The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Yesterday, the Senate Banking Committee voted along party-lines, 13-10, to send Senator Dodd’s reform bill to the Senate floor. As noted in this NY Times article, the Committee’s Republicans decided not to offer amendments during the bill’s markup, preferring instead to seek changes before the full Senate vote.

– Ed Hauder, Exequity

After a general industry decline in long-term incentive (LTI) opportunity from 2008 to 2009, we recently analyzed insider filings (Form 4) for the CEOs from Fortune 500 companies to gauge the percent change in LTI opportunity from 2009 to 2010. Overall, our study found that median LTI opportunity increased 8% relative to a 36% stock price increase over the prior year.

This Quick-Take Study presents the key findings from the analysis, including percent change in LTI opportunity relative to three stock price categories (greater than 60% increase, less than 60% increase and greater than 20% increase, and less than 20% increase), percent change in LTI opportunity by industry, and an in-the-money option analysis for 2009 stock option awards.

– Broc Romanek, CompensationStandards.com

Just when “bonus” has become the equivalent of a four-letter word in households across the country, the WSJ ran this article noting that at least 50 companies have recently disclosed plans to pay semiannual bonuses, with more than half of them having adopted the plans since 2008 (fyi, the Hay Group did the research for the WSJ on this). This piece ignited a hailstorm in my world as nearly 2 dozen journalists called me yesterday seeking comment.

My immediate take was that there wouldn’t seem to be justification for such a widespread move and that this short-term approach fostered by more frequent bonuses could cause even more managers to manipulate the numbers and all the other perils of short-termism. And for the most part, that is still my position.

However, I checked in with some of the responsible experts that we deal with frequently and got this feedback:

Semi-annual bonuses were adopted by a small fraction of companies due to those companies’ inability (or unwillingness) to set 12 month financial targets due to the uncertainty of the economy. I’ve seen companies adopt the semi-annual approach and they seem to only pay the bonus when the calendar year is over. I imagine the compensation committees made sure the goals were stretch-based on the best available information at the time the goals were set. Some of these same companies retained the discretion to reduce bonuses prior to payment after taking stock of the year as a whole.

I do not disagree with you that using six-month measurement periods is too short-term, but it’s possible that the compensation committees took comfort in the fact that LTI represented the largest component of pay and most executives have substantial ownership, so the risk of maximizing short-term results at the expense of long-term performance was fairly modest.

This too shall pass, as compensation committees hate negotiating bonus targets two times per year (or even four times if you count the end-of-the-period negotiations on what to include – or exclude – in the final performance calculations).

Another expert noted that the two industries highlighted – tech and retail – are long-time users of semi-annual and quarterly bonuses. Take those out of the data and this is only a handful of companies. See Fred Whittlesey’s blog about “when is a trend not a trend”…

– Broc Romanek, CompensationStandards.com

Given the heft of the 1300-plus pages of Sen. Dodd’s reform bill that was released earlier today, I was inclined to first read the 11-page summary. Unfortunately, the summary is a pretty high-level document and I was forced into the abyss. Today’s draft bill differs quite a bit from Dodd’s bill released in November – and substantially different from legislation passed by the House in December (and the exec comp provisions differ from Sen. Menendez’s bill that I blogged about on Friday). [We’ll be posting the inevitable onslaught of memos in our “Regulatory Reform” Practice Area.]

As could be expected from such a comprehensive bill, there is a lot of ground covered. Here are the executive compensation highlights:

– The Table of Contents omits Title IX, Subtitle E “Accountability and Executive Compensation” and Subtitle F “Improvements to SEC’s Management” (ie. Sections 951-966 on pages 868-895) for some reason. Wishful thinking?

– Non-binding say-on-pay (Section 951, pages 868-869)

– Compensation Committee independence and consultant/lawyers independence (including authority to hire and “reasonable” of their compensation)(Section 952, pages 869-876)

– Disclosure of executive pay vs. performance (Section 953, pages 876-877)

– Clawbacks (Section 954, pages 877-878)

– Disclosure of executive and director hedging (Section 955, page 879)

– Excessive compensation paid by financial holding companies (Section 956, pages 879-880)

And here’s what to expect going forward from Sonnenschein: Chairman Dodd plans to have the Committee begin its markup of his revised bill on Monday, March 22 at 4:00 p.m., and to continue as necessary with the goal of completing the markup by the end of the week. Emphasizing that he wants the Senate to “move quickly” to pass financial regulatory reform, Senate Majority Leader Harry Reid (D-NV) indicated that he wants to bring the bill to a vote on the Senate floor before the Memorial Day recess at the end of May.

