Anticipating the passage of the Dodd-Frank Act, Dave Lynn just put the finishing touches on a special “Summer 2010″ Issue of the Compensation Standards print newsletter that lays out a number of action items that you should be considering now to comply with the new executive compensation provisions in the Act. This print newsletter is a part of your CompensationStandards.com membership.
What to Do Now: Ahead of our package of two full-day Conferences on the executive pay provisions of the Act – coming up in just two months – we have just announced a special July 29th pre-conference webcast to help you start taking the actions you need to be taking now. Dave Lynn, Mark Borges and Mike Kesner headline this webcast: “The New Pay Legislation: Action Items.”
Below is something I recently blogged on “The Race to the Bottom” Blog:
With say on pay for top executives about to become law (something we will examine, along with the other corporate governance provisions in Dodd-Frank, over the next series of posts), we note some growing sentiment for say on pay director pay.
As we have noted time and time again, directors in many companies are well paid, sometimes receiving in the vicinity of $700,000 in total compensation. These amounts have become clearer with the compensation reforms in 2006 that now require companies to disclose “total compensation” paid to directors. The amount of compensation can be large enough to create an economic incentive to support the policies of the CEO (particularly the ones governing his/her compensation) and avoid risking the lucrative sinecure on the board.
Ted Allen at RiskMetrics has reported on the latest batch of companies where shareholders have voted in favor of a say on pay proposal. It has happened at Target (52%) and TJX (53.9%) and, most recently, at Chesapeake Energy (56%), the 12th company so far this year to see majority support for such a proposal. It is evidence of the growing desire by shareholders to have a greater voice in the compensation process. Of course, these votes are advisory and the board can ignore them. That will change when the financial reform bill passes. After that, it will be mandatory say on pay.
The most interesting thing about this spate of approvals, however, concerns the one at Chesapeake. In addition to the usual say on pay proposal, a second one called for annual shareholder approval of the compensation paid to directors. As the proposal provided:
Resolved: That the shareholders of CHESAPEAKE ENERGY CORPORATION request its Board of Directors to adopt a policy that provides shareholders the opportunity, at each annual meeting, to vote on an advisory resolution, prepared by management, to ratify the compensation of named-executive officers listed in the proxy statements Summary Compensation Table and compensation awarded to members of the Board of Directors as disclosed in the proxy statement.
It passed. The vote totals for Chesapeake can be found in the Company’s current report. Why? Chesapeake has a well paid CEO (total compensation in 2008 of around $112 million, a more modest $18.5 million in 2009). See Summary Compensation Table of 2009. They also have well paid directors, with total compensation somewhere around $530,000 in 2009 and somewhere in the vicinity of $700,000 for 2008.
How many times did the board meet in 2009? Four in person and six by telephone. To the extent that this looks meager, the proxy statement did point out that “management frequently discusses matters with the directors on an informal basis.”
Moreover, that is not all. As the proxy statement discloses:
In assessing director independence, the Committee considered the business the Company conducted in 2007, 2008 and 2009, including payments made by the Company to National Oilwell Varco, Inc. (NOV), for which Mr. Miller serves as Chairman, President and Chief Executive Officer, and payments made by the Company to BOK Financial Corporation (BOK), for which Mr. Hargis served as Vice Chairman until March 2008 and since then has served as a director. The Companys business transactions with NOV and BOK were all conducted in the ordinary course of business.
Payments made to NOV represented approximately 1% of NOVs gross revenues during each of the last three years, well below the NYSEs 2% of gross revenues threshold, and the Companys payments to BOK were nominal during the review period. The Committee also considered transactions and relationships with Oklahoma State University, for which Mr. Hargis has served as President since March 2008, including contributions and support for scholarships and faculty chair endowment, university athletics and various sponsorships and training programs. The Committee specifically considered the employment by the Company of Governor Keatings son and daughter-in-law during 2009 in non-executive positions. The Committee determined that all transactions and relationships it considered during its review were not material transactions or relationships with the Company and did not impair the independence of any of the affected directors.
This is a well paid board that does not meet in person very often. How does it respond to shareholder initiatives? In 2009, shareholders voted to recommend majority voting for directors and the elimination of the staggered board. How did the directors respond?
The Company and our Board take seriously shareholder proposals, especially proposals that receive majority votes from our shareholders. As a result, over the past year our independent Nominating and Corporate Governance Committee and the Board have consulted with outside experts and actively considered the proposals. The Board believes strongly that it is not advisable, in light of the unique circumstances of our industry, to adopt majority voting or to declassify our Board. The oil and natural gas industry is highly cyclical due to short term volatility in commodity prices, which are outside our control.
