We have posted the transcript for our recent popular webcast: “Gearing Up for Say-on-Pay: What Clients Are Asking Now.” Don’t forget that those that renew for 2011 now – all 2010 memberships expire at the end of the year – will gain access to these two upcoming say-on-pay webcasts:
Just after I heard Pat McGurn speak this morning at the ABA Fall Meeting, ISS issued it’s 2011 Policy Updates. Courtesy of Ed Hauder of Exequity, here is a brief summary of the Updates that relate to executive pay:
– Equity Compensation Plans: Burn Rate–ISS is making a change to the Burn Rate policy so that the burn rate caps cannot increase or decrease by more than two (2) percentage points from year-to-year. The 2011 Burn Rate table will be released as part of ISS’ 2011 Summary Guidelines in December 2010.
– Say When on Pay Vote–ISS will support annual advisory votes on compensation, as its draft policies released at the end of October suggested. However, it still remains unclear what ISS will do if a company chooses a different frequency or the shareholder vote supports a different frequency.
– Problematic Pay Practices–ISS is revising the list of “major” problematic pay practices which alone could trigger application of the policy. The “major” problematic pay practices are now identified as the following:
– Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
– Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
– New or extended agreements that provide for:
1. CIC payments exceeding 3x base salary and average/target/most recent bonus;
2. CIC severance payments without involuntary job loss or substantial diminution of duties (Single” or “modified single” triggers);
3. CIC payments with excise tax gross-ups (including “modified” gross-ups).
– Additionally, ISS is slightly reworking how the presence of problematic pay practices will influences its vote recommendations. As before in such cases,
– ISS will recommend against management say on pay (MSOP) proposals,
– Then ISS will recommend against/withhold on compensation committee members (or in rare cases the full board) in (i) egregious situations, (ii) when no MSOP item is on the ballot, or (iii) when the board has failed to respond to concerns raised in prior MSOP evaluations, and/or
– ISS will recommend against an equity incentive plan proposal if excessive non-performance-based equity awards are the major contributors to a pay-for-performance misalignment.
– Problematic Pay Practices-Commitments–ISS will no longer accept future commitments on problematic pay practices as a way of preventing or reversing a negative vote recommendation.
– Voting on Golden Parachutes–ISS sticks pretty close to the draft policy it issued in late October 2010. Such proposals will be evaluated on a case-by-case basis, but the presence of certain practices could lead ISS to recommend against the proposal.
Recently, Professor Bainbridge ran this blog about a paper entitled “Riskmetrics: The Uninvited Guest at the Equity Table” written by Stanford business school professors David Larcker and Brian Tayan that that relates to the SEC’s proxy plumbing project.
With the new year quickly approaching, many companies are well into the process of considering whether to seek shareholder approval for additional share authorizations for their equity plans. In connection with this review, publicly-held companies that have any type of performance-based incentive compensation plan should also review whether performance-based goals need to be reapproved by shareholders at the next annual meeting pursuant to the regulations under Section 162(m) of the Internal Revenue Code.
Section 162(m) of the Code imposes a $1 million annual limitation on the deduction for compensation paid to each of the CEO and the three most highly compensated executives, other than the CFO, of publicly-held companies. However, “performance-based” compensation is not subject to the deduction limitation of Section 162(m), as long as it meets certain requirements. One such requirement is that the material terms of performance goals must be disclosed and approved by shareholders before the performance-based compensation is paid. For companies whose compensation committee has the authority to change the targets under a performance goal following shareholder approval, Section 162(m) regulations require that the performance goal be reapproved by shareholders no later than the first shareholder meeting that occurs in the fifth year following the year in which shareholders previously approved the performance goal.ยน In other words, reapproval of the performance goals by shareholders is needed at least every five years.
We remind public companies to check the date of the last shareholder approval for performance-based plans, and to ensure that the last shareholder approval covered performance goals for purposes of Section 162(m). Both cash and stock incentive plans may need reapproval at least every five years. If a company’s plan last received approval in 2006, shareholders may need to reapprove material terms of performance goals this coming year.
Not all plans that qualify for the performance-based compensation exception require reapproval every five years. Shareholder reapproval is not necessary if a company relies on an approach to plan design that is commonly referred to as a “plan within a plan” or an “umbrella” plan. Under that approach, generally, a fixed formula (often based on a percentage of earnings) is approved by shareholders and dictates the maximum amount of the payment to the covered executives. The compensation committee retains negative discretion to reduce payouts below the maximum, subject to whatever objective or subjective criteria the compensation committee may wish to apply from year to year. Similarly, a plan that permits only stock options and stock appreciation rights to be granted at fair market value will not require reapproval.