If this goal is met, the hope is that a conference committee will reconcile the House and Senate bills by the July 4 recess. Because the House and Senate bills are expected to be considerably different, a difficult conference is anticipated. Signaling his intention to protect the House bill, House Financial Services Committee Chairman Barney Frank (D-MA) stated that he wants all conference committee deliberations to be televised on C-SPAN.

– Broc Romanek, CompensationStandards.com

Tune in tomorrow for the webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Ira Kay of Ira T. Kay & Company, Mike Kesner of Deloitte Consulting and James Kim of Frederic W. Cook & Co. analyze what types of risk assessments companies are putting into place as well as what are companies doing in the areas of equity grants pay-for-performance and 280G gross-ups.

The SEC’s New Rules: Corp Fin Issues Three More CDIs

Even though calendar-year fiscal companies are pretty close to finalizing their proxy materials, Corp Fin continues to issue interpretations on the SEC’s new rules. On Friday, these three new CDIs were issued:

– New Question 119.25
– New Question 119.26
– New Question 133.12

In his “Proxy Disclosure Blog,” Mark Borges provides some commentary on these new CDIs.

– Broc Romanek, CompensationStandards.com

As Senator Dodd races to release his comprehensive financial regulatory reform bill on Monday in the Senate (without Republican support according to this announcement), it is believed that the say-on-pay part of that package has already been unveiled – courtesy of Sen. Robert Menendez, D-NJ – in the form of S. 3049, “The Corporate Executive Accountability Act of 2010.” Senator Menendez, a member of the U.S. Senate Banking Committee, introduced his bill a few weeks ago – and I’ve seen reports that it’s expected to be part of the Democrat’s larger reform package (but it’s possible it could be changed before then of course).

Under the Menendez bill:

– Shareholders at public companies would have a nonbinding vote on the proxy disclosure of compensation packages for the company’s named executive executives
– Shareholders would have a nonbinding vote on the merger proxy disclosure of golden parachute arrangements for the company’s named executive executives
– Investment managers would annually have to disclose how they voted on the two items above
– SEC required to adopt rules eliciting internal pay ratio disclosure from publicly traded companies (ie. disclose the ratio of pay for CEOs compared to the median of all employee’s pay)
– Stock exchanges would required to adopt listing standards giving regulators and investors authority to clawback incentive-based compensation from executives if the company has a restatement due to material noncompliance of the company (the “misconduct” standard would be struck from Sarbanes-Oxley)
– A “senior” executive officer “terminated for cause” (which is defined in this Act) would be barred from receiving a severance package as determined by the company’s board
– Section 16 would be amended to limit executive officers from selling more than certain amounts of vested equity compensation; the bill has a 4-year formula where only 20% could be sold after the first year of vesting, 40% after the second year; 60% after the third and 80% after the fourth)

As noted in this article, one sticking point for the Republicans in a reform bill is proxy access. The prospects for Sen. Dodd’s bill being passed is mixed right now…

– Broc Romanek, CompensationStandards.com

Here is an interesting article from Bud Crystal with his view of the Black-Scholes model. I love his warning at the top of the piece…

– Broc Romanek, CompensationStandards.com

Below are the results from a recent survey that I just wrapped on TheCorporateCounsel.net regarding the topic of proxy drafting responsibilities (including items such as the amount of time consumed):

1. The following takes the lead in drafting the proxy statement at our company (excluding the executive compensation disclosures):

– In-house Securities Attorney – 63.4%
– In-house Human Resource Staff – 1.0%
– In-house Accounting Staff – 3.0%
– General Counsel – 11.9%
– Corporate Secretary/Assistant Corporate Secretary – 18.8%
– Outside Counsel – 1.9%
– Outside Consultant – 0.0%
– Other – 1.9%