For a number of reasons (some apparent and some not apparent) the volatility in energy prices is magnified in the stock price for independent exploration and production companies, such as us. The Board believes that the resulting cyclical nature of our business exposes independent exploration and production companies, more so than companies not operating in extractive industries, to short-term opportunism that arises from the divergence between the shorter term focus of the stock market and the longer term focus of industry participants. The Board believes the risks from implementing these proposals far outweigh any benefits and that implementing these proposals would be detrimental to the long-term interests of the Company and its constituencies. For these reasons, the Board has decided to implement neither annual elections nor a majority voting standard.
As say on executive pay becomes more common, pressure for the right to have a say on director pay will likely grow. If past patterns are any evidence, widespread adoption will have to wait for the next instance when Congress dips into the corporate governance area.
Yesterday, as noted in this NY Times article, the US Senate voted 60-39 passing the conference report version of the Dodd-Frank Act. Three Republicans voted for the legislation, which was supported by all but one of the Senate Democrats. In our “Dodd-Frank Act” Practice Area, we continue to post numerous memos on the executive pay provisions of the Act – including this condensed 605-page version of the Act itself (no easy feat given that it’s a 75% reduction – can’t help but think of George’s “shrinkage” episode from Seinfeld).
What to Do Now: Ahead of our package of two full-day Conferences on the executive pay provisions of the Act – coming up in just two months – we have just announced a special July 29th pre-conference webcast to help you start taking the actions you need to be taking now. Dave Lynn, Mark Borges and Mike Kesner headline this webcast: “The New Pay Legislation: Action Items.”
I read about this new study in this NY Daily News article of all places, which pulled it from the Huffington Post. I’m not sure how these Professors evaluated what seems like such a subjective topic, but there you have it. Here is an excerpt from the article:
The study, conducted by professors at Rice University, Harvard University and the University of Utah, found that “increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy.”
The authors believe that this increase in meanness is due to an increase in power: As executives get paid more, they get a heightened sense of power, and “more power leads managers to mistreat subordinates more and evaluate them more unfavorably,” the findings suggest. This meanness gets worse as the gap between CEO compensation and the pay of lower-level employees widens, according to the study, called “When Executives Rake in Millions: Meanness in Organizations.”
European Union parliamentarians voted last week to approve new caps on bonuses paid to bankers that will take effect beginning in 2011. Advocates of the new EU-wide law say it will “transform the bonus culture and end incentives for excessive risk taking.” The rules are largely similar to pay restrictions promulgated by some national regulatory bodies, including the U.K. Financial Services Authority, and those voluntarily adopted by many of Europe’s largest banks in the wake of the global financial crisis. Consequently, the impact of the EU rules will likely be most pronounced at small to medium-sized financial services firms.
Under the new rules, upfront cash bonuses will be capped at 30 percent of the total bonus and at 20 percent for “particularly large” bonuses, EU officials said in a July 7 statement. Moreover, between 40 and 60 percent of any bonus must be deferred for at least three years and can be recovered if “investments do not perform as expected.” At least one-half of the total bonus would be paid as “contingent capital” (funds to be called upon first in case of bank difficulties) and shares, EU officials said. The new rules also stipulate that bonuses be capped as a proportion of salary. Each bank will have to establish limits on bonuses related to salaries, on the basis of EU-wide guidelines, “to help bring down the overall, disproportionate role played by bonuses in the financial sector.”
“Exceptional” pension payments must also be held back in instruments such as contingent capital that link their final value to the overall strength of the bank. This, EU officials said, will avoid situations that occurred in the past, in which some bankers retired with substantial pensions unaffected by the crisis their former employer was facing.
Published in the Federal Register last week, the FAA recently issued a proposal to revise its broad prohibition on pro rata reimbursement for the cost of owning, operating and maintaining a company plane when used for routine personal travel by executive officers under certain conditions. I’m far from being a FAA expert – but I believe this change, if approved, would permit greater flexibility for companies to seek and accept reimbursement from executives for their personal use of the corporate jet.
Given the affinity for private plane use – and officer distaste for disclosure about this practice – my bet is that executives would jump at the opportunity to do this, particularly if the money that executives paid was “replaced” in some way. The upshot is we may well see fewer perk disclosures for personal plane use in the not-so-distant future…
– Ed Hauder, Exequity and Reid Pearson, The Altman Group
In this Special Report, we examine the 38 equity plan proposals that failed out of approximately 2,200 total proposals put forward by Russell 3,000 companies from 2007 through 2009. The authors detail several lessons for companies to consider when requesting shares, the most significant of which are to ensure that both dilution and burn rate are not excessive.
The Special Report also looks at the success rates of RiskMetrics/ISS’ against vote recommendations for equity plan proposals and finds that they vary, sometimes significantly, based on the industry group. Similarly, the percent of equity plan proposals that failed varies based on industry group. Companies that are considering requesting shareholders to approve additional shares for their equity compensation plans will have a better idea of the challenges they face after reading this Special Report.
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.