We’re done! Just in time for mandatory say-on-pay, Dave Lynn and Mark Borges have finished updating the Lynn, Borges & Romanek’s “2011 Executive Compensation Disclosure Treatise & Reporting Guide.” This means that:
2. Hard copy – For those that want a hard copy of this massive 2011 Treatise, note that it is not part of CompensationStandards.com – so it must be purchased separately. However, CompensationStandards.com members can obtain a 40% discount by trying a no-risk trial to the hard copy now. This will ensure delivery of this 1000-plus page comprehensive tome as soon as it’s done being printed after Thanksgiving.
If you need assistance, call our headquarters at (925) 685-5111 or email info@compensationstandards.com.
Although the concept of shareholder advisory votes on executive compensation has been discussed and debated for years, it’s only been since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July that most companies have given much thought to what say on pay might look like in practice for them. Now that companies and investors have had several months to digest Dodd-Frank’s provisions and the SEC has now proposed rules to guide companies in conducting their shareholder votes, some preliminary points of view – and even a few areas of agreement – are beginning to emerge on how companies can best implement say on pay.
One thing that’s clear is that say on pay and the other Dodd-Frank governance and executive compensation reforms have been the hot topics of late on the conference circuit. This article summarizes what we have heard in recent sessions around the country.
Voting Frequency
One of the main topics of discussion is the appropriate frequency of say-on-pay votes. Under Dodd-Frank, companies must conduct a say-on-pay vote at least once every three years and must allow shareholders to vote on their desired frequency at least every six years. Neither vote is in any way binding. For the 2011 proxy season, companies will need to conduct both say-on-pay and say-on-frequency votes.
Based on their comments at recent conferences, many proxy advisors and institutional investors appear to consider annual votes as their “default” preference. At least one large investment firm is already writing letters to the companies in its portfolio requesting annual votes, and some investors expect companies are likely to receive formal shareholder proposals seeking annual votes.
While investors acknowledge that there may be situations in which less frequent votes are appropriate (e.g., compensation programs with sufficient long-term orientation, true performance goals and little or no board discretion), the onus will clearly be on companies to make a strong case for any frequency other than annual votes. Articulating a sound rationale in the proxy statement will be critical in these cases. What’s more, many observers note that there will be an added possibility of negative votes for board members in years in which no say-on-pay vote is held. In other words, the view is that annual votes may even “protect” compensation committees.
Defining Success
Another hot topic is how success or failure will be defined in a say-on-pay world. For most companies, a majority of shareholders casting negative votes on executive compensation would be viewed as an embarrassment, even though the vote is advisory. But what about something less than a clear majority “no” vote? It’s worth noting that more than 80% of the U.S. companies that have conducted say-on-pay votes thus far have received support from 80% or more of their shareholders casting ballots, although negative votes have occurred in a few cases.
While the stated views on this issue varied somewhat, there are emerging opinions that negative vote levels above 15% should be viewed as a signal that shareholder concerns need to be examined or addressed, depending on the circumstances. The trend from one vote to the next will also be an important barometer of shareholders’ views. For example, a company that goes from 95% favorable in one say-on-pay vote to 80% the following year may have more to worry about than a company that consistently receives 75% shareholder support for its pay programs.
Shareholder Engagement
There’s also been much discussion of whether and how companies should engage their shareholders in a dialogue about executive pay. The prevailing view on this score is that shareholder engagement efforts need to be situational, rather than an across-the-board activity undertaken by all companies just for the sake of it.
For example, institutional investors note that shareholder engagement might justifiably be less of a priority for companies with sound pay practices and little or no history of shareholder concerns about pay matters. Investor groups also have expressed the view that they don’t want to be cast as “pay czars” and have no interest in setting pay levels. But, in cases where shareholders do have significant concerns about pay, companies are advised to establish effective and ongoing channels of communication to help them understand and address investors’ concerns.
