual Executive Compensation Conference” and the “18th Annual NASPP Conference” to be held in Chicago on September 20-23 (the “7th Annual” is also available via video webcast).

Among the 40-plus panels at the Conferences, we have tailored a special track to help you prepare for mandatory say-on-pay including these panels:

– “Say-on-Pay: The Proxy Solicitors Speak”
– “Say-on-Pay: Successfully Communicating Externally and Internally”
– “The Proxy Advisors & Investors Speak: Their Hot Button Issues and Say-on-Pay”
– “The New Compensation Legislation: What to Do About Say-on-Pay and More”
– “Five Hot Button Compensation Fixes: In Light of Say-on-Pay and More”
– “This Coming Year’s Grants: How to Deal with Last Year’s Inadvertent Gains”
– “The Big Roundtable: Consultants, Directors and Top HR Heads”
– “Directors Speak Their Minds on Executive Compensation”

With Conference registrations going strong – on track to reach nearly 2000 attendees – you don’t want to be caught unprepared as we head into next year. Last year’s Conference sold out a month in advance – and that was without the reality of mandatory say-on-pay hanging over our heads.

Act Now: You have two choices – either attend the “18th Annual NASPP Conference” in Chicago (which includes the ability to attend the “7th Annual Executive Compensation Conference” – or attend the “7th Annual Executive Compensation Conference” by video webcast (which includes the “5th Annual Proxy Disclosure Conference”).