2. The following takes the lead in drafting the CD&A/other executive compensation:
– In-house Securities Attorney – 45.9%
– In-house Human Resource Staff – 29.4%
– In-house Accounting Staff, including CFO – 1.8%
– General Counsel – 12.8%
– Corporate Secretary/Assistant Corporate Secretary – 11.0%
– Outside Counsel – 4.6%
– Outside Consultant – 1.8%
– Other – 1.8%

3. The following provides significant assistance in drafting the CD&A/other executive compensation disclosures:
– In-house Securities Attorney – 32.4%
– In-house Human Resource Staff – 32.4%
– In-house Accounting Staff, including CFO – 18.1%
– General Counsel – 14.3%
– Corporate Secretary/Assistant Corporate Secretary – 17.1%
– Other NEO(s) – 0.9%
– Outside Counsel – 21.0%
– Outside Consultant – 8.6%
– Other – 4.8%

4. The following are involved in reviewing and providing comments on the draft CD&A/other executive compensation disclosures:
– In-house Securities Attorney – 38.6%
– In-house Human Resource Staff – 46.6%
– In-house Accounting Staff, including CFO – 54.6%
– General Counsel – 54.6%
– Corporate Secretary/Assistant Corporate Secretary – 37.5%
– Other NEO(s) – 38.6%
– Outside Counsel – 60.2%
– Outside Consultant – 42.1%
– Communications Staff – 19.3%
– Independent Auditor – 20.5%
– Other – 15.9%

5. For the lead drafter, the following is the estimated amount of time devoted to drafting proxy disclosures for this year:
– Less than 100 hours – 14.5%
– 100-200 hours – 53.0%
– 200-300 hours – 16.9%
– 300-500 hours – 6.0%
– Too many hours to even estimate – 9.6%

6. For all those involved in drafting proxy disclosures (including the lead drafter as well as people outside the company), the following is the estimated amount of time devoted to drafting proxy disclosures for this year:
– Less than 100 hours – 3.5%
– 100-200 hours -14.9%
– 200-300 hours – 32.2%
– 300-500 hours – 24.1%
– 500-700 hours – 9.2%
– Too many hours to even estimate – 16.1%

– Broc Romanek, CompensationStandards.com

As has been the case for the past decade, the topic of executive compensation is dominating the proposals that shareholders have submitted to companies. And as usual, there is quite a variety regarding the focus of these proposals. One “flavor” of the proposals this year is a push by 30 faith-based investors – all of whom belong to the Interfaith Center on Corporate Responsibility – to use compensation as an instrument in the battle for health care reform.

As this press release indicates, at least 21 health industry companies received proposals asking them to publicly disclose the total compensation packages of their top executives, including their health care packages, vis-à-vis that of their lowest paid U.S. workers. According to the release, among the insurers, medical device makers and other companies receiving the resolutions are many of the leading opponents of Congressional action on health care reform.

This new pay-disparity proposal asks for a report covering:

1. A comparison of the total compensation package of our company’s top executives and our lowest paid employees (including health care benefits and costs), in the United States in July 2000, July 2004 and July 2009.

2. An analysis of any changes in the relative size of the gap between the two groups and an analysis and rationale justifying any such trend.

3. An evaluation of whether our top executive compensation packages (including, options, benefits, perks, loans, health care, and retirement agreements) would be considered “excessive” and should be modified to be kept within reasonable boundaries; and

4. An explanation of whether any such comparison of compensation packages (including health care benefits) of our highest and lowest paid workers, invites changes in executive compensation, including health care benefits for departing executives, to more reasonable and justifiable levels, and whether the Board should monitor the results of this comparison in the future-with greater equity as the goal.

– Broc Romanek, CompensationStandards.com

Now that the SEC’s new rules went into effect over the weekend (ie. February 28th), Corp Fin cleaned up all of their Compliance & Disclosure Interpretations on Monday morning that deal with the old Summary Compensation Table reporting scheme. It’s unusual to see CDI activity so early in the morning. That certainly woke me up!

Here’s the changes:

– Withdrawn Question 119.04
– Withdrawn Question 119.05
– Withdrawn Question 119.11
– Withdrawn Question 119.12
– Withdrawn Question 119.15
– Revised Question 119.16
– New Question 119.24
– Withdrawn Question 120.05
– Revised Interpretation 220.01