Varying Approaches
Similarly, it’s clear that many investors will take a situational approach in preparing for and casting say-on-pay votes. Some investor groups and proxy advisors say they’re planning to focus primarily on the “outliers” (i.e., companies that push the envelope in terms of questionable pay practices). Priorities also vary in terms of what investors will scrutinize most closely. Examples mentioned in recent forums include:
– Pay practices and programs, which may be reviewed from the perspective of “do they make sense”
– A combination of committee process, pay practices, pay for performance and CEO pay
Other investors say no one thing will be most important and that they’ll be looking to understand the big picture. Moreover, it seems clear that the largest institutional investors will follow their own counsel and may rely less on the recommendations of proxy advisors in making their vote decisions. This does not necessarily diminish the influence of leading proxy advisors if smaller institutional investors find themselves relying on their vote recommendations when faced with the task of reviewing many more say-on-pay proposals.
One point of agreement regarding say on pay is that the quality and clarity of companies’ proxy disclosures on executive compensation should improve next year for some companies dramatically. Many investors feel that improvements in the Compensation Discussion and Analysis (CD&A) should be the starting point for companies in preparing for say on pay. Desired CD&A enhancements include executive summaries (e.g., to highlight changes and provide context) and more graphics, especially to help shareholders see the link between executive pay and company performance. Overall, investors want more clarity and insight, and less legalese and boilerplate language.
A Big Deal?
Given the widespread expectation that most companies will enjoy high levels of shareholder support in their say-on-pay votes and that say on pay will have minimal impact on pay at the vast majority of companies, one frequently debated issue has been whether say on pay will be a big deal or a big bust. The consensus is that say on pay will not be a big deal for many companies, despite the general perception that it will be a “game changer” for executive pay overall.
Ultimately however, perceptions of say on pay vary widely depending on which side of the fence one sits on. While shareholder groups may see it as a welcome addition to the corporate governance landscape, others tend to view the votes as a distraction that will provide little insight into the compensation issues shareholders care about and will have no significant impact on executive pay levels.
I’ve developed an executive pay model that might be useful to directors and human resource professionals. I’ve used the 18 years of history in the Execucomp database to develop a model of future three year shareholder return as a function of four key pay variables (pay level, pay leverage, pay equity and stock ownership) and a set of company variables. The model can be used to quantify the excess return attributable to the four key pay variables and to make value enhancing trade-offs between the four factors. 55% of the company-years have a positive predicted excess return and 45% of the company-years have a predicted three year excess return of at least 3% (positive or negative). The formula for the predicted excess return is shown on p. 18 of this presentation.
I’ve also proposed to the SEC a “pay-versus-performance” analysis that you might find interesting. The analysis uses data on relative pay and relative performance to calculate three quantitative measures investors can use to assess a company’s pay program: a measure of incentive strength (pay leverage), a measure of incentive efficiency (the correlation of relative pay and relative performance) and a measure of compensation cost (relative pay at industry average performance). My comment letter shows the analysis for Wal-Mart, Pfizer and Bank of America to demonstrate that the analysis can be done with publicly available data.
This recent study entitled “CEO Pay and Shareholder Activism” by Prof. Fabrizio Fabri, Yonca Ertimur and Volkan Muslu allegedly refutes fears expressed by say-on-pay critics by showing that “just vote no” campaigns and voluntary say-on-pay votes did not lead to radical changes pushed by special interest groups. It’s worth a read.
Recently, we released the 2010 CEO Benefits and Perquisites Report. The report finds that in 2009, over one third of the Fortune 100 eliminated one or more perquisites from their overall compensation programs. In fact, the median value of “all other compensation” paid to Fortune 100 chiefs reached a five-year low of $249,632 in 2009. By comparison, in 2008 the median value was $348,101. Additionally, the median value of perquisites related to corporate aircrafts – historically one of the more controversial perquisites – fell by 18.3 percent, from $141,477 in 2008 to $115,588 in 2009.
The Report features an in-depth look at the following perquisites, among others, paid to America’s top chiefs:
– Financial Planning and Other Professional Services;
– Flexible Perquisite Accounts;
– Personal Home Security;
– Personal Use of Corporate Aircrafts; and
– Tax Reimbursements
If you would like to request the full report, please e-mail info@equilar.com or visit our website.
Tune in tomorrow for our webcast – “Gearing Up for Say-on-Pay: What Clients Are Asking Now” – featuring Towers Watson’s Eric Larre; Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay, Deloitte Consulting’s Mike Kesner and Verizon’s Mary Lou Weber as they provide guidance about how you can put your best foot forward with shareholders to help gain their approval on the ballot. This is the first of a trio of say-on-pay webcasts on CompensationStandards.com – renew now for 2011 as all memberships expire at